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Social trading: What you should know

Social trading

There is so much buzz about social trading. Today, more people are leveraging social trading to make money. But what exactly is social trading and how can you take advantage of it? Well, read on as we will be breaking things down shortly. 

To start with, social trading is a very popular way to access financial markets. Through social trading, investors are able to execute successful trades by following positions from top professionals. Today’s post will help you to discover how social trading works and the accompanying risks that come with it. 

Social trading: What is it?

Social trading is a unique trading strategy where traders copy and execute the strategies of experienced traders with a track record of successful trades. Even though most traders execute trades based on their fundamental and technical analysis, there is a unique set of traders who prefer to observe, copy and replicate the trades of other professionals. And to be honest, there are a lot of perks that come with taking this approach. 

Experts like to see social trading as a unique type of social network. And that’s because it allows traders to not only interact with others, but also watch each other’s trades, and learn a thing or two about their decision making process. 

How does social trading really work?

Social trading is super unique and creates quick access to financial markets. The overall goal of social trading is to allow both newbies and experienced traders to share strategies and copy each other’s trade. Some of the leading platforms like eToro, Hot Forex and more have made it super easy for anyone to become a social trader. With social trading, you don’t have to solely rely on your trading strategies as you can now keep tabs of trading strategies of more experienced traders and replicate their trades. 

Some traders out there, especially people just starting out prefer using a fully integrated social trading platform. By fully integrated, we mean a platform that allows seamless sharing of trading strategies using a mirror trading or copy trading feature. Just like an average social networking platform, social traders have the liberty to subscribe to another trader’s channel. Once subscribed to a channel, social traders will get broadcasted live feeds and have the opportunity to copy trades from such channels. Simply put, if trader A executes a trade, trader B can automatically replicate the same trade. 

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Traders who share their trades in social trading platforms enjoy a lot of incentives including getting rewarded with money and status. By status, you get to rank higher on the leaderboard based on your popularity and success rate. 

Another unique thing about social trading is the freedom it offers. While on the one hand, it allows traders to leverage the principles of social trading, traders also have control over their trades and can deploy a range of signals and indicators to improve their success rate. By getting a glimpse of market sentiments and activities of other trades, you can confirm if your  analysis is correct or not. 

What markets can you use social trading for?

Social trading kicked off in the early 2000 and was used to mirror successful forex trading strategies. Away from the forex industry, many retail traders are leveraging social trading across different markets and asset classes. Today, you can take advantage of social trading to trade popular commodities, shares, indices and more. And the cool thing about all this is that you don’t need to have prior experience before you can get started with social trading. 

Things you should know before you start social trading

While there are a lot of benefits that come with social trading, keep in mind that it isn’t for everyone.Although many experts have praised social trading for breaking the barriers to financial inclusion, it has also been heavily criticized for downplaying the knowledge needed to navigate financial markets

One of the biggest mistakes newbie social traders make is to think that social trading eradicates the risks that come with trading. But just so you know, all trading strategies come with risks and social trading isn’t any different. Even though you’ll likely make profit with social trading, keep in mind that you’ll also make losses sometimes. While social trading means trusting another person’s trading decisions, you’ll also be incurring risks and losses if things were to ever go wrong. 

With years of experience navigating the financial markets, we know for sure that trading financial instruments requires knowledge and patience. And even though social trading has the tendency to help you skip a few steps, you’ll be missing out on a lot of experience up the knowledge ladder. While copying other people’s trades, it’s important you know and understand what you’re doing. This way, you’re able to come up with a robust risk management strategy. 

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The most important thing you should know right from the get-go is that when you copy another person’s trading strategy, you’re exposed to risks too. So it’s best to have a trading strategy that is unique to you and your objectives. 

While you can no doubt leverage other trading strategies to guide you on trade execution, remember their trading plan is suited for their own goals and motivation. When exploring social trading, always have it at the back of your mind that every trader has a risk appetite and capital to play with. So trading like someone else may not be a smart thing to do. 

Social trading: How do you start?

Starting social trading is super easy. And the best part is that you don’t need to have a robust knowledge of trading to get started. Platforms like eToro have a robust social trading feature which doesn’t give control of your trading strategies to a third-party. With platforms like eToro, you have a fully integrated social trading platform with access to highly profitable traders, sharing their trades.

Before you even start exploring social trading, keep in mind that the main objectives of social trading is to build a large community where everyone can share trade ideas, copy trade opportunities, whether for buy and sell positions and gain valuable experience of market sentiment and more. Read on as we delve deeper into alternative ways to explore social trading. 

eToro social trading

eToro offers one of the most robust social trading services we have come across. With many top traders signed up for eToro social trading, there is no shortage of trades you can execute. And the best thing is that they provide you with valuable data on the best social traders, this way you know which trader to follow. 

With eToro social trading, you get access to a large community of online traders, who are happy to share their knowledge and trades. Thanks to this unique space, you can kick off your trading journey without having a deep knowledge of trading. 

If you have always wanted to trade the financial markets but don’t know how to start, you’re welcome to explore eToro’s social trading service. 

Trading signals

One of the most interesting things about social trading is that it helps you replicate the trades of others. But while social trading will greatly reduce the amount of preparation you need to study charts and find positions, it also means you’ll become out of depth quickly. And just so you know, there is no guarantee that the trader you choose to follow has done a thorough job of analyzing the market. 

Thankfully, you can leverage technical analysis to know the perfect time to trade on different markets including stocks, commodities, forex and indices. eToro social trading for instance, provides social traders with buy and sell suggestions from other traders. you are at liberty to follow these suggestions. So feel free to do your due diligence before following any trade suggestions. 

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Market sentiment indicators

One of the best ways to keep track of, identify trends and positions of other traders is to take advantage of market sentiment indicators. For newbies, market sentiment indicators show the mood of financial market participants. Using this tool will provide you with intelligent insight on what is being traded and when. 

Unfortunately, gaining market sentiment isn’t always easy and that’s because there are a number of factors that can influence whether traders are optimistic or pessimistic. That said, here are a few ways you can measure market sentiment. 

The commitment of traders (COT): This report is published by the Commodity Futures Trading Commission (CFTC) every Friday. The report shows the net short and long positions of speculative traders. It provides you with a clear picture of how traders are positioned and their overall attitude to the market.

The volatility index (VIX): This tool tracks S&P 500 option prices. It particularly measures the implied volatility of the stock market. Instead of showing price direction, VIX usually shows how much fear is on the market. The higher the volatility, the more fear about the current trend. On the flip side, low volatility indicates a more stable market. 

High/low sentiment ration: This indicator helps to compare how many shares are at their highest level over the last 52 compared to the amount of shares making 52-weeks lows. Should the average trend point towards the low, it is an indication that the market is bearish. If it is high, it indicates that the bulls are bossing the market. 

Social trading on MT4

It isn’t only brokers that are offering social trading services these days. Even platforms like MetaTrader 4 have jumped on the bandwagon. MT4 has a function called sentiment trader. This feature helps traders to analyze the market sentiment and view historical sentiment charts. This gives a pointer into how other traders have performed over time. 

The MT4 sentiment trader indicator is super easy to understand. To start with, it displays the percentage of traders who currently have or previously had an open buy or sell position on a specific asset. The indicator uses information from real accounts, instead of relying on only price action. 

Conclusion

Social trading has changed the fortunes of many people, including people who have no knowledge about trading. If you have always wanted a chance to trade the financial markets, you’ll not go wrong to give social trading a try. And yes, there are tons of platforms out there including the likes of eToro offering robust copy trading services.

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