What is Social Trading, Best Social Trading Brokers
In the modern digital age, social trading has emerged as a revolutionary tool for traders worldwide. It is particularly useful for those just starting. By bridging the gap between isolated individual trading and a powerful collective knowledge community, social trading platforms are the best way for new traders to get ahead.
With the best social trading brokers, you can get real-time insights into the strategies of seasoned traders. For newbies, this means a chance to learn, adapt and thrive in fast-paced markets. For traders who are more experienced, they get the chance to lead, share and even monetize their knowledge. In this article, we will discuss social trading in detail and explain how social trading is not just a trend, but a valuable tool for informed decision-making in the modern trading landscape. We will also introduce you to the broker we believe is the best copy trading broker active today.
What Is Social Trading?
Social trading is an activity whereby traders observe and follow the trading strategies and behaviors of more experienced traders. Think of it as a type of collective intelligence that is facilitated by online platforms. Here's a deeper look into its key features:
Platform-Based: Most social trading takes place on specialized platforms that allow traders to share their actions, strategies and results.
Follow & Copy: One of the most powerful features of social trading is the "copy trading" tool. We should point out that copy trading relates to the action of a new trader copying an experienced trader’s moves, whereas social trading relates to a broader number of actions that include studying, copying and discussing trades with elite traders. If you want to learn more about copy trading, read our article here.
Transparency: Social trading platforms typically provide detailed performance metrics about traders who wish to share their results. Commonly shared information includes profit percentages, risk levels, preferred assets and trading frequency.
Education & Community: Besides the trading aspect, these platforms also often have communities where traders can meet to share insights.
Broker Integration: Many social trading platforms are either linked to or owned by brokerage firms. This makes it easier for users to seamlessly execute trades without switching among multiple platforms. However, note that websites that offer social trading do not have to be a broker. Here at Arincen, we are one such example.
Risk Management: While copy trading can simplify investment decisions, you should never forget that all trading involves risk. Many platforms offer risk-management tools, allowing users to set limits on their copy trading activities.
Monetization for Top Traders: Successful traders can benefit from social trading by gaining followers. Some platforms will even compensate popular traders based on the number of followers they have or the volume of assets copying their trades.
Pros and Cons of Social Trading
Pros:
- Educational: Newbie traders can learn from experienced traders at a time when they need direction the most.
- Simplified Decision-making: Capital does not come easy for the vast majority of traders. The money they use to trade has often been painstakingly saved with the goal of launching a trading career. The stakes are often high. Rather than analyzing markets independently, beginners can rely on the expertise of those they follow.
- Community Engagement: Financial trading can be a solitary pursuit, but social trading allows traders to discuss strategies and market insights with others.
Cons:
- Over-reliance: There's a risk that you might lean too heavily on others without developing your own understanding.
- Past Performance: A common mistake is assuming that past performance guarantees future results. It does not. Just because you enjoyed some wins in the past doesn't guarantee any future success.
How Does Social Trading Work?
Social trading exists at the intersection between traditional trading and social networking. Traders can share their actions, insights, strategies and results in real-time. Here's a step-by-step breakdown of how it generally works:
Sign Up: Just like with any other online platform, the first step is to sign up for an account on a social trading platform or broker that offers social trading services.
Profile Creation: Traders create profiles that display their trading results, strategies and other relevant data. This allows other users to assess their performance over time.
Observing Other Traders: Users can browse through the profiles of professional or more experienced traders to see their trading strategies, risk profiles, preferred instruments and more.
Follow & Copy Trading: One of the best features of social trading is the ability to "copy" another trader's actions.
Follow: You can choose to “follow” certain traders, which means you get updates and alerts about their trading activities.
Copy: This takes “following” a step further. If you opt to “copy” a trader, the system will automatically replicate their trades in your account based on the funds you allocate. So, for example, if the experienced trader you are following buys Tesla stock, then Tesla stock is also purchased in your portfolio.
Interactive Features: Social trading platforms usually offer features like commenting, forums and chats. It’s important to provide a place where traders can discuss market events, share insights, ask questions and even debate strategies.
Risk Management Tools: Recognizing that not every trader's risk appetite or strategy may align with the follower's goals, the best platforms provide good risk-management tools. You can set maximum loss limits, decide on the portion of your capital to allocate to copy trading, or even choose not to copy certain types of trades.
Withdrawing Profits & Funds: Just like with traditional trading platforms, users can withdraw their funds or profits. However, it's important to understand the platform's fee structure, as some might charge for withdrawals or have other associated fees.
Social trading is so powerful because it democratizes the trading experience, providing newcomers with a window into the strategies of those who are more experienced, and potentially helping them navigate the often turbulent waters of financial markets.
Kinds of Social Trading
Copy Trading:
Social Following:
Portfolio Mirroring:
How Can I Earn Money Through Copy Trading?
Is Social Trading Safe?
Social trading, like all financial activities, carries inherent risks. When thinking about safety, remember two things: security from potential fraud, and trading risks.
Security Risks:
Platform Integrity: As with any online platform, there's a risk of cyber-attacks. You may be excited by a broker’s brand promise or they may come highly recommended by a friend, but you still need to perform due diligence. Ensure that the platform you choose uses tough cybersecurity measures, like data encryption and two-factor authentication.
Regulation: This advice will never change. Always go with a platform that is regulated by a reputable financial authority. For example, in the world of FOREX, regulation is very important, which is why lists such as these are so helpful.
Transparency: The platform should offer transparent details about its fee structures, trader performance metrics and any potential conflicts of interest. If you are not sure about something, reach out to the platform’s customer service representatives for clarity.
Financial Risks:
Market Risks: Markets are volatile. Past performance does not guarantee future results. Even if you're copying an experienced rock-star trader, there's no guarantee of profit!
Risk Management: Not all experienced traders will align with your risk tolerance. Some might employ high-risk strategies that can lead to huge gains but can also set you back through tough losses. Make sure you set appropriate risk management controls, like stop-losses.
Recommended Brokers
Best Social Trading Brokers, Platforms, and Websites
Etoro - Copy Trading Broker
- Seamless account opening
- Powerful social trading with popular traders
- Advanced trading features in mobile app
- Beginner-friendly presentation of financial data
- Only one account base currency
- Customer support can be improved
Arincen - Social Trading and services Website
- Vibrant social trading community
- Offers access to stocks, FOREX, crypto, Indices and futures markets
- Access to a large number of high-performing traders to follow
- Excellent signals package
- High quality information and news packages
ZuluTrade - Social Trading Website
- Easy-to-use platform with reliable connectivity
- Fast connection to more than 70 top brokers
- Large number of global affiliate brokers
- Free demo account
- More than 90,000 traders to follow and copy
- Algorithm for ranking signal providers could improve
- Customer service responses are slow
Tradingview - Services Website
- Several different Japanese Charts are available
- Vast number of pre-built and community built indicators
- Economic calendar directly on the platform
- Dividend and earnings calendar shows directly on the stock chart.
- Advanced analytical tools
- Excellent educational resources
- Users on the free plan may not have access to advanced features
- Delayed response times from customer service
MT4 - Trading Platform
- Ease of deployment
- Platform doesn’t overload the computer
- User-friendly design for beginner investors
- Compatible with several operating systems
- Advanced charting capabilities
- Automated trading
- Comprehensive historical data for backtesting isn’t available
- Execution speed is not good and is unsuitable for high-frequency trading
What Is the Best Copy Trading Platform?
Does Copy Trading Really Work?
This is a complex question. The first thing to point out in the trading world is that there is no sure thing. Trading is risky, and you can lose money very easily.
Back to the question. Does copy trading work? If by this you mean whether the mechanics of copying another trader's moves in real-time functions correctly, then yes, on reputable platforms, copy trading works.
However, if you're asking whether copy trading guarantees profits, the answer is more nuanced. Yes, you can be successful with copy trading because trades are based on the actions of experienced and motivated traders. These traders are your eyes and ears in the market, and they have invested considerable time and energy honing their skills. For as long as you have selected the right trader or traders to follow, and as long as they are profitable, you can be profitable too. It’s not a definite yes, is it? There is still a lot that can go wrong. Remember these critical considerations:
Past performance does not guarantee future results.
Always diversify. Relying on a single trader or asset class can be risky.
Not every trader's risk profile is best for you. Find someone who has a similar tolerance as you.
Always research and choose traders based on more than profits. Look for trading strategy, the length of their career and other relevant metrics.
Watch out for additional costs and slightly wider spreads that can impact your net returns.
Try to educate yourself. Relying solely on copy trading blunts your ability to develop a trading strategy of your own.
Use risk management tools. Be it by setting a maximum loss limit or deciding the portion of your capital to allocate to copy trading, always cover yourself.
Understand the difference between popularity and skill as it relates to traders you follow. Is a trader more skilled or simply better at promoting themselves?
Copy trading can work, but like all investment strategies, it's not foolproof or guaranteed to be profitable. You must approach it with a comprehensive understanding and manage risks effectively. Don’t be totally hands-off. Continually assess and adjust your copy trading portfolio.
Is Copy Trading Risky?
Tips for Getting Started
If you're considering diving into the world of copy trading, following these tips can help you get started on the right foot:
Research Platforms:
Look for platforms that are regulated by reputable financial authorities. Check for transparent fee structures and user reviews.
Understand the Costs:
Be aware of any fees associated with copy trading, which might include spreads, overnight fees and subscription costs. You must determine if the costs are justifiable for the service provided.
Start with a Demo Account:
Many platforms offer demo accounts that allow you to practice copy trading with virtual funds. This can give you a feel for the platform and the process without risking real money.
Evaluate Traders:
We’ve covered this at length in this article because it is so crucial. Don't just look at profits; assess traders based on their risk scores, trading strategies, trading history and preferred assets.
Avoid traders with extremely aggressive strategies unless you understand and accept the associated risks.
Start Small:
Once you are ready to launch, consider starting with a smaller amount of capital until you're more comfortable with the platform and process.
Diversify:
Don't put all your eggs in one basket. Consider copying several traders with different strategies or asset focuses to spread your risk.
Set Clear Risk Parameters:
Before you get started, have some idea of how much of your portfolio you want to allocate to copy trading. Don’t forget to make the most of risk management tools offered by the best copy trading brokers.
Monitor:
Regularly review your copy trading portfolio. The best social trading brokers allow you to track your choices easily. Don't think twice about unfollowing a trader if their strategy no longer aligns with your goals or if they consistently underperform.
Set Realistic Expectations:
Copy trading is not a guaranteed way to make money. Understand that losses are a part of trading, and even the best traders can have off periods.
What to Look for in a Social Trading Platform
When considering a social trading platform, there are several factors to consider to ensure a safe and productive trading experience. Here's a detailed breakdown of what to seek:
Financial Assets
Variety: A diverse array of assets means you can invest in markets that suit your interests and expertise, whether it's FOREX, cryptocurrencies, commodities, stocks or indices.
Liquidity: Popular assets should have enough trading volume to allow for easy entry and exit without significant price fluctuations.
Access: Check if the platform offers access to global markets or is limited to specific regions.
Reputation and Regulation
Regulatory Oversight: Ensure the platform is regulated by a reputable financial authority in its jurisdiction. An example of a top-tier regulator is the Financial Conduct Authority (FCA) in the UK. If you want to read more about how the FCA protects traders, read our article here. Other examples of tier-one regulators include the Swiss Financial Market Supervisory Authority (FINMA), and the Australian Securities & Investments Commission (ASIC). This list is not exhaustive.
Regulatory oversight provides a level of protection and comfort that the platform complies with industry standards and best practices. Remember always that you don’t have to rely on these regulators alone. Depending on which part of the world you live in, your local broker may not have a footprint in countries where these tier-one regulators operate. Your next best bet is to make sure they are regulated locally.
User Reviews: This is a treasure trove of feedback. Look up reviews on independent forums, websites or financial communities. Positive feedback from real users can often be the best indication of platform reliability.
History: A platform with a long-standing history in the industry can often be a safer bet than a new entrant. Check for any past security breaches or issues in the press.
Leverage
This is linked to our point above about regulation. Different regulators have different guiding policies in leverage. Consider this, with brokers based in Europe operating under the rules of the European Securities and Markets Authority (ESMA), the leverage for Contracts for Difference (CFDs) is heavily regulated. Because of this, you can only get leverage of:
30:1 for major currency pairs
20:1 for non-major currency pairs, gold and major equity indices
10:1 for commodities other than gold and non-major equity indices
5:1 for individual equities and any underlying not otherwise mentioned
2:1 for cryptocurrencies
Retail Trading Accounts: These generally offer more protection than professional trading accounts including a negative balance protection policy and lower leverage (maximum 30:1 in ESMA-controlled countries).
Professional Trading Accounts: These generally offer high leverage of up to 200:1 even in ESMA-controlled countries. This is because it is understood that professionals have the skills and experience to not fall victim to irresponsible trading.
On the other hand, let’s consider that in some jurisdictions, you can get leverage as high as 500:1. In fact, if your broker is registered in the South American country of Belize, you can get leverage as high as an eye-popping 1000:1. It should not come as a surprise to learn that brokers in these jurisdictions are not considered to be part of a high regulatory tier.
This is a double-edged sword because you can make a lot of money, but you can just as easily become financially ruined!
Research Tools and Education
Analytics Tools: The platform should offer robust analytical tools and many methods to evaluate trader performance. This includes historical returns, risk metrics, trading strategies and more.
Educational Content: For beginners, educational resources are crucial. Look out for platforms offering webinars, tutorials, articles and even demo accounts to familiarize users with trading concepts.
Community Engagement: A vibrant community can provide peer reviews, insights and discussions, which can be invaluable for both novices and experienced traders.
Real-time Data: This is the lifeblood of social trading. Make sure your broker gives you access to live market data, news updates, and economic calendars that can help in making informed decisions.
Fee Structure and Costs
Trading fees can sometimes be difficult to keep track of. Be sure to check how these fees compare with industry standards:
Spreads: There are two main kinds of spread, one is fixed and the other is variable. Generally, the spread refers to the difference or gap between two prices, such as the bid/ask rate in a currency exchange rate. An example of a good spread is 1.4 pips for the EUR/USD (the narrower the better, this means that a spread of 1.4 pips is better than a spread of 2 pips). This article explains more about this important concept.
Commission: This is nothing more than the service charge that brokers require for carrying out transactions on behalf of their clients.
Rollover fees: When you leave a trade open overnight, the broker normally charges a rollover fee for the facility of holding your trade open for that period of time. This is because they assume the risk of the market changing adversely.
Withdrawal and Deposit Fees: Some platforms might charge fees for depositing or withdrawing funds. Pay attention to this. It's important to be aware of these and any associated limits or conditions.
Subscription or Inactivity Fees: Certain platforms have monthly charges or fees for inactive accounts. Ensure you're aware of these potential costs.
Performance Fees: On some social trading platforms, a portion of the profit might be taken as a performance fee, especially if you're copying a trader. Make sure you factor this into your profitability calculations.
Let’s Recap
FAQ
What is copy trading?
How does copy trading differ from traditional trading?
Can I lose money in copy trading?
How do I choose the right trader to copy?
Are there fees associated with copy trading?
Do I have control over my investment in copy trading?
Is my money safe in copy trading?
