Introduction to Social Trading

Social trading is a system of forex trading or binary options trading in which a social network of traders is created, with lesser experienced traders being able to learn, follow and eventually copy not just the trades of the more experienced and profitable traders, but the trading styles and techniques of these traders.

In every trade process, there is not just the trade itself, but the technique and mentality behind each trade. Social trading allows the inexperienced trader to undergo the full learning process that leads to a trade in the markets. This is what sets social trading apart from copy trading where the end is the ultimate goal; no thought is given to the means by which these ends are achieved.

The aim of social trading is as follows:

  1. Increase participation in the markets by allowing those with little or no knowledge of forex trading or binary options trading to participate in the market by copying the trades and techniques of other traders who are more experienced and profitable.
  2. Allowing traders to network, share knowledge and get connected doing something they are passionate about and making money in the process.

In social trading, traders can become members of a trading community, where one or two very experienced traders can provide trade direction and signals services for other traders in the community to follow.

 

How Social Trading Works

On a social trading platform, there are three categories of participants:

  1. The Leaders: On some platforms, they are also known as the providers: These are the successful/profitable traders who provide the signals and trade direction for other traders to follow. Followers may pay some money to plug their accounts to their strategies. It is from this pool of funds that the Leaders are compensated for their effort, although some social trading platforms may provide services for free.
  2. The Followers: These are the inexperienced traders who follow the strategies of the leaders for replication of the trading processes undertaken by the leaders. Followers pay some money for the opportunity to follow the strategies of the leader. It is possible for a Follower to follow more than one Leader.
  3. The Social Network Provider: The social trading platform provider could be a broker doing this directly, or a third party provider that sets up the platform that all participants can plug in to. The social network provider creates a transparent platform that both parties can connect to, and also provides the metrics on which leaders are selected.

Now it may all sound so simple, but when it is considered that the leaders seen on a Leaderboard for one month may not be the same as those seen on the Leaderboard the next month, then traders can understand that it is not just about seeing some “flash in the pan” results but sustainability. This brings us to the issue of how to select a Leader in a social trading network.

 

How to Utilize a Social Trading Network

There are processes to adopt in ensuring that the best Leaders are followed on a social trading network. These are outlined below.

Step 1: Assessing Potential Leaders to Follow

When it comes to choosing a leader, the metrics used will ultimately determine whether the social trading venture will turn out successful or not. The following snapshot is the Leaderboard for a particular social trading platform.

 

 

 

Several metrics are used in judging the performances of the Leaders shown on the Leaderboard. Some of these are:

  1. Profitability
  2. Drawdowns
  3. Length of time the trader has been trading
  4. Number of followers
  5. Trades per month
  6. Profitability chart

 

A proper assessment of a leader should have the following in place

  1. Reasonable profitability. The Leader must have a strategy or process which must be profitable; else it would not be worth following in the first place.
  2. The Leader’s strategy must have the least possible drawdown levels.
  3. The Leader must be one with a reasonably lengthy trading career. One year is regarded as a gold standard in this regard.
  4. Whether the number of trades per month matters will depend on whether the follower is a scalper, intraday trader, swing trader or position trader.
  5. The profitability chart is very important. Consider the chart for the 1st placed Leader and the 3rd placed Leader. We can see very clearly that the 3rd placed leader’s chart has two areas where there were dips in the graph, sufficient enough to send the trader back to the starting point. This is in contrast to the 1st placed Leader where the chart was more consistent. Stick to the ones with consistency and greater smoothening of the profitability. You need to avoid traders whose profitability graphs show sharp spikes. Spiking graphs indicate “one-off” events. Smoother charts indicate consistency.

Step 2: Funds Allocation

After selecting a trader to copy, the next step is funds allocation. For risk management purposes, you should try to allocate not more than 3% of your total capital for use in following a Leader’s strategies.

Step 3: Continuously Evaluate Your Performance and That of the Leaders

Always evaluate the performance of a Leader and your own portfolio. This will indicate where some change needs to be effected; either a change of the Leader or a change of strategy on your part.

 

Advantages of Social Trading

Social trading brings benefits to brokers and traders alike. These advantages are listed below:

  1. Social trading provides an avenue for experienced traders to monetize their knowledge, since they are paid a commission for each trader that follows their strategies.
  2. Inexperienced traders and traders who do not have the time to trade can simply plug their accounts to a profitable trader’s strategies, and watch the money rolling in; practically without lifting a finger.
  3. These ultimately lead to an increase in the number of traders in a broker’s platform, thus increasing the revenue base of brokers.
  4. Social trading can potentially shorten a trader’s learning curve. By exposing the novice trader to other more experienced traders and providing the opportunity for social interaction, novices with a learning interest can interact with the leaders and gain better understanding of the market without paying so much money for seminars and other learning resources.

 

Disadvantages of Social Trading

There are some disadvantages to social trading:

  1. Many novice traders are unable to properly assess Leaders on a social trading network. This puts the chances of success squarely in the hands of Leaders. If a leader’s strategy turns out to be too risky and unprofitable, the trader can lose a lot of money down the road.
  2. If a leader quits a platform or dies, the new traders have to seek new leaders to continue the flow of trades.
  3. Many social network providers use the wrong metrics in displaying Leaders to follow. There tends to be too much emphasis on profitability alone without consideration for elements of risk, drawdowns and sustainability of strategies used.

 

Conclusion

Social trading is a great way of trading, as two heads (in this case hundreds) always prove to be better than one. However, the process starts with proper Leader selection, which allows the rest of the process to fall in naturally.

 

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