The rise of social trading: an evolving paradigm in the financial aspect

forex

Social trading is a relatively recent trend in today’s sharing economy. It allows traders to share their knowledge and experiences with fellow investors. Copy trading is a unique form of social trading best suited to amateur traders who are able to mimic the trades of expert traders in the live market for a certain fee. A copy-trading mechanism could many times be facing a transparency-revenue dilemma. At one end of the spectrum, social trading platforms must make traders’ trades open for other traders to be able to compare and assess their trades. But there is a downside to this at the other end of the spectrum–ensuring complete transparency could be detrimental to the platform and the revenue they make as the followers might just copy the trades manually to avoid paying the fees. Visit multibankfx.com

 

Social trading gets you word-of-mouth credibility

Though there is a large segment of investors who prefer conservative and seemingly safer ways to invest, social trading has found takers in young investors. The data which is gathered by the platforms has paved the way for better and neutral reporting of performance which makes the association between costs and returns all the more visible and clear to the investor.

 

However, since several individuals in a number of online communities are unrated, there are dedicated platforms that display traders’ performance and allow other users to imitate these actions. A key advantage of social trading is that when you copy trades, you mimic actual traders’ actions–they have also invested their own money which is not the same as a fund manager advising you or managing your portfolio and funds.

It is similar to going to a friend who is passionate about cuisines for restaurant advice or going to a good trainer to get better results from a workout. Therefore seeking advice and looking for customer ratings is nothing new but in the world of investments, it is rather recent.

 

Can you make money from social trading?

There are many benefits of social trading. There are certain areas of social trading that would be relevant for those investors who prefer not to interact too much with other traders online. Traders could look at deals and put forth their questions in moderated social trading chat rooms. If you’re new to trading, you would find this to be a truly enriching learning experience.

 

How does social trading function?

Today a majority of the social trades are carried out via specialized websites. The social trading community makes it easier for investors to copy the trades of leading investors whereas moderators, who themselves are usually seasoned investors, lead these conversations. Copy trading and mirror trading are two different types of social trading.

 

Social trading is basically like an arm of online social networks that use a fresh way to verify how accurate financial data is. Traditional investors typically operate with either of these two standard approaches: fundamental or technical. Social trading enables discussions on the market conditions and speculation on the market trends in the future as well as the factors that may affect them.

Generally, social trading is carried out online. It could be very insightful for traders while also providing them with a much-needed morale boost. Traders would often want to upgrade or change their trading tactics, risk management methods, and trading psychology by copying certain methods they pick from a social trading environment. Short-term trading is one of the key areas of focus in social trading. It can give a solid boost to market liquidity. Yet another advantage of social trading is that one is able to see past performances of the user and how different strategies worked for them.

 

Platforms for social trading

Social trading platforms can now be accessed through most retail brokers. Anyone could be a leader and a follower. A leader is the one who suggests trades–they should be able to prove their success and clearly explain their methodology and process. This is how their followers would be able to locate them. There are plenty of social trading technologies made available by social trading networks out of which, a few have millions of users.

 

You would be able to view the risk score and the performance histories of the platform’s top traders on most social trading platforms. The Sharpe ratio is a popular risk metric that depicts the mean return as a standard deviation of the returns percentage. If the efficiency index is high, it shows better financial performance.

 

Application for collaborative trading

You should be able to access social trading tools on your mobile devices such as your iPhone, Android, or iPad. It is no longer limited to your computer. Mobile-friendly charts, indicators, and dashboards can be categorized as the basic features in any social trading app, there’s of course much more to them.

 

Few risks of social trading

One should be aware of the following risks before choosing to go for social trading:

 

  • Non-independent opinions. You may come across collective opinions which could turn out to be a matter of concern for the traders who are not as experienced traders. It could lead them to risk-prone trades.
  • Unrealistic expectations. Many people find the idea of earning big with a little investment quite tempting and it is only natural. These expectations become all the more pressing when one sees others around achieving this feat. But one should not get carried away and carefully approach trading as often leverage can boost both your profit and loss potential.
  • No diversification. A majority of the new traders who do not have enough experience tend to put all their money behind just one trader. Each network would have a number of different traders who you could follow and copy. Therefore, consider investing in multiple traders rather than blindly following just one.
  • Risk management. Poor risk management could happen on many levels resulting in a major loss. One should always limit the amount of capital one can afford to lose.

 

In conclusion

Social trading involves sharing data and using the same for trading purposes. It is inclusive of mirroring and duplicate trading. Social trading gives traders an avenue to discuss fresh ideas, learn new risk management, and learn how to keep emotions in control.

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