The Concept of Social Trading in Forex
Social trading in forex has been around for at least 10 years now. A typical social trading community consists of:
- Providers: The traders who provide the trading signals for others to follow are known as Providers/Leaders.
- Copiers and Followers: The traders who follow or copy trading signals sent by the providers are known as Copiers or Followers.
- The social trading platform providers are 3rd party companies or Forex brokers themselves. The type of social trading platform provider will decide how compensation to Providers are paid, and how Followers will access the social trading service.
There is also the social trading feed, which is where ideas, data, techniques and strategies are discussed. This is what brings out the social nature of the entire venture. Social trading networks are usually accessible to everyone from around the globe. The 24-hour nature of the market ensures that there is a constant flow of information and trading signals.
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So how do the different categories of players in the social trading arena fit into the market?
Some traders will end up as providers. If we go by the statistics of successful retail traders in the forex market, the Providers are usually in the minority. The Providers are usually experienced and profitable traders. Profitability is usually measured with performance stats that show profitable trading history over a minimum of 12 months. In order to become a Provider, you must have traded successfully in an uninterrupted manner for this time period. You can then apply to be listed as a Provider. The statistical data used in evaluating and positioning Providers on the Leaderboard are obtained from the Provider’s trading account to accuracy and legitimacy.
Data are continuously updated as the Provider trades. Therefore, there is always pressure to maintain performance as Copiers/Followers start to follow the Provider’s trades.
Become a Provider means you have to provide trade signals for other traders to copy. You need to be sure that you are able to offer trade alerts round the clock, so that your followers can get value for their money. One of the ways to do this is to automate your trading strategy and host your software on a VPS so that it is possible to ensure round the clock service. You need to understand that your clients may come from various time zones. Let’s assume that you are based in Europe and have clients from Australia. This means your followers will be awake when you are asleep. Having paid for your service, they will not entertain a situation where they get no trades from you while you sleep, especially if they are followers and not copiers (i.e. they implement your signals manually).
You will be able to charge subscription fees for your services. The social trading network provider will lay out the guidelines on how you can set and collect your fees.
Copiers and Followers are inexperienced or time-limited forex traders who either do not have much experience with trading forex, or cannot by reasons of work or illness or other reasons, trade forex on their own. Followers receive instant notifications of trader alerts either by SMS, email, desktop or push notifications, and implement the signals manually. Followers must therefore have a means of instantly implementing trade signals on their accounts. Copiers opt to get automatic execution of the Provider’s trades on their accounts. Copiers and Followers have to pay a subscription fee in order to receive the Provider’s services.
You have to decide whether to be a follower or a copier. There are set parameters that you should use to identify which of these two trader models fits you.
- If you want to learn more about forex, or you have a means of instantly implementing trade signals, or you want to have more social engagement with Providers and other traders, then you should be a Follower.
- If you have no time to implement signals on your own, have issues with placement of orders by yourself, or you are not interested in learning more about forex, then you should choose to become a Copier.
Whichever model you choose to implement the Provider’s signals, you must be able to choose good Providers. Here are some metrics you should look for.
- Risk Score: Only choose Providers that have a Risk Score of between 2 and 4 out of a possible 10. Risk Scores that are higher than 5 are too risky. In essence, a losing streak will have a higher chance of wiping off your account capital if you choose Providers with high Risk Scores.
- Profitability Over 7 Days, 6 months and 1 year should show a rcopyegular pattern.
- Performance graph should show gradual appreciation. Avoid Providers with spikes in their performance graphs.
You must continue to review these metrics at periodic intervals for Providers you have chosen, and you should also keep studying new Providers that show up on the Leaderboard and save their profiles as potential replacements for any of your existing Providers should their performance start to drop off.
Social Trading in Forex: Best Practices
For Providers as well as Copiers/Followers to get the best of social trading in the forex market, some industry best practices need to be adhered to. A summary of these best practices is given below.
- The forex market runs for 24 hours a day, with one time zone always active at any point in time. To benefit maximally from copying or following Providers, Copiers/Followers can choose a Provider from each time zone (New York, London and Tokyo/Sydney) to provide round the clock trading.
- Similarly, Providers should automate their systems/strategies and hook them up with virtual private servers for continuous operations.
- Some social trading platforms work with multiple Forex brokers. You can use multiple accounts to copy/follow several Providers so as to spread your risk across board.
- The reward-risk ratios in forex are far better than what is obtainable in binary options. You will have far greater numbers of profitable Providers to choose from.
- The Risk Score in forex is important. Follow or copy Providers that have Risk Scores of no more than 5/10. Risk Scores of between 2 and 4 out of a possible 10 are the most desirable, especially if you are a beginner or do not have much capital.
- If you do not have ready access to a computer to implement trade signals, or you are not very good at it yet, opt for the Copy trade model so that trades can be implemented on your account in an automated fashion.
Traders who decide to join a Forex social trading network can become Providers or they can choose to become Copiers/Followers. Competition for listing on the Leaderboard is fierce and only the best Providers end up being listed out of the thousands of Providers on a social trading network. Therefore, Providers must be able to create value for their followers and ensure that their trading performance do not drop off. Copiers and Followers must not only choose their Providers carefully, but must also evaluate their performance even after choosing them to ensure that they always have the best services for their money.