Social Trading and Social Trading Platforms: Complete Guide

What is social trading? For those that want to understand a bit more about this form of trading this is probably the first question they ask. They want to enquiry about what it is with one goal in mind, of course, how can they best take advantage of this innovative form of investment.

In this guide we will explain what the nature of social trading is – with a particular emphasis on social trading platforms. Social trading is a very broad concept that can only be fully grasped if we give solid examples of how it really works. By emphasising social trading platforms we will do so. Here is what we will discuss:

  • What is Social Trading
  • Best Social Trading Platforms
  • How can Forex Social Trading Benefit You
  • What are the Different Forms of Social Trading
  • How Social Trading Platforms Work
  • How Social Trading Brokers Make Money
  • Social Trading Versus Trading Robots/Signals
  • Advantages and Disadvantages of Social Trading
  • Conclusion
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    WHAT IS SOCIAL TRADING?

    Social Trading is a process through which online traders rely on user generated financial data gathered from various web platforms as a primary information source for making trading decisions. This new and revolutionary way of analyzing financial data provides a ground to compare and copy trades, strategies and techniques.

    Online trading and social networking are the internet’s leading two activities, and therefore it is no surprise that sooner rather than later someone was going to think of a cocktail of the two. The combination of the two activities also allows traders to share experiences with others, along with the other aspects of trading as outlined above.

    In autotrading, traders simply followed other without the opportunity to interact. Social trading changes all that. Statistics have shown that with the increase in social media interactivity, forex social trading is also on the rise. The demand is so much that a personal survey done has shown that about 80% of brokers are now tapping into the opportunity, unlike just three years ago when one could count the number of brokers providing social trading services on the fingers of one hand.

    BEST SOCIAL TRADING PLATFORMS 2017:

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    HOW CAN FOREX SOCIAL TRADING BENEFIT YOU?

    Forex social trading can be of immense benefit to both providers and followers in a symbiotic relationship.

    Providers: Lead traders who are followed by others are compensated according to a model that is usually agreed on between brokers on whose platform the social trading activity is carried out and the traders themselves. This can be a great way to earn from forex for those who are masters in the game.

    Followers: Those who follow other traders are charged for the service. The charges are not so high, and are usually incorporate into the trading spreads that they incur when they engage in social trading. We have already mentioned the benefits of being in a social trading network. They are immense.


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    WHAT ARE THE DIFFERENT FORMS OF SOCIAL TRADING?

    Social trading is broadly discussed as one subject but when we get down to the nitty-gritties, it has sub-categories.

    The word social comes into play in the aspect of interaction between traders either via a forum, comments and blogs. However, over the last few years, the social trading platforms have now added the various forms of trading including Copy Trading and Mirror Trading.

    Copy Trading

    In most cases, the term copy trading is used interchangeably with social trading with the reference to the same thing, thus making it the most popular form of social trading both in theory and numbers.

    Copy trading is whereby traders are allowed to automatically copy positions opened and managed by a selected investor normally in the context of a social trading network.

    It links the amount invested by the copy trader to the account of the copied trader, which leaves virtually every trading decision from allocation of stop loss, take profit limits or closing of orders at the mercy of the copied trader.

    What are Some of the Top Providers of Copy Trading Platforms?

    Copy trading has been growing in popularity over the last few years with the two leading platforms E-Toro and ZuluTrade heading the campaign.

    E-Toro:This is one of the pioneers of social trading. At e-Toro, traders can follow expert traders’ traders in turn replicating their success for the period followed. They can choose the traders to follow based on certain preferences such as highest profits per week etc.

    Etoro trading featured followed traders

    Etoro Social Trading

    E-Toro is primarily a Forex Trading only platform featuring various currency pairs including the Majors, Minors and Exotic pairs among others, as well as, commodities and indices.

    However, traders can also choose to follow traders who predominantly invest in stocks or those who have achieved success by following others.

    Etoro trading platform

    Etoro Social Trading Platform

    E-Toro’s platform also allows traders to see the bias in the market in the form of the percentage of traders buying or selling a particular instrument.

    ZuluTrade: ZuluTrade is yet another copy trading platform with multiple copying functionalities. The platform features two major markets; Forex and Binary options.

    It is widely used by binary options brokers to add to their portfolio of option types. With ZuluTrade, a trader can follow another trader’s portfolio or a select portfolio of trades all at once and also close the positions at once or individually as they deem fit.

    Social Trading Platform - ZuluTrade

    ZuluTrade Social Trading Platform

    Trader can also open individual trades personally but those are displayed separately from the select portfolio of copied trades.

    Challenges of Copy Trading

    One of the biggest flows in copy trading is the timing differential between when the copied trader’s trade executes and when the copying traders order goes through. In most cases it takes only a few seconds and as such no much damage in terms of profit/loss outcome.

    However, in some cases this differential can be huge and as such resulting into a big gap between the return made by the copied trader and the return the copied trader receives.

    Mirror Trading

    The main difference between mirror trading and copy trading is the process involved in identifying targets. With mirror trading, traders assess various investments strategies and historical returns, and then select the strategy that they wish to follow.

    After that, they can then replicate the trades of the strategy developers to their trading accounts, in what now draws similar comparisons with copy trading.

    However, as discussed, with copy trading traders simply select a trader whom they wish to follow based on success while in mirror trading, it has more to do with the strategy including (whether the copied trader is a swing trader, day trader or a position trader etc), as well as, risk levels, leverage, and asset types among others.


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    HOW SOCIAL TRADING PLATFORMS WORK

    As discussed earlier, there are diverse types of social trading platforms. However, when it comes to the trading activity on the various platforms, the mechanism is pretty much similar. All social trading platforms allow traders to copy the trades of other traders and vice versa.

    This means that you do not necessarily have to be an expert for your trades to be copied by others. If the person whose trades you follow is successful, then you will also be successful. This makes you a viable candidate for novice traders looking to follow expert traders.

    When you become a copied trader, you stand a chance to earn a commission based on the number of copiers that follow your trades. As such, the more successful your trades are, the higher the chances of earning more commissions.

    Social trading platforms also allow traders to interact in trading forums where they can share trading ideas, as well as, comment on breaking market news. These forums provide a platform where traders can do more than just trade. Here traders can learn various trading strategies, money management strategies, as well as, tricks on how to use various tools and resources available on the platform.

    Social trading platforms also allow traders to weigh up the trading activity on an asset thereby enabling them to gauge the potential direction of the trade. For instance, it’s possible to see the level of bids versus asks for an asset, which makes it easy to decide your next trade.

    Generally, traders can trade several assets and commodities via a single platform, but depending on the type of the broker, some platforms can be limiting. Currently, there are three main types of brokers that provide social trading services. They include Forex brokers, binary options brokers and stock brokers.

    Forex Social Trading Platforms

    These are the most popular in the market. Most of them allow traders to trade forex, commodities, indices and even at times stocks. Some of top social trading platforms include the world’s largest social trading platform eToro, ZuluTrade, and CMS Trader, among others.

    These platforms fetch their data from various exchanges including commodities trading exchanges, futures trading exchanges, as well as, stock trading exchanges. In cases where the broker is a market maker, trading data can be sourced from leading brokerage platforms that are directly linked to the main exchanges.

    Traders sign-up for a normal trading account, which then gives them access to the social trading services provided.

    Binary Options Social Trading Platforms

    Binary options social trading platforms are gaining popularity and are now some of the most common in any binary options brokerage platform. Unlike in forex trading where the entire social trading system is supported by the broker, binary options social trading systems are mostly developed as part of the binary options brokerage platform. As such, the binary options broker is nothing more than an intermediary who connects traders to the platform.

    Besides Zulutrade, some of the top binary options trading platforms that have social trading features include Panda TS and SpotOption. However, other brokers like AnyOption are believed to have created their social trading platforms for binary options traders such as CopyOp.

    Stock Trading Social Trading Platforms

    Just as I mentioned above, most brokers provide social trading for nearly all the asset types you can imagine. In fact, there are those who already provide social trading for cryptocurrencies. In such brokerage platforms, social trading for stocks is also available.

    Binary options brokers also provide stock trading services, which means that for those whose platforms have a social trading feature, the traders can still capitalize on it.

    Some of the most popular ones include eToro and ZuluTrade. However, it is hard to find a pureplay stock broker offering social trading services for stocks. Alternatively, at times there is a form of mainstream stock investing that has been likened to social trading. Investing via mutual funds, municipal funds and MLPs (Master Limited Partnerships) allows novice investors to capitalize on stock picks made by experienced investors.

    If you think of it, when you copy a certain trader’s trades on eToro, for instance, chances are that you aren’t the only one doing so. Several traders are likely to have copied the same trader, which means, it’s pretty much a huge portfolio of investors using the same channel to make profits. So, it’s similar to mutual funds only that in this case, the copying trader can pull out his money at any time. And by the way, eToro also have their own CopyFunds.


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    HOW SOCIAL TRADING BROKERS MAKE MONEY

    With so many skeptics of online trading out there, it is fair to discuss briefly how these so-called social trading brokers make their cut. After all, nothing is given free to the word of online trading. So how do they make money?

    The Spread

    A social trading platform is not that different from any other trading platform. Trading mechanisms are the same, which means that, even when a trader copies the trades of another trader, the concept of bid-ask spread comes into play.

    This means that traders must part with the spread on every trade they open, as well as, when closing those trades. Therefore, for every trade, you take the value of the spread and double it to get the solution to what the broker receives from one completed trade.

    Commissions/Fees

    Now, spread applies to forex brokers, but when it comes to binary options, brokers get their cut from the commission charged on the payout. Again, when you follow an expert binary options trader’s trades, your wins still depend on the payout provided by the broker.

    If it’s 85% as is the case on many binary brokerage platforms, then the remaining 15% is the commission taken by the broker.

    Mind you, binary options brokers also benefit from losing trades as do some forex brokers who also qualify as market makers.


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    SOCIAL TRADING VERSUS TRADING ROBOTS/SIGNALS

    While many trading and education platforms tend to put social trading systems and trading robots in the same basket, they are quite different. Additionally, social trading systems also have some aspects of typical trading signals in the way they operate. However, they are not actually signals. Let’s debunk the relationship between social trading, trading robots and trading signals.

    Social Trading and Trading Robots

    Trading robots pick and execute trades based on an algorithmic system that utilizes various technical indicators and digital instructions set up by the trader/the developer of the robot. On the other hand, social trading mainly relies on the trading activity of other traders.

    With trading robots, traders have the freedom to tinker with the system and customize it to their acceptable risk levels. In social trading, the platform ranks every trader’s portfolio by allocating various risk parameters including win-rate, average drawdown, as well as, the number of assets and the trader’s historical performances.

    Social Trading and Trading Signals

    In social trading, and especially for those who choose to follow, and not necessarily copy the trades of other traders, signals are generated after the expert trader opens a trade.

    On the other hand, when it comes to typical trading signal services, the signals are generated by a system which relies on various technical tools and data to identify possible winning trades.

    In some cases, some trading signal service providers provide their trading signals to traders based on the trades they make. But this is very rare.


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    ADVANTAGES AND DISADVANTAGES OF SOCIAL TRADING

    In this section we will discuss different advantages and disadvantages of social trading.

    Advantages

    Social trading has been welcomed by many especially novice traders over the last couple of years. It is a form of trading that has enabled some traders to improve their trading profits by significant levels especially those that copied trades of recommended traders.

    One of the biggest benefits of social trading is that traders do not require any trading experience to do it. Take for instance ZuluTrade which auto selects a portfolio of trades for traders. All that is required is to identify a trader with a good win-rate ratio and you are most likely to profit.

    Social trading has the potential of shortening a trader’s learning curve. A trader can be transformed from novice to experienced trader. Rather than attend courses and seminars which do not deliver all the trader needs to learn in the few hours that such interaction takes place, social trading provides an opportunity for novice traders to follow the lead traders, copy their trades, and interact with the lead traders to understand why certain positions have been taken. It is simply a question of watch, copy, ask questions and learn. It is far better than autotrading, which is the precursor to social trading.

    Unlike trade alert services where the subscriber to the service simply follows the trade alerts like a robot with very little personal interaction between the trade alert provider and the subscriber, social trading is a more personalized approach to the concept of trading in a community.

    Additionally, Social Trading takes emotion out of the equation thereby reducing trading risk associated with psychological inclinations.

    Social Trading also helps traders share experiences via the various social platforms, such as forums, community websites and blogs, as well as, via comments sections.

    Disadvantages

    Social Trading makes the game easy for new and novice traders. As such, it almost certainly curtails their efforts towards learning how to trade, which means they can only trade by copying others.

    Therefore, while trading can be an intense and high emotion activity, social trading takes out some of the fun that traders who trade manually experience.

    CONCLUSION

    The bottom line is that social trading has brought in a new lease on life for new and novice traders especially given the rate at which most traders blow up their accounts shortly after funding them. Metaquotes Inc, makers of the popular MT4 and MT5 software, have begun to incorporate functions on these platforms that will allow traders the ability to follow other traders in a social trading capacity.

    We are now seeing mergers, acquisitions and innovations in the area of social trading. New demographics of measuring the performance of lead traders are being introduced so as to enable followers better gauge the performance of traders they are following.

    Social trading has established means for beginner traders to turn profits despite their lack of trading experience by capitalizing on the experience of others.

    Social trading has also contributed to a great deal in helping various traders overcome difficult situations as the platforms encourage engagement between traders thereby sharing experiences that can be a source comfort for others.

    Some platforms also encourage continuous learning by providing educational resources to traders to capitalize as they engage in trading.

     

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