Social trading enables traders or investors to copy and follow the strategies of their peers or more experienced traders. While most traders perform their own fundamental and technical analysis, there is also a group of traders that prefer to observe and replicate the analysis of others. It is often thought of as a type of friendship network, as the function enables traders to interact with others, watch each other’s trades and learn about decision making processes.
When this concept first started in the early 2000s, when it was used to mirror successful forex trading strategies. Since then, retail traders have begun to use it for an ever-growing number of trades across different asset classes, as anyone can participate with little-to-no previous experience of trading. So, socially participating in the trading of shares, commodities and indices has also become popular.
How does social trading work?
The idea works by creating quick access to financial markets, enabling experienced traders to share strategies and allow other traders to copy their trades. With new technology and advanced platforms, it makes it easier than ever to become a social trader. The trader could either use a comprehensive social platform or adopt some of the features within the platform.
Some traders might want to use a fully integrated ‘members only’
exchange, which facilitates sharing of market strategies using a ‘copy’ or ‘mirror’ trading feature. Similar to a social networking platform, the trader could choose to ‘subscribe’ to another trader’s account, whose positions would be broadcast simultaneously with the option to copy their deals and execute it.
The incentive for experienced traders to share their strategies is that they are often rewarded with both money and status. Within the platform, there are networks that is built together with a leaderboard based on popularity and success rate of traders.
Alternatively, traders could utilize the principles of social trading, but maintain control over their trades by using a range of signals and indicators. By looking at the market sentiment and activity of other traders, social trading can act as confirmation of other forms of analysis.
Is social trading suitable for everyone?
This innovative concept has been praised for knocking down some of the barriers to financial inclusion but has also been criticized for downplaying a lot of the knowledge needed to properly negotiate financial markets.
One of the biggest mistake a trader can make is thinking that the method eradicates risk completely. All investments involves risk, and traders are likely to make a loss at one point or another, and the idea of trusting a third party’s judgement, while retaining the risk of loss, is seen as a large drawback on social trading.
Financial markets require knowledge and patience, while social trading can potentially help new traders skip a few steps, it does so at the expense of experience. It is important to make sure new traders understand exactly what they are doing and have a risk management in place. Everyone has their unique risk appetite and capitalization, therefore trading the way someone else would may not always necessarily be a good idea.
Social Trading platforms offer beginners avenues where they can easily and efficiently trade in the market. Although they do not completely eradicate failure, they can minimize chances of failure. Since social trading platforms are cater for both beginners and professionals, they create a reliable trading community that enables people to trade and learn at the same time.
We offer zero to one solutions in creating a unique social trading portal for your business, if this your idea of exploring your broker dealer business, reach out to us.