The ﬁrst social trading networks appeared in late 2010 and are on their way to becoming ideal solutions for many investors seeking forex exposure and diversiﬁcation but who lack the time or expertise to trade successfully on their own.
What Is Social or Copy Trading
A service that allows your account to automatically copy trades of one or more chosen expert traders. To help you identify the top traders most suitable for your needs, these services include trader rankings complete with detailed data on their styles, performance, maximum drawdown, and other risk data, experience, and so on. Most major brokers are either linking up with existing social trading services or building their own. Why?
Because social trading or copy trading ﬁlls an important unmet need, a shortcut to trading success without needing to trade yourself, but with better transparency and lower entry costs than with traditional forex managed accounts. You’re more likely to actually make money by letting an expert do it for you. For those interested in becoming star traders themselves, they can raise their chances of making money sooner by using a portion of their accounts to trade via experts until they reach a similar level of performance. OR, to become one themselves and receive additional income through efficiently managing investor funds.
Basically, you select one or more of your favorite experts based on the data available on them and set up an account that mimics their every trade (copy trade service), based on different settings allowed for managers. Experts are compensated based on performance measures that vary from broker to broker, such as proﬁtability and number of followers. You set up a trading account, then select the trader(s) that your account will mimic. When that star trader makes a trade, your linked account simultaneously makes the same trade automatically. This use of hired expertise makes social trading similar to managed accounts, with the advantages of lower entry costs, greater accountability, more transparency, and far greater ease of switching between experts. You always know how your chosen traders are performing in real time by a variety of measures and how they compare to others. If you see that a chosen trader is underperforming, you can switch over to another.
In theory, having a proven pro trade for you should vastly improve your odds of making money. There are still risks, though. Because pros focus on risks before proﬁts, let’s consider risks ﬁrst.
Copy Trade Risk
Will your results accurately reﬂect those of your chosen experts? That is, do these accounts accurately copy the trades of the expert trader you’re following? Because currency prices can change so quickly, followers’ trades might be executed at slightly different prices than those of the trader they’re following. For trading styles that seek to eke out very small gains from minute-to-minute moves, that difference could turn a proﬁtable trade into a loser for the followers.
Selection Process and Quality of Experts Vary
As with managed accounts, your success depends on your ability to pick winning traders and know when to switch to others. That gets easier if you have all the information you need to make that choice, a range of choices from a qualiﬁed pool of applicants, and an ability to move to different experts quickly and easily without needing to close and open different accounts.
Your costs to participate
To participate in AM Broker’s social trading program, you need a minimum $1,000, though the average account is around $25,000, increasingly from satisﬁed customers starting forex trading with small accounts and subsequently adding funds in the hope of averaging up, as one would do with any other winning investment in a ﬁrm uptrend. Additional, managers will set up fees themselves, but those are limited by the broker.
Success at Social Trading Still Ultimately Depends on Your Own Skill and Judgment
Though social trading is a huge shortcut to success, it’s far from an idiot-proof solution. There’s skill involved in knowing how to select expert traders, how long to stick with them, and how to deal with one’s own psychological, risk, and money management issues. You are still responsible for these. These issues are critical, yet they are difﬁcult to master and often neglected in the mistaken focus on ﬁnding the magical mix of trade setups or analytical tools. In other words, you still need enough of a background in analysis, trader psychology, risk, and money management to be able to:
Select the experts that best ﬁt your own risk tolerance, account size, style preferences, and current market conditions, and know how long to stay with them even when normal drawdowns tempt you to switch prematurely to another expert.
Be responsible for your own risk and money management.
Rewards of Social Trading
Now that the risks are clear, let’s look at the advantages of the social trading approach.
Higher Chances of Success
Not surprisingly, leaving the trading to those better qualiﬁed should produce better results than if you did your own trading, at least until you become an expert trader yourself. According to a report by the Aite Group, a Boston consulting ﬁrm that specializes in the ﬁnancial services industry, up to 50 percent of social traders are proﬁtable in a given quarter versus only about a third (at best) of do-it-yourself retail traders, according to data from the major retail forex brokers.
While it’s not so surprising that copying forex experts should produce better results for most people, early results suggest that a decent picker of top traders could beat markets in general, regardless of weather conditions are bullish or bearish. As social trading sites become more adept at making it easier to identify and track top performers, this performance advantage is likely to grow, regardless of how many followers are attracted. The forex market dwarfs that of the major stock indexes, so it is very hard for anyone except for a few central banks to generate enough volume to move markets for more than a matter of days.
While it still takes skill to succeed with social trading, you save an enormous amount of time and effort compared to the time and effort invested to become and remain a top trader. Even if you do expect to become a star trader, you still need to consider whether your results are likely to justify the extra time and effort invested. We suspect that the advantages of better results and time saved will cause many to decide to study forex with a goal of becoming adept selectors of trading talent rather than traders themselves. Just like there are funds comprised of shares in other funds, and investors who focus on mutual funds and exchange-traded funds (ETFs), there will be forex investors who prefer to build portfolios of traders as part or all of their forex activities.
Better Way to Play the Lower Correlation with Other Markets
The very nature of currency trading allows traders and investors to proﬁt in down as well as up markets. There’s always a trend to be played in some pair or time frame, and the almost interchangeable nature of retail forex and commodity trading means that skilled forex traders can as easily exploit developments via certain commodities, making it easier still to ﬁnd worthwhile opportunities when other retail markets are more challenging. In other words, forex’s low correlation to other markets means you’re not forced into the same crowded and often overpriced assets like investors in other markets are.
Transparency: You Know Your Experts’ Track Records and Current Performance
You have the records of the other experts against which to compare the results of your own. This is critical because even the most exclusive private account and hedge fund managers at some point go cold. You need a way to monitor them. Social trading provides past and current performance information that is at least as good as and usually better than traditional managed accounts, and come with the added bonus of community for consultations about your chosen experts and their competitors.
Copy Trades of Top Experts in Sum
If your searching for the best social trading system that brings investors and traders together, allowing investors to earn on the Forex market without trading on their own and managers to receive additional income through efficiently managing investor funds, search no further.