Social Trading in a Nutshell
Social trading (also known as copy trading, mirror trading) is an increasingly common trend in the most popular investment markets, CFDs and Forex. It has become a widely used tool in financial markets. This type of trading is particularly popular among beginners just starting their adventure with financial markets. While many consider copying trades a great way to earn money in the currency and commodity markets, others believe that social trading is overrated and aimed at ripping off inexperienced traders.
What’s the reality? We’ll try to explain the concept of social trading, while leaving it up to you to assess its suitability for your strategies. It’s worth considering what social trading is and how it works.
What is social trading?
Social trading is an interesting investment option designed primarily for beginner investors. Simply put, it allows you to automatically imitate another, more experienced investor. You can execute the same trades as the person who shared their trading with you. Typically, we choose a very experienced investor or someone who has recently achieved good returns and hope to achieve the same success.
Some social trading brokers further facilitate and encourage this type of activity. They allow you to automatically copy the positions of someone you’re following. Furthermore, these positions are scalable. This means that when a selected investor opens a position, the same position will be opened with you, but in the appropriate size, depending on the capital in your account. All these settings and options are available on specially designed social trading platforms.
Many people undoubtedly wonder why someone would share their knowledge and investment moves with us. This is precisely what some brokers have done, making “social trading” more popular. In some cases, those who share their moves receive a commission, while in others, this commission is hidden in the increased spread. It’s also worth remembering the simple market effect of sharing signals. An investor who gains the trust of many followers can expect the asset they purchased to appreciate thanks to many people making the same move as them. After their purchase, the price immediately increases because their move generated demand , which translates into a price increase. Of course, this is only more significant in small markets or among investors with a reputation as renowned as Warren Buffett. While imitating large investors is different from what copy trading platforms currently offer, it is a prototype. This is how the first social investing began.
Social commerce platforms
In the context of social trading, it is also important to choose the right broker to perform these activities. It’s especially important to pay attention to how the broker allows you to use signals. It’s important to check what investor statistics you can view, whether you can contact them, and whether signals can be copied automatically. Contact with investors is especially important for beginners. This gives you the opportunity to ask about specifics about strategies or the reasons behind specific decisions – this is excellent learning material and valuable knowledge.
Brokers with social investing:
Social Trading – is it profitable?
There’s no clear answer to this question, of course. In this type of trading, much depends on the performance of the investor we choose to emulate. However, this doesn’t diminish our responsibility. Above all, we must choose the “donor” carefully .
It’s worth paying attention to the diversification of their portfolio . The greater the diversification, the lower the risk from downturns in individual instruments and markets.
Even theoretically well-chosen portfolios don’t guarantee success. Let’s be honest – social trading isn’t a silver bullet for risk-free profits. Even an investor who has previously achieved good results can simply run out of luck. It’s also important to remember that only individual investors will truly reveal their intentions. Major stock market players like Warren Buffett and major investment funds , while often publicizing their intentions, don’t share their copy trading trades.
Social trading can be profitable for other reasons, however. If you’re a beginner trader, it’s worth using this type of service. By being able to see how the best traders behave, you can simply learn . Not every investor’s strategy will be 100% accurate. This allows you to adopt only what you like. Another significant advantage is the ability to copy multiple traders simultaneously. This gives you the opportunity to invest some of your funds, for example, in commodities, using the best traders on the commodity market, and in stocks, using a different expert.
Social trading is certainly also an excellent solution for those who don’t have time to regularly monitor quotes and financial news . Thanks to the relatively small commission, someone will essentially do this for us. Of course, the question remains whether they will do it effectively. However, social trading is certainly less risky than investing without any knowledge or monitoring current information.
What investment portfolios to copy
Choosing the right investor and their portfolio to copy is essentially the foundation of our success in copy trading. Unfortunately, this decision isn’t easy. When making a choice, it’s worth paying attention primarily to past performance . However, remember that past results offer little (or even no) indication of how a portfolio will perform in the future. Moreover, it can even be information that leads us astray. A portfolio that has been growing rapidly recently may experience a correction after our investment – which, in such a case, is likely inevitable sooner or later.
As with all investments, the security of your funds is paramount in social trading. Remember to choose diversified portfolios or diversify yourself —for example, by copying signals from more than one investor. While this means you have to devote even more time to choosing a portfolio, it can protect you from losses you’re not prepared for. It’s also worth considering a trial period for newly selected investors. Initially, it’s a good idea to entrust them with a smaller portion of your portfolio as an experiment—to avoid risking losing too much of your total deposit.
Summary – is it worth using social trading?
In summary, everyone must decide for themselves whether social trading is the right tool for them. The potential profits that can be achieved are attractive and tempting, but we must remember that the risk is still very high. Most people involved in Forex know well that approximately 90% of market participants simply lose money. Therefore, without the necessary experience, it’s worth investing only the amount you can potentially lose, even with the help of experienced investors. With success, you can always increase your investment. Patience is key with copy trading, as with any form of investment.
