Social Trading – the Ultimate Guide for Beginners

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Social trading represents an alternative form of investment, recommended especially for less-experienced traders. It emulates other investors’ trading activities and allows less experienced traders to follow their strategies, using copy trading or mirror trading.

Table of Contents

Definition

Copy Trading versus Mirror Trading

Advantages of Social Trading

Disadvantages of Social Trading

The Bottom Line

Definition

In a nutshell, social trading represents a trading strategy used by investors in order to minimize the risks. This technique appeared in the early 2000s, eToro being one of the first platforms that have offered this alternative form of trading.

Traders that choose this technique will look after more experienced investors, in order to analyze and compare their strategies and investment portfolios. Then, they will decide which stock broker fits best their expectations, and will copy his/her actions, using copy trading or mirror trading.

etoro social trading

There are some aspects that traders should take into account when analyzing which investors they will follow:

  • Trading history;
  •  Performance of the investments;
  •  Number of open positions;
  • Average investments holding time;
  • Most preferred types of investments;
  •  Annual performance.

People can use the social trading technique on their own, following more experienced traders, or they can choose an operator that offers this feature.

Social trading requires little knowledge about financial markets, making it one of the most suitable forms of trading for beginners.

Copy Trading versus Mirror Trading

Often confused, copy trading and mirror trading are the two main strategies used for social trading.

The main difference between them is that, with copy trading, investors will pick what trades they want to copy from another trader, while with mirror trading, investors will copy all the trades made by another trader.

For example, when using the copy trading technique, if the trader you copy buys shares in the amount of 1000 GPB from Amazon, you will also invest 1000 GBP in Amazon.

Mirror trading is a strategy generally used in forex markets. This method usually requires users to have an account on a dedicated mirror trading platform. After the investors decide which experienced trader to follow, they will link their account with the more experienced trader’s account. As a result, every time the copied trader will execute a trade, the same trade will also appear in the investor’s account.

Advantages of Social Trading

Low risk

Compared to traditional trading, social trading comes with a lower risk. This is mainly because traders do not need to come up with their own strategies, as this form of trading creates the opportunity to learn from someone else’s experience. Also, traders do not need to analyze market movements or trends. They can use the portfolio of a more experienced investor, usually, the one they choose to copy.

Passive approach

Social trading is a passive form of trading, as investors do not need to spend too much time analyzing the market. They can easily follow other investors’ portfolios, and decide if they want to follow those strategies.

Social trading is considered to be a semi-automated form of trading because it can determine the moment a trade gets opened or closed. As a result, it reduces the stress and emotions associated with traditional trading. This can come up as an advantage, especially for beginners or traders with more impulsive behaviour.

Cooperative trading

This form of trading offers investors the possibility to collaborate and create trading teams. These teams can help with dividing the research or sharing information, such as strategies ideas.

Transparency

The online trading platforms that provide this form of investment usually offer full transparency for the followed accounts, by giving full details about open and past positions, as well as access to performance metrics. This way, traders can be aware of the risks and decide which strategies suit them better.

Disadvantages of Social Trading

Spend some time researching traders

Investors that choose this form of trading should be aware that they need to do some research before choosing a trader to follow. 

Keep in mind that no trader has perfect knowledge about the market and the best companies to invest in, or about the best moment to buy or sell shares. 

Therefore, a certain amount of risk is associated with social trading.

Before choosing a more experienced investor to follow, traders should determine if the strategies used are in line with their goals.

Change of strategies

Traders should keep in mind that the followed experienced investor may choose to change his/her trading strategies and style. There is a chance that these new strategies may not be in line with traders’ goals.

Limited performance history

Social trading is considered to be a new form of trading, as it has appeared less than 20 years ago. Because of this, there is no evidence about how this technique works in certain market conditions, such as a severe bear market. 

The Bottom Line

Social trading is an alternative form of investment that mimics other traders’ strategies and portfolio. This technique is recommended especially for beginners, as the risk associated with this method is lower compared to traditional trading.

Also, traders do not need to know very much information about financial markets to be able to use this technique.

Before choosing an investor to follow, traders should spend some time doing some research, in order to pick the best option. 

Traders should keep in mind that social trading has a limited performance history, as it has appeared less than 20 years ago.

Reference list

https://finance.yahoo.com/news/copy-trading-004534084.htm

https://en.wikipedia.org/wiki/Social_trading

https://en.wikipedia.org/wiki/Copy_trading

https://en.wikipedia.org/wiki/Mirror_trading

https://www.investopedia.com/terms/m/mirror-trading.asp

https://www.investopedia.com/articles/investing/120213/using-mirror-trading-strategy-stocks.asp 

https://www.investopedia.com/articles/fundamental/03/121703.asp

We’ve prepared a list of platforms that offer social trading below.

Brokers with MetaTrader 4
3.8 rating
81% of retail CFD accounts lose money
4.0 rating
75% of retail investor accounts lose money
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