Social Trading Explained for Dummies

What is social trading?

Social trading is a trading strategy used by traders and investors, allowing them to observe, compare, copy, and execute the trading behaviour and strategies of other investors and experienced traders. It is a trading strategy in which traders are not required to rely on fundamental or technical analysis to make investment decisions. Social trading started in 2010 and has grown in popularity since then. It is a type of trading that enables quick and easy access to financial markets, such as the foreign exchange (forex) market in which the currencies of countries are traded. Social trading is also a popular strategy in the trading of CFDs (contracts for difference). CFDs enable traders and investors to speculate in over-the-counter (OTC) markets in underlying financial assets (instruments) such as shares, indices, commodities, currencies, and treasuries.  

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What is a social trading platform?

Simply put, a social trading platform is a trading platform that allows investors and traders to trade and invest in a variety of financial assets by using social trading. An investor is required to open a trading account to trade on a social trading platform. However, it does not require a lot of money to start trading on the majority of social trading platforms in the forex market. Typically, novice traders use social trading to learn more about trading in financial markets and to get the feel of it. Some novices have claimed that social trading reduces the time from novice to experienced trader considerably. On the other hand, professional traders use social trading as an additional strategy to diversify their portfolios. Social trading platforms adhere to the fundamentals of social media, namely communication, sharing of knowledge, fellowship, and mutual support. Usually, investors using these platforms have expert traders at their disposal who can help to make informed trading decisions. The experts’ trading activities can be viewed, and their trades copied - manually or automatically. An investor can make use of a comprehensive social trading platform, also called a fully integrated social trading platform, which enables investors or traders to comprehensively share the trading strategies of experienced traders or peers, using copy trading or mirror trading. Wikipedia describes copy trading and mirror trading as follows:

• Copy-trading: ‘Trader A places exactly the same trade as trader B’s one single trade.’
• Mirror trading: ‘Trader A automatically executes trader B’s every single trade, i.e., trader A follows exactly trader B’s trading activities.’

(Accentuations in the quotations are by the article writer.) Alternately, traders might choose to utilise individual aspects of social trading, maintaining control over their trades by utilising various trading signals and technical indicators. Following trades of other traders, social trading can confirm other signals and indicators. Experienced traders are rewarded for sharing their trading strategies and knowledge with:

• Money, which is earned as commission on investment returns or as fees.
• Status in the particular trading community. Normally, social trading networks have a leader board, indicating prominence and success rate.

 

Some features of social trading

• Free flow of information

Unrestricted access to information about the trading strategies of other investors and traders.

• Shared trading

Social trading allows traders to work together in a cooperative way, sharing information and strategies.

• Transparency

Social trading platforms disclose traders’ open and past trading positions, and their performance statistics, allowing social traders to view the reputation and credibility of the experienced traders on the specific platform.   In addition, the platforms communicate market sentiment.  

Advantages of social trading

Social trading:

• Requires very little knowledge and experience of the financial markets.
• Saves money, described by traders as ‘a low-cost, sophisticated alternative to traditional financial products.’
• Allows quick access to financial markets, enabling novice traders to easily become social traders, earning money when they take their first steps in the world of trading.
• Enables investors to study the trading strategies of experienced and professional traders.
• Provides the opportunity to communicate with other investors, affording a valuable support network.
• Saves time, allowing investors or traders to spend less time actively trading.
• Reduces anxiety about day-to-day price fluctuations in the financial markets. Traders can anytime decide if they want to continue with the trading strategy of a certain trader or to simply withdraw.
• Presents performance and statistics in real-time.

 

Disadvantages and risks of social trading

• Performances of traders in the past do not guarantee the same results in the future.
• Social trading is not safeguarded from losses.
• Traders followed in social trading can take unnecessary or excessive risks.

 

Terms used in social trading

• Strategy provider

Typically, a strategy provider is an experienced trader who is followed by other investors and traders, providing profit opportunities for social traders.

• Social trader

A social trader also referred to as a copy trader or an investor, uses the social trading platforms to view and choose trading strategies executed by strategy providers, and consequently copy the trades executed by the experienced traders.

• Expert advisor (EA)

Expert advisor refers to a prominent trader who can be followed in social trading.

• Guru

A common and informal way to refer to a recognised trader who has a proven and successful history of trading and who can be followed and emulated.

• Slippage

Slippage is the difference between the price at which a social trader executes a trade and the price at which the strategy provider - who is copied - executes the trade.   This means that sometimes a social trader will get a better price, and sometimes the price will be lower at which the trade was executed.

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