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In the past, social trading was more likely to refer to wild parties thrown by brokers and traders. Nowadays the phrase refers to a new form of democratized money managers. New social networks have sprung up to offer financial pundits the technology to invest in the markets.
What is a Social Trading Platform?
Copy trading platforms allow web-based investors trade based on the information provided by others. The social element comes from copying the trades of other traders, who may be professionals or amateurs.
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By taking time to find traders who fit your own goals and profile of risk you can outsource your own trading. If you choose your traders well you can profit from the successful trades they make.
Usually when you copy a trader you set an amount to invest in their strategies. Some networks limit this amount to a fixed percentage of your capital, to help avoid a wipeout should a trader lose.
Once you start copying a trader's strategies the platform will automatically open a position each time your guru does. Other systems offer email or phone notifications giving you more control.
The main difference between social or copy trading and 'mirror' trading is that the signals are from fellow humans. Mirror trading is automatic trading based on signals created by algorithms or 'forex robots'.
As well as being able to copy trades, a major benefit of these social networks is the ability to discuss the markets. You can follow traders without copying them. By networking, sharing news and swapping tips on the markets you can learn and refine your own strategy.
Best Copy Trading Sites
There's a broad choice of trading platforms that focus on social networking and copying.
eToro is one of the most visible and highly trusted platforms in the category. It's also one of the biggest trading network for both copiers and investors. There is a focus on the networking side of copying over highlighting strategies.
Etoro has recently made efforts to improve its 'People Search'. This makes it easier to find traders suited to long term gains rather than highlighting riskier short term profits. It's simple to open a demo account and get a feel for the follower system before investing real money.
Tradeo and Ayondo are two more popular social trading networks. Of the two we found Ayondo's trader search the most in-depth, with real world risk metrics that go far beyond etoro's. Tradeo has a slick interface but it appears to be more geared towards the 'get rich quick' mindset. Tradeo's 'trader search' highlights the traders making unrealistic gains of 6,000% or more. This implies a risk level more akin to gambling than trading.
ZuluTrade is another option, though less accessible for beginners. ZuluTrade provides a complete copy trading feature and is compatible with major brokers. This allows you to mirror trades using the broker of your choice.
Finally there is SignalTrader, which offers automated mirror trading across a range of instruments. You can trade in different markets including forex, stocks, commodities, and bonds.
Making money as a Guru leading followers
It's not just a hands-off trading opportunity for people with more money than time. There are significant advantages for experienced or professional traders. By providing your own signals and allowing people to copy your trades you can earn perks and hard cash.
Most trading networks are aware their advanced traders are one of their biggest assets. As a result, Gurus with a large following are treated well by the brokers.
eToro offers its top Popular Investors a 100% spread rebate on their trades, as well as a monthly cash sum. This can be as much as 2% of the funds invested by their followers.
Ayondo's Top Trader program offers the chance to earn up to $5 per lot traded by your followers. Tradeo offers nothing, but Zulutrade will offer signal providers 0.5 pips per lot traded in profitable months. This will vary according to the spread and currency, but the average earnings are $4USD per lot.
Tips For Making Money On Social Trading Networks
The social trade revolution doesn't necessarily increase your odds of becoming richer. It all boils down to following the right people and trading the right markets. It's not enough to just see a high profitability rating on a trader for you to entrust your hard-earned money at their hands.
Know how they trade and what risk management strategies they practice. A trader that gets lucky a few times and manages to triple their account in days can be a bad bet for the long run and vice versa. Use hard numbers that can be found on the Performance section of most trading platforms. They provide a graphic way of displaying key performance metrics. These including the average pips won, max trades open per day or week, and the account's drawdown.
Try to distribute your available capital into different financial assets and professional traders. This gives you a higher chance of making money in social trading by capping risk and capitalizing on different price movements. It's also wise to diversify between instruments like binary options, indicies, commodities and stocks.
Crowd Trading: An alternative to following?
The CFD brokers keep innovating, and it wasn't long before someone decided to find a third way between manual trading and copy trading. For those who wish to benefit from the insights of a social trading network but still maintain control of their own capital and trading style, crowd trading offers an interesting alternative.
The premise is simple: by monitoring the market flows and the postiions others are taking, its possible to glean an insight to what might happen next. Platforms such as Trade360and Tradeo allow you to monitor the 'market sentiment'. This allows you to see how other traders are feeling about the current pricing and which way the market might move, allowing you to take a position for or against the mood.
It is worth exploring what the sentiment analysis of each platform is based on - for this to be effective a larger sample size is essential. Ideally this should include institutional investors as well as retail traders.