What is social trading?
Social trading works just like social media but in trading perspective. Platforms like eToro, ZuluTrade and MetaTrader offer services to follow an experienced and verified trader.
These platforms will show you transparent tracking record on the strategy that the traders are using. It gives us a hint in terms of choosing a trader to subscribe.
Copy-trading or mirror trading is a specific type of social trading where we copy all the trading action done by the trader we follow. It allows users to copy their trades automatically.
For beginners, it would be an excellent choice to start with copy trading. Since all the trading record is transparent, these data will give us a hint of how experienced traders operate their fund and which strategy they are using.
What are the benefits and drawbacks of copy trading?
WIth copy-trading, it will take the emotion out of the trading. Investment decisions are made base on the system developed by the traders. The system can be manual and automated, but most of them are fully automatic.
Since they are mostly automated, it can minimise the mistake from the trader itself. Plus, you do not have to watch the screen 24/7 when you are copy-trading!
Offers Transparent Data
Copy-trading is often time displayed on platforms like eToro, ZuluTrade and MetaTrader. They all provide transparent data such as trading history, performance, operating time and AUM(Asset Under Management).
A Good Start for Beginners.
If you have just entered the trading world, it would be challenging to understand what is going on with all these instruments and tools. For copy-trading, platforms have put massive work to make the service as straightforward as possible to get started.
Benchmark and Learn.
Once you start to copy-trade, you can see the live trading history and which forex pairs or other assets the trader is trading. It can give you an idea of how the trading strategy works and make your system in the long run.
However, If we depend on the trader only, we might not learn how to trade. It is an excellent way to get started, but on the other hand, you can practice with a demo account and understand how things work!
Potential Human Error
Even though it is an algorithmic trading system, the variables can be tweaked regularly by the developer/trader. They might have altered it for better performance, and backtest results might be fabulous. But, it could be over-optimised and too concentrated on the past, resulting in a bad performance for subscribers.
Some strategy might work for 3 years, even 5 years, but we do not know if it will sustain longer or not. The pattern and the fundamental of market changes in a cycle depending on the instruments. The trader has to continuously research and enhance the algorithm to maintain the alpha and strategy. This requires massively hard work.
How do we know which trader to follow?
By considering the past performance of the traders, we can consider it as an indicator to determine whether the trader is reliable or not. There are a few things you have to consider before you choose a trader.
- Some traders performed extraordinarily good in the short-term (like few months)
- But we do not know if this is pure luck or not.
- Considering at least 1 year of data would be necessary.
- Profit rate, Winning rate, MDD and more statistics are provided as statistics to consider.
- The excellent profit rate is essential. However, MDD(maximum drawdown) is also significantly important.
- Psychologically, we feel twice as more pain than joy when we lose/win the same amount of money.
- Every trader who offers the service of copy trading has briefly explained what the logic and strategy that they are using is.
- It is crucial to go through all the details and determine whether it makes sense or not.
- For EA in MetaTrader, you can backtest the strategy for free before the copy trade or purchase.
How to do social trading?
1.Decide which platform you want to use.
- There are multiple platforms like eToro, Zulutrade and MetaTrader.
- You can study these platforms and choose the one that is more suitable for you.
- All of these platforms are user-friendly and easy-to-use.
2. Choose a trader you want to follow.
- You can choose a trader base on 3 primary criteria.
- Operating period, performance and strategy.
- Choosing the right trader would be the most critical thing in terms of copy trading.
3.Deposit your trading fund.
- After deciding which platform to use and which trader to follow,
- the next step would be depositing the fund you would like to trade.
- $300~$500 would be reasonable for starting. But, some strategies might require more deposit to operate the system thoroughly.
4. Sit back and watch.
- When all is set, you have to sit back and observe.
- The cost of copy trading might vary on the structure.
- Either it is $30~$50 per month or distribute a portion of profit the trader has earned.
5. Repeat and diversify.
- Once you realise how copy-trading works, it would be easier for you to choose the right traders.
- Using multiple strategies would give you an advantage of diversifying the risks of your fund.
How can I find a good copy-trading platform?
There are several criteria you have to consider in terms of choosing a copy-trading platform. Here are the things that can help you to select a suitable one for you!
1. Trading Cost
a) Deposit and Withdrawl
- Most brokers and trading platforms offer services to deposit and withdraw with bank wire and e-wallets like Neteller, Skrill and Paypal. Some brokers support crypto and local bank transfer.
- Make sure there are suitable ways for you to deposit and withdraw! If you can not put in and out your fund, it would be not very sensible!
b) Minimum Deposit
- Every broker and trading platforms may ask the different amount of minimum deposit to start with.
- Some may ask a small amount of initial fund and others with greater demands but cheaper fee and leverage.
- Please check if the requirement of minimum deposit suits you!
c) Spread and Commissions
- Spread is the primary source of income for brokers and trading platforms. It is essential to choose a broker with a less spread and cheaper commission.
- These fees will influence your profit rate significantly.
- Minimising the cost is the key to succeed in trading.
2. Trading Platform & Broker
- Trading itself is complicated. The ease of using the platform for the users is a crucial factor to consider.
- A user interface, such as layout and bottoms, should be sensible and easy to read.
- Check if the UI is user-friendly and easy for you to comprehend.
b) Execution Speed
- The trading execution speed varies among the brokers and trading platforms.
- By comparing with other platforms and ensuring the trade is placed accurately, you can identify if it is reliable or not.
c) Trading Instrument
- For CFDs, there are Forex, Stocks, Crypto, and so on.
- Some brokers may not offer the asset you seek to trade.
- Confirming the trading instrument you want to trade would also be necessary.
d) Margin and Leverage
- Base on the account type you have registered, margin rate and leverage may vary.
- Leverage can offer you the opportunity to maximise your profit with limited capital.
- On many review websites and forums, we can easily check the comments of other people.
- This may help you to know what other people think about the platform.
- For copy-trading, go through the comments on the trader would help you to decide which strategy to follow.
- Be careful with unregulated trading platforms and brokers!
- There cases where brokers ran out with customers fund!
- Please ensure which legislative institution regulates the broker or platform!
a) Tracking Period
- The longer the period of time being operated, the more credibility it has.
- At least 1 year of tracking record would be recommended.
- The profit rate is significant, but we would like to emphasize the MDD(maximum drawdown).
- If the drawdown goes below -20%, it could be hard for you to maintain the strategy.
- Other than these, checking the profit factor and winning rate would help you to determine which trader to follow.
c) Number of Subscribers and AUM
- AUM(Asset Under Management) and several people following can be an indicator upon deciding the legitimacy of a trader.
- Even though the performance is fabulous, if there is no operating fund and subscribers, you should be cautious.
- Every trader has their own strategy, and it is briefly introduced in the caption section.
- If you don’ understand, feel free to ask the trader about their strategy.
- Once you think the strategy makes sense in terms of sustainability and performance, you can try with the smaller fund.
Social trading is one of the trading methods which you can follow an experienced trader with verified performance. This is a great way to participate in the trading world, especially for beginners. It offers an idea of how trading works and give hints upon strategies.
Copy trading is a type of social trading where you can copy the trades automatically via platforms like eToro, Zulutrade and Metatrader. It is often time fully automated and enables you to prevent mistakes from human emotions. But, the strategy may not be permanently outperforming and possible human mistakes can occur.
Overall, for people who are interested in automated trading and want to learn about it, copy-trading will provide transparent trading history. This can be a good source to benchmark in terms of developing your own system. Even though you are not a developer, you can always learn new things from the experienced traders! For beginners who do not know anything about trading is strongly recommend to start with copy-trading.