Social Trading in a nutshell
Social trading (copy trading, mirror trading) is a more and more often encountered trend in the most popular investment markets CFD and Forex. It became a frequently used instrument in financial markets. This type of trade is especially popular among aspiring investors, who are just starting their adventure with financial markets. Despite the fact that many believe that copying transactions is a great method to earn in currency or raw materials markets, others believe that social trading is overrated and it aims at conning inexperienced traders.
What is the reality? We will try to explain the idea of social trading and at the same time leave the assessment of this instrument’s usefulness to your strategies to you. Thus, it is worth considering what is the social trading and how does it work?
What is the social trading?
The social trading is an interesting investment option, which has been created mainly having the aspiring investors in mind. In short, it is a possibility to automatically copy other, more experienced investor. We have the possibility to conduct the same transactions, as the person who disclosed their moves to us. Therefore, we usually choose a very experienced investor or a person, who has recently generated good return rates and we hope that we will be as successful.
Some social trading brokers additionally facilitate and encourage us to this type of activities. They enable automatic copying of the position of the person we are observing. Additionally, these positions are scaled. It means that after opening the position of an investor selected by us, the same position will be opened on our account, however, of a proper amount depending on the capital on our account. All of the above settings and possibilities are available on specially prepared social trading platforms.
Nevertheless, many persons surely ask themselves the question, why someone would want to share their knowledge and investment moves? This issue has been taken care of by some brokers, who made “social trade” more popular. In some cases persons who share their moves receive commission therefor and in other cases, this commission is included in the increased spread. It is also worth remembering the simple market effect of sharing signals. An investor who gains trust of many followers can expect that the asset purchased by them increases due to the fact that many persons make the same move. After the purchase is made by them, the price immediately increases, since this move generates demand, which will translate into an increase in the price. Of course, it has more significance only in small markets or in case of investors with such a good reputation as Warren Buffet. Despite the fact that copying large investors is different than what is currently offered by copy trading platforms, it is a kind of prototype. Thus, first social investments started.
Social trading platforms
What is crucial in the social trading context, is to select a proper broker to perform these activities. You should predominantly pay attention to the manner in which the broker enables benefiting from signals. You should check, what statistics regarding investors you can view, can you contact them and can signals be copied automatically. Especially contact with the investor is very important for aspiring investors. Thus, we have a chance to ask about details regarding the strategy or reasons for particular decisions – this is a very good material to study and valuable knowledge.
Brokers with social investment function:
Social Trading – is it profitable?
Of course, there is no straightforward answer to this question. In case of this type of trading a lot depends on how the investor, who we have decided to copy, performs. However, it does not diminish our responsibility. First of all, we have to select “a donor” well.
It is worth paying attention to their portfolio diversification. The larger it is, the smaller the risk resulting from dips on single instruments and markets. If their portfolio is not divided between various assets, we can consider copying more than one investors. It is also worth paying attention to the historical results of a given portfolio. The longer the history, the better. We do want to earn in the long-term, yet, unfortunately it often turns out that new portfolios generate very high returns for a few – several weeks and then, experience value plummeting. It is worth avoiding.
Even theoretically well selected portfolios do not guarantee success. Let us not kid ourselves – social trading is not a golden method to earn without any risk. Even the investor, who hitherto generated good results, can simply stop being lucky. Let us also remember that, in fact, only individual investors share their intentions. Big stock exchange players, such as aforementioned Warren Buffet or the most important investment funds, despite often publishing their intentions, do not share their moves in the copy trading model.
Nevertheless, Social Trading can be profitable due to other reasons. While being an aspiring trader, it is worth using this type of services. Having the possibility of watching how the best players behave in the market, we can simply learn. We will not always 100% like the strategy of a particular investor. It gives us the possibility to adopt from such a strategy only what we do like. A significant principle consists also in the fact that we can benefit from copying several traders simultaneously. Thus, we have a chance to invest some funds in, for example, raw materials by using the best traders in the raw materials market, and in shares by using other expert.
Furthermore, social trading is certainly a good solution for those, who do not have the time to regularly track quotations and news from the financial world. Thanks to the relatively small commission someone will basically do it for us. Of course, the question, if they do it effectively remains open. However, social trading is surely less risky than investing without any knowledge and tracking ongoing information.
Which investment portfolios should we copy
Choosing a proper investor and their portfolio that we wish to copy basically constitutes the grounds for our success in copy-trading. Unfortunately, this decision is not easy. While making a choice, it is worth paying attention mainly to the hitherto generated results. However, we should remember that, in fact, past results show how the portfolio will behave in the future to a small (or even no) extent. Moreover, this information might be even misleading. The portfolio, which has been recently intensively increasing can, just after our investment, come across an adjustment, which, in this case, is probably sooner or later unavoidable.
As in the case of all investments, in social trading safety of our funds is the most important. We should remember to choose diversified portfolios or to diversify them ourselves – for instance by copying signals from more than one investor. Even though in such a case choosing the portfolio requires even more time, it can protect us against losses to which we will not be prepared. It is also worth considering a kind of a trial period for newly selected investors. At the beginning, it would be good to entrust them with a smaller part of our portfolio as an experiment in order not to risk losing too large part of our total deposit.
Summary – is it worth using social trading?
To sum up, everyone must independently decide, whether social trading is an instrument for them. Potential gains which we can generate are attractive and tempting, however, we have to remember that the risk remains very high. A majority of persons dealing with Forex know very well that approximately 90% of market participants simply lose thereon. Therefore, while having no relevant experience, even when we use the help of experienced investors, at the beginning it is worth allocating to investment only an amount that we can potentially lose. In case of successful operations, we can always increase our engagement. The basis in case of copy-trading, but also in case of any form of investment, is patience.