Social trading, as a mechanism, is the ability to literally copy the trades of other professionals on the same platform and execute those trades in your own portfolio. Examining the habits and emulating the patterns of more experienced traders is an excellent strategy in and of itself, but having the added utility of being able to practically implement those habits by duplicating them perfectly; that’s a competitive edge that pays for itself if used properly. eToro, Zulutrade and Ayondo are all platforms that offer this service. Read on to see if Social Trading is right for you.
Top 3 Brokers For Social Trading or Copy Trading
eToro is a social trading and multi-asset brokerage company that was founded in Tel Aviv, later expanding its headquarters to Cyprus and the United Kingdom, and it is finally available to traders in the United States.
75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Zulutrade is a dynamic company that offers multiple automation and copy trading options for markets like forex, indices, stocks, cryptocurrency and commodities.
What Is Social Trading?
Social trading is a type of trading which brokers such as Trading 212 say help to democratize trading, by creating an environment of high-availability for information, and diffusing this information to less seasoned users across the industry.
Similar to social media accounts you may be familiar with, professionals using the social trading services provided by certain platforms, are enabled to “follow” other traders and keep track of their trading activity and data. This information can be utilized in a passive way, for purely education purposes, or in a more active way, by literally duplicating the trades of those being followed.
Regulation is as tightly controlled as the rest of the finance and investing industry. Let’s talk a little about Social Trading’s background; how it was created, and how it evolved
Comparing Social Trading Brokers
Different brokers have different selling points which correlate to various perks and drawbacks for different trading styles. Figuring out which broker and platform are right for you and your style, so you can maximize your effectiveness, will take some time, but with any luck, the list we’ve compiled will help you find the best combination for you.
It isn’t always clear from the outset what costs you will incur when signing up with and utilizing any particular broker. Here are some things to look out for and compare:
Spreads and Fees.
Fees, however small, can eat into your bottom line and slowly (or rapidly) diminish your ability to accumulate capital or even stay afloat if you’re not careful.
I wish it were as simple as examining which broker has the highest fees and just staying away from them, but it’s not. In fact, very few things in this industry are as simple as they first appear. Not only should you stay away from fees that are high, you should look into the types of fees there are, and think about how often you may run into them depending on how many trades you make on average and what types of trades you make.
An account might be free to “use” for example, but they broker might charge you for everything from withdrawals to inactivity on your account over time, so stay sharp.
Something else to look out for are the differences between brokers regarding their minimum and maximum deposit amount.
Some companies are geared toward the novice and, consequently, aren’t too terribly hard on their traders when it comes to this factor. Others have designed platforms that target a more experienced demographic and therefore have better leverage options.
Deposit and Withdrawal
You may not have thought about it, but the methods a broker allows you to use for extracting and infusing capital into your trading account so that you can actually finance your work, is important. Some of them offer bank wires, which are reliable and secure but tend to be more rigid than other methods. More brokers are offering things like PayPal and Skrill. Their not as secure, per-se, but are certainly more mobile platform friendly.
Not all platforms are created equal, or designed to suit all people. What you want to do with your account, materially and practically, whether you’re aggressive or not, will have a huge impact on what platform you should use. If you’re going to need extensive charting functions, don’t go with company A. If you need access to more markets in a specific country, use platform B. And so on.
Ease of Use
Broker will either have a platform designed for them, or they will essentially use a general platform that they give you access to. If the architecture of the program doesn’t look good to you, or isn’t easy to navigate, then you may have a harder time using it on a daily basis, and that’s just sacrificing valuable metal resources you could be using to build a trading strategy.
Your chosen platform doesn’t have to be full-on minimalist in order for it to be clean, effective, and easy to use. Trying to make a living as a trader isn’t exactly easy, but the interface you use to make it happen doesn’t have to make it even more difficult. Even the obvious stuff like quick heads up panels and neat displays will help you both in the beginning and the long run.
Even if the display and such isn’t exactly what you want from the get-go, if it’s easy to customize, then you may be able to mitigate some of those start-up drawbacks with small tweaks.
All right, so you found a platform that you like in principle, now we need to take a look at the every-day implementation of that system and find out if the hardware matches the shiny box it comes in.
The interface with best appearance doesn’t always deliver on performance. If your trades aren’t going to be made as quickly as you’d like, or as accurately, then it doesn’t matter (or matters far less) that the interface looks pretty.
There are no guarantees in this industry, and that’s true for security too. But that doesn’t mean you should just go with whatever broker claims to have the best security hardware, team, and software.
Ensure that this company can describe to you what methods they use to secure trades and funds, and look into whether or not they a dedicated security team working for you while you’re at it.
Platforms with two factor authentication or deposit protection guarantees are a must, as are ones with more rigorous financial checks.
Don’t pick a broker who isn’t licensed or registered. And if they are registered, go a step further and examine the entities that regulate them. This will give you some idea of the frequency and rigor with which the broker is “checked-in” on by regulatory agencies.
And after all this, you’ve probably narrowed it down to a few that have pretty similar traits and offering in the security department. So which one do you chose out of the highest rated brokers?
I’m glad you asked. Now we have to look at the platform they offer and it’s internal features.
Do they offer trading hours that are congruent with the market you want to trade in? No? Then you should look elsewhere. Trading hours for your home market are not to be overlooked when making this analysis.
Now, I recommend looking up the broker’s Asset List, which “lists” all of the markets they make available to traders, and because everyone is essentially trying to target either a specific demographic with their services (like specialists), or a wider range of people, not specializing in any one particular market, you should pick a broker that suits your needs.
For example, if you’re a forex trader who specializes in specific currency pairs, you could probably trade comfortably at any broker, but another trader, with different strategies, might rely on a diverse set of markets with less correlation.
It will definitely behoove you to research what kind of tools and widgets a broker offers before signing up and dumping money into an account. A few brokers offer things like compendiums and educational tutorials, glossaries and market monitoring tools, while others still offer up to date news displays.
Some brokers offer more tools to help you manage risk of loss, or more comprehensive and user-friendly tools like guaranteed -stop and the like. I think you should check those tools out before diving in.
Mobile App & Research Tools
Consider what kind of tools you’re getting in the package you sign up to use as well. On one end of the spectrum, you might have minimalists, and on the other you have guys who absolutely love to get their hands on any and all tools at their disposal.
Mobile apps and analysis features are a few of the most common offering from brokers, and researching the functionality and efficiency of these types of tools is key.
A lot of this research you’ll be doing will be streamlined if you can decide in advance what you actually want out of a trading platform. Doing some learning along the way is natural, but deciding what type of account to open with a broker, for example, come with their own deposit structures and trading fees.
Margin and Leverage
In order to have the best, most expansive and rewarding experience possible with your broker and trading platform, you’ll need to tackle some important questions.
Exclusive account types are common in the industry and often come with perks, such as increased return interest and sign-on bonuses for loyalty programs, to higher leverages for paid accounts versus free accounts.
Not all companies allow you to trade beyond the Euro, the English Pound, the Dollar, and the Yen. So if you want to trade with more exotic currencies like cryptos and Reals, double check that the broker is even open to that specific currency.
There are different types of Copy Trading, and getting to know the differences will help you in the long run. Here are some examples:
Follow & Lead
Social trading is the mechanism we talked about earlier that allows you to follow other traders, hopefully picking up useful skills and habits along the way while you customize your own style. A good broker will have tools and structures to help you do that.
Are there not very many traders using this platform, comparatively? Or at least not many you ewant to follow. That makes a big difference developmentally, and should factor in to your calculations when searching brokers.
Amount of Data
Does a broker who offers social trading only allow you to see their currently active trades? Or do they let you examine their histories and trends? The more data you have in this industry, the better. So keep that in mind when looking into the amount of data you get.
Don’t let a trader arbitrarily restrict the number of other people you can follow. If that’s a policy of a company you’re looking into, be wary. Flexibility is paramount.
Ever read the reviews of a product before you buy it? Yeah, you should see what people think of a broker before you start an account with them, too. (Other traders and professionals of course) It is an important barometer for competitiveness and customer satisfaction.
Security of Broker
I had a friend once who almost bought a house from an “agent” who didn’t have an office, business cards, advertisements, or a social media presence. He almost got robbed. Be wary of brokers like that. If they don’t have a “presence” maybe you should find out why. Check out their official credentials as well: who regulates them and how that entity supports it’s decisions will be very telling. It is also worth double checking the financial stability if possible.
The market is a volatile place, and loss is inevitable. But if you look at brokers in the European Union, for example, who are required to list on their websites the percentage of traders who lose money, this should give you an indication of not only the type of trader that may tend to use this platform, but also of the stability and versatility of the broker.
You should always be growing and learning in this industry. My father used to say, “If you’re not getting sharp, you’re getting dull,” and I believe that. So find a broker that offers at least some tools for educating yourself. Glossaries, tutorials, actual paid teams who will produce content daily for their traders to enrich themselves with. All of these things will help you.
The History of Social Trading
As you might imagine, the actual mechanism of social trading evolved from an already social practice. Traders who were conversing with one another about the business of the day after the markets had closed exchanged a diverse rage of information with one another, especially about the trades they’d made and the profits they expected to make. This normally took place in a local bar or in a penthouse down the street.
So a trader hears a good tip and he writes it down manually to copy it for the next days business. As we scale up this model of operation through the years and introduce some new tech, we can easily develop an image of how it would have evolved as a practice. And naturally because everyone wants things to faster, smarter, cheaper, better, we end up where we are today, with the current iteration of a practice that started a long time ago in a bar between traders.
eToro and their OpenBook platform was one of the first solid advancements, bringing this tool to a broader audience. OpenBook really makes the “hive mind” concept possible in the industry, allowing people to learn from each other and alter their behavior according to the latest, best practice. This also means that the best and brightest don’t necessarily have an edge just because of their online habits anymore if everyone can see them.
Forms of Social Trading
Here are the most popular forms of social trading:
Social Trading isn’t synonymous with Copy Trading. All ravens are black but not all black things are ravens, right? But people still use the terms with a degree of vacillation that isn’t helping beginners at all.
Copy Trading gives you the ability to follow people and copy their trades directly, whereas social trading only allows you to accomplish the former of these. Informatively, we have a great many metrics in the industry for ranking traders, and this helps us decide who to follow and why. These metrics include statistical information and data values informed by the trader’s history of profit and loss, career level, etc.
Over time, you can decide who to trust and who not to trust, and keep tabs on the integrity of what you base your trust on in the first place, making modifications to your habits as you go.
This is a Forex mechanism that sounds exactly like Copy Trading on the surface, but it isn’t the same, and the differences are striking. Mirror Trading allows you to copy a trader’s entire strategy, rather than just a few trades.
The Mirror Trader selects a trading strategy that reflects specific criteria, such as currency type and budget. When a position is opened by the chosen strategy’s developer, the same position is opened in the investor’s account. A subtle difference, but if you don’t understand it well enough to operate with it smoothly and confidently, then I suggest not employing it until you gain a greater degree of familiarity with other forms of social trading.
Signals and Tips
These are essentially what they sound like. They are helpful bits of information regarding a specific topic in the industry. Everything from whose stock is predicted to go up or down, to sharing trade secrets and ideas concerning strategies and tools.
Forex subscriptions are a new development that produce alerts when a certain fluctuation matching the criteria occurs, this is then sent to the subscribers and they do with that information whatever they wish.
Some of these tools may cost you some money in monthly fees or upfront payments, although some are free in exchange for signing up with a valid email, it can be well worth it if they are integrated into a comprehensive strategy. One more tool for the box.
The Pros and Cons of Social Trading
The advantages and disadvantages of social trading are many, but let’s look at a few highlights.
As part of a vast network of traders, a social trader is elevated to a higher level of interaction among his peers in the industry (and his superiors) and his bandwidth for processing and utilizing information is widened well beyond what it would be if he was manually researching and following up on tips and leads. The “collective” that is formed from this is always adapting and bustling with energy, and inside that network are all the good and bad ideas that germinate new expansion for beginners and seasoned traders alike. We can all learn from each other.
As part of the package with many brokers, you get access to not only the currently active trades of those you are following, but their histories and stats as well.
Watch and Learn
Combined with an effective and well oiled educational matrix, social trading is a superior tool for learning in real time everything you need to in order to maximize your potential.
The “social” aspect of this mechanism can make a trader who otherwise feels that he is “going it alone” more like he is part of something less antagonistic than it may first appear. It is a highly volatile and high-risk career choice after all, and this can weigh on a trader who is just starting out.
Going shopping for groceries when you’re hungry is generally thought of as mistake, because you make decisions based on your hunger, and the influences of the market place might have you grabbing at things you’d otherwise avoid. Trading is the same in some respects, and the dispassionate component of automatic trading can give you the advantage of not making split second decisions in the heat of an emotional tumult.
Now how about the cons:
Just because you can view a wide variety of information about a trader you’re following, you can’t see everything. Some things remain private.
You won’t be able to see how much actual capital they have, for one. You won’t know anything about their diversification, if any, and their successes or failures off-platform aren’t going to be easy to find either.
False Sense of Security
With automation of any kind, if history is any gauge, brings with it efficiency, diversification, innovation, and opportunity. But it can also give you a false sense of security. Just because you can automate your trades based on what “the big boys” are doing, doesn’t mean you should just sit back and expect them to do all the work while you reap all the rewards. That’s just silly, and if you lose sight of how volatile and risky this industry actually is because you have a new toy, you’re in for a rude awakening.
If you get into this business, invest some capital, find a trader to copy and make a profit relatively easily, you might fall victim to the feeling that it will always be that way, or that it should be that way when it becomes apparent that you got lucky and now your lack of real acumen is starting to show through.
Don’t be a victim of beginner’s luck, only to stop trading altogether when things start to get difficult. It was always going to be difficult, you just momentarily fooled yourself into thinking something that wasn’t true.
Everybody’s different, and other traders may have advantages that you haven’t yet cultivated that are also hidden from you.
They may have capital to burn that you don’t. That’s a big influence on trading habits.
The same hedging techniques that apply to other forms of trading should apply to social trading. They are things like:
- Get your risk management strategy together.
- Don’t stop watching your investments because your mirror trading.
- Do your own homework and apply your knowledge in a way that suits your style.
- Don’t risk more than you can lose, obviously.
At the end of the day, social trading is a great tool that should be incorporated into your arsenal if it fits your style, and used with discipline and care.
eToro is a multi-asset platform which offers both investing in stocks and crypto assets, as well as trading CFDs.
Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 62% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
Past performance is not an indication of future results.
Cryptoassets are volatile instruments which can fluctuate widely in a very short timeframe and therefore are not appropriate for all investors. Other than via CFDs, trading cryptoassets is unregulated and therefore is not supervised by any EU regulatory framework.