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At DDI, we aim to highlight many of the most useful consumer-level technologies that can enable you to take charge of your investing future. Social trading is one such technology…

If you consider yourself a novice investor, or perhaps lack the confidence to make independent trading decisions, the learning curve ahead of you might feel rather daunting. But through social trading, you can gain access to some of the world’s brightest trading minds.

Clearly there are expert traders out there who are adept at generating positive returns across a range of market scenarios. Social trading networks allow such traders to be considered an asset themselves. By having their ‘followers’ invest in their trading strategies, those followers can also make money when the expert’s strategy wins.

Social trading enables the democratization of financial trading through the power of peer-to-peer networks and communities. It combines two of the internet’s most popular activities – social media and online trading.

While Facebook is a social network for friends, and LinkedIn is a social network for business, social trading networks are all about finding people who are good at trading, and leveraging their skills to either learn from them, or copy their trades.

Indeed, social trading has become immensely popular all over the world, for its openness, its ease of use, the opportunity to make money by copying profitable strategies, and the chance to connect with traders and discuss the market in real-time.

Investment Advice

Within most of the top social trading platforms such as eToro and Ayondo, you can find expert traders on their respective networks with whom you can chat and from whom you can gain valuable trading advice.

By clicking on their profile, moreover, you can be presented with a wealth of information pertaining to their previous trading performance, the types of trades they have made, and how much risk they have been willing to tolerate.

And it seems to work. According to a report in Harvard Business Review in which the author examined 10 million financial transactions that had taken place on eToro, “The fascinating thing was that we could actually see social learning happen, track the effect it had on people’s actions, and measure whether or not each action was profitable. There are few (if any) other data sets where you can see social exploration so clearly and determine which patterns of it work best.”

Copy Trading

Arguably this is the most important feature of social trading, especially for less experienced investors. As a term, it is often used interchangeably with social trading, but in fact specifically refers to the facility of allowing investors to automatically copy trading positions that are opened and managed by a trader.

This allows less sophisticated investors to piggyback off the decisions made by the experts. Indeed, copy trading can leave every decision in the hands of the copied trade, such as putting on a stop loss, taking profit limits or closing orders at the mercy of the trader being copied.

The broker itself takes a margin off every trade being made, both by expert traders and their copiers. And if you happen to be an expert trader yourself, you will earn more income from the social network by sharing your trades. The better you perform, the better your chances of increasing your own personal follower count, and ultimately, the greater the amount of commission you can earn.

Popular social trading platforms

Most social trading networks either register as a broker themselves – and thus make money on spreads directly, or they have agreements in place with a number of external brokerages which are connected to their platform and the money earned from spreads are shared between the brokers and the platform.

  • The eToro trading platform has become synonymous with social trading. With an estimated 6 million users worldwide, it is certainly the most successful of all social trading networks. As a user on eToro, you can trade independently, follow other traders to see how they trade and share investment information, copy other traders by automatically replicating their strategies, or do a combination of all of the above.
  • If Forex or Binary Option trading is your main focus, give ZuluTrade a try. Its Copy Trading feature is particularly strong, whereby you can closely analyze experts’ trading strategies and have a range of advanced and professional tools for customization and money management at your disposal. Traders can also provide feedback/comments for other traders.
  • Darwinex takes a slightly different approach. It focuses less on the social aspect than, say, eToro, and more on the chance to invest in a trader’s strategy as if it were its own asset class. Investors can buy ‘Darwins’ (or Dynamic Asset and Risk Weighted Investments) which represent the trader’s own trading strategy. But the strategies within these Darwins are not visible to the investor/copier. Instead, Juan Colon, co-founder and CEO of Darwinex, describes the Darwin as “like an ETF that you can buy and sell at any time.” They are continuously monitored by Darwinex, while the investor has access to sophisticated and automated risk control tools, in order to remain protected.

Advantages of social trading

  • It allows those with less confidence with financial markets to boost their chances of earning profits. And you can gain real insight into pace for communication with other traders and listening to their forecasts and opinions
  • It is cheaper than using a traditional investment advisor, who will incur a comparatively hefty fee, normally as a percentage of the total investment value. Neither do social trading platforms require sizeable deposits up-front to begin trading; so again, unlike with investment advisors, you don’t need a lot to get going in the social trading world.
  • Transparency – social trading platforms allow you to scan the trading performance of other users. So, if you’re underperforming compared to others, you can easily adjust your trading goals/preferences or change strategies. The free flow of information on social trading platforms also mean less time/cost is required on traditional investment research.
  • It provides expert traders who are open to being followed and copied with a source of additional income.

Disadvantages of social trading

  • If you’re a novice trader, then simply copying more experienced traders won’t teach you much about how to trade. Ideally, the more time you take to learn and trade by yourself, the more successful you will be in the long run across various challenging market scenarios.
  • With copy trading, you’re placing all your trust in the hands of someone else. Although that ‘someone else’ may well have an excellent track record, that’s no guarantee that they will remain successful going forward.

Ultimately, social trading is helping to knock down those walls that sought to preserve the exclusivity of the investment world. And while a trader’s winning strategy was a deeply guarded secret once upon a time, this strategy can now be bought into by other, less experienced investors who also want to win big. In doing so, ordinary investors can now gain access to the trading floor like never before.

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Dr Justin Chan co-founded OCIM and serves as Chief Investment Officer for its fund management platform. Within OCIM, He co-manages OC Horizon Fintech, where he translates real applications and future-awareness into investment performance. He also oversees a number of important tech projects in the fintech and data science space. Prior to co-founding OCIM, he worked as a senior quantitative strategist at GMO and developed in-house trading strategies. An expert in microstructure, market liquidity and behavioral finance, Dr Chan holds a doctoral degree from UCLA, and once served as assistant finance professor at Singapore Management University. He can be reached at justinchan@datadriveninvestor.com.

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