Social Trading is a new way of trading financial securities and refers to using financial social networks that allow you to copy trades of ‘professional traders’ to generate a profit. This concept is very new and has sprung out of the growth in fintech and the increase in
use of online social networks.
Popular platforms that offer social trading (also known as ‘copy trading’) are Ayondo, ZuluTrade and the current market leader eToro.
What is social trading?
The way social trading works is actually very straightforward. You sign up to a social trading platform, deposit cash into your trade account and browse through the most successful traders on the platform. On the platform, you can see what each trader has invested in, his or her performance, their risk tolerance and how many people are copying their trades. Below you can watch a video by eToro (from the 2012 Finovate Conference in NY) explaining how social trading works using their platform.
Is it a viable trading strategy to copy successful traders?
According to research conducted by MIT “generally social trades outperform individual trades”. I believe that following successful traders whose trading strategies are in line with your own, have a similar risk tolerance as you and that trade asset classes you are familiar with can lead to you generating strong trading profits with minimum personal input. So, yes – social trading can be a viable money making trading strategy.
However, you need to be very careful when selecting traders to copy. If the trader you are copying has a very clear strategy that he or she follows, in a market niche that he or she has become an expert in, you will likely profit from copying their trades. On the other hand, if you follow someone who takes high risk and trades risky asset classes, such as currencies, then you could easily lose a substantial amount of money.
Hence, in my view, the key to successful social trading is carefully analysing the performance and trading strategies of the traders you intend to copy. Also, don’t simply follow one trader and put all your money into following his or her trades. Follow several traders, so that you are more diversified in your exposure in terms of trading strategies. Furthermore, copy a range of traders that focus on different asset classes to diversify the asset mix in your trading portfolio. And finally, to lower your trading costs try to choose traders that don’t constantly move in and out of positions, as trading costs will lower your overall investment returns.