Social Trading

Last Updated :

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Blog Author :

Gayatri Ailani

Edited by :

Raisa Ali

Reviewed by :

Dheeraj Vaidya, CFA, FRM

Table Of Contents

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What Is Social Trading?

Social trading is an online trading that allows traders to connect and share information, strategies, and insights on investment decisions. The main aim of social trading is to help traders improve their trading performance and make more profitable trades by connecting with other traders and sharing information. 

social trading

Sharing ideas about which stocks or other assets to trade, discussing market trends and conditions, and following the trade practices of other traders are all part of the social trading practice. Furthermore, it can foster community and collaboration among traders, benefiting new and experienced traders. Finally, this sense of community and collaboration can benefit traders looking to improve their trading performance and make more profitable trades.

Table of contents
  • Social trading is an online approach allowing traders to connect and share information, strategies, and insights.
  • Social trading platforms provide traders access to an online community to exchange knowledge and gain insights from other traders. This can potentially improve their trading performance by following the trading practices of more experienced traders.
  • It can foster community and collaboration among traders, benefiting novice and experienced traders.

How Does Social Trading Work?

Social trading platforms allow traders to see and even automatically copy the trade practices of experienced traders. It can help new traders learn the trade process and gain experience faster while allowing more experienced traders to share their knowledge and earn extra money by having others apply their trade practices. One of the most important aspects of social trading is the ability to view other traders' trades in real time. It enables traders to learn from and replicate the strategies and decisions of more experienced traders.

Chat rooms or discussion forums are important techniques where traders can ask questions, share their experiences, and get advice from other community members. Furthermore, social trading platforms most often include tools for analyzing and comparing the performance of various traders. For example, profit and loss, win-loss ratio, and drawdown are such metrics. Traders can use this data to decide which traders to follow and copy and track their performance. 

In addition, social trading platforms offer a wide range of assets to trade, including stocks, currencies, commodities, and cryptocurrencies. This provides traders diverse investment opportunities and allows them to build a well-rounded portfolio. It offers a unique and innovative approach to online trading, allowing traders to connect, share knowledge and insights, and improve their trading performance. 

Strategy

Traders can employ various social trading strategies depending on the investor's objectives and risk tolerance. Some of the most common strategies are:

  • Copy Trading: This strategy involves replicating the trades of other traders, also known as mirror trading. Traders can choose which traders to follow based on their performance, risk profile, and trading pattern. As traders follow the trades of more experienced traders, this can be a low-risk strategy.
  • Social Following: This strategy entails following the trades and insights of other traders without necessarily copying their portfolios. Traders can use the information shared by other traders to make their informed decisions on trading practices.
  • Crowd Trading: Rather than following the trades and insights of a single trader, this strategy involves following the trades and insights of a group of traders. It can provide a more diverse view of the markets while potentially reducing risk.
  • Portfolio Mirroring: This strategy involves replicating a trader's entire portfolio rather than individual trades. It can be beneficial for traders who want to replicate the performance of a particular trader or investment strategy.
  • Hybrid approach: This strategy combines social trading strategies, including copy trading, following, and portfolio mirroring. It can result in a more varied and well-rounded approach to trading.

Examples 

Let us look at social trading examples to understand the concept better:

Example #1

John, a new trader interested in trading stocks, registers for a social trading platform to gain experience and learn the trading process. He explores the platform and notices several traders with successful track records trading for years.

One of them, Michael, catches John's attention due to his impressive 10-year track record of profitability. Intrigued, John decides to follow Michael's trades and insights. He notices that Michael is long on a particular stock and decides to go long on the same stock.

The stock eventually rises in value, and John profits from his trade. He is pleased with the outcome and keeps track of Michael's trades and insights. As John gradually learns more about trading and gains more experience, he develops his trading strategies and makes his trades.

While following Michael, John notices other traders performing well on the platform and starts following and copying their trades. Furthermore, he diversifies his portfolio by following different traders with varying risk profiles and strategies, reducing his overall risk.

In summary, John started as a new trader with no experience and used social trading to learn from successful traders and gain experience. He followed and copied the trades of successful traders and gradually learned to develop his trading strategies while diversifying his portfolio to reduce risk.

Example #2

Anna is a forex trader who is interested in social trading. She knows that social trading only accounts for 3% of the total traded volume in the forex market, but she believes it can still be useful for her. She joins a social trading platform and starts exploring the different features available. Anna can see the trading history and performance metrics of other traders on the platform, and she can copy their trades or follow them for educational purposes.

Anna discovers a successful trader, Tom, with a high win rate and good risk management practices. She decides to copy Tom's trades and invests some of her capital in the same positions he has taken. As a result, Anna benefits from Tom's expertise and earns a profit from her investment. Anna realizes that social trading can be a valuable resource for learning and making profitable trades, despite its low adoption rate in the forex market.

Benefits

The following are the benefits of social trading strategies: 

  • Access to information: Social trading platforms offer a wealth of information and insights from other traders that can assist traders in making more informed decisions.
  • Learning opportunities: Social trading can be a valuable tool for new traders because it allows them to learn from more experienced traders and gradually develop their strategies.
  • Reduced risk: Following the trade practices of more experienced traders can help traders reduce risk and make more profitable trades.
  • Diversification: Traders diversify their portfolios by following and replicating the trades of multiple traders with varying risk profiles and strategies.
  • Sense of community: It can foster community and collaboration among traders, benefiting new and experienced traders.
  • Time-saving: Social trading saves traders time because they don't have to spend hours analyzing the market; instead, they can follow or copy the traders they trust.

Frequently Asked Questions (FAQs)

What is social trading vs. copy trading?

Social trading is a trading strategy that involves connecting and sharing information, strategies, and insights with other traders. In contrast, copy trading refers to the practice of automatically copying the trades of other traders. Social trading encompasses a broader range of interactions and collaborative opportunities among traders, while copy trading is a more specific feature within social trading platforms.

What is a social trading broker? 

A social trading broker is a brokerage firm that offers a social trading platform to its clients, allowing them to connect with other traders and copy their trades. These brokers provide a platform that facilitates social trading and offers various features such as copying other traders' trades, following experienced traders, and engaging in discussions with other traders. 

What are some of the best social trading platforms?

Several platforms are available; the best one for a trader will depend on his needs and preferences. Some popular options include eToro, ZuluTrade, NAGA, and Darwinex. Each of these platforms has its unique features and advantages.