So what is social trading exactly, and why has it gained such a strong following over the last few years? Let’s dive into this modern trading phenomenon for the answers.
What Is Social Trading?
Social media may have taken over most aspects of our daily communications, but it is relatively young. The first genuine social media site was SixDegrees.com, established back in 1997. While it still exists, it’s morphed into a more closed community. It was, however, the first real social media site to exist.
The power of social trading comes from the power of community. A community-driven trading platform is essentially an umbrella term for mirror trading and copy trading, but both run on the strength of the community.
The concept is relatively simple. Social trading works by allowing novice or less experienced traders to copy trades and strategies from more successful traders using an automated trading platform or service connected to their copy trading platforms.
In recent years, however, individuals with trading experience have started to use the tactic to diversify their portfolios and trade assets unfamiliar to them.
As we touched on earlier, social trading derives its popularity from the idea of community. We can all remember the GameStop short squeeze. That incident started when subscribers to the wallstreetbets subreddit took on the hedge funds and short sellers to the tune of several billion dollars and at least two significant hedge funds going out of business.
That is the power of social trading, a community of like-minded individuals using a social network to trade the financial markets by following someone’s lead and copying trades, in this case, buying GameStop shares.
Advantages of Social Trading
The idea of community driven trading is more than just an excellent way for beginners to dip their toes into the world of online trading.
As we saw in the GameStop example, people who, under different circumstances, would have had little interest in buying shares in the company did so out of a desire to be part of the community.
Of course, the chance to take a swipe at the big hedge funds also played a role, but as individuals, the GameStop investors would have made little to no impact.
Big machines, though, are made up of many little parts, and social trading networks give social traders opportunities and advantages.
Copying strategies and trades from more experienced traders means beginners can, to a large degree, overcome the emotional side of investing. We’ve collected feedback from several traders, and the emotional side of their trading was one of the key stumbling blocks they had to overcome. However, social trading lets them do exactly that.
Most social trading platforms will include a facility to filter the available strategies and only follow those that meet a person’s particular requirements. This filtering could include Type of Instrument, Trade Volume, Maximum Drawdown, and Number of Trades, among others.
One of the most critical features of any trading community is the ability to measure the performance of trade and strategy providers and only copy providers that show consistently good results.
Of course, past performance can never guarantee future performance, but strategy providers with a history of consistent results will probably be the best choice.
Trading is a numbers game. It doesn’t matter how many successful trades you make. It’s the overall result that counts.
Social Trading Disadvantages
Any investment carries a degree of risk. That’s just a fact of life where trading is concerned. Any trading strategy generated from a social trading platform also has a degree of risk.
Blindly following a particular trading strategy could result in traders using levels of risk that might be outside their usual comfort zone. An efficient social trading platform should have the correct levels of filtering that will allow users to see their risk exposure and make fast adjustments if necessary.
This risk management becomes even more critical for trading strategies with fixed parameters, such as volume and instruments.
Another downside of the tactic is that traders depend on strategy providers and do not develop their trading skills.
While the whole concept is an excellent tool for beginners, brokers who offer these platforms together with properly structured training courses such as webinars, for example, have the potential for excellent FTD and retention numbers.
Social trading is an excellent tool, but it should form part of a broader environment to be truly effective.
We’ve already touched on the potential of better FTD and retention figures from offering social trading to your clients, but brokers have some additional advantages.
Social trading opens avenues to additional revenues generated from the fees your brokerage charges strategy providers. Since these fees come from trading volumes, they can add up to a significant new income stream.
Social trading is one of the buzzwords in the industry today. As a result, social trading and other variations, such as copy trading and mirror trading, are trending topics in the fintech markets.
Most new traders signing up with your brokerage will look for all the new features, including social trading. If you don’t offer this, expect to lose new traders to competitors providing the feature.
The YOONIT suite of intelligent modules includes a cutting-edge social trading module, part of our MAM plugin for MT4 and MT5.
Already in use with over one hundred of the leading brokers in the world, YOONIT is a multiple-award-winning solution providing a range of benefits to your brokerage.
Built on the highly secure Microsoft Azure infrastructure, YOONIT includes the following modules:
- Social Trading
- Risk Management
- Bonus Management
- IB and Affiliate Management
- Custom Forex CRM
We would love to show you what YOONIT can do for your business, so why not schedule a no-obligation demo with one of our account managers and see what we can do for you?