Designed so that a trader can follow the strategies deployed by other users, or even “mirroring” their trades in detail, social trading platforms are growing increasingly popular.
They are a product of the developments that took place in the financial sector over the past three decades, which saw the rise of a new financial industry built around retail traders - an ecosystem composed not just of the traders themselves, but also of brokers, liquidity providers, and infrastructure technology providers.
New services and modern technologies may have given plenty of average Joes a chance to invest globally, but the reality is that although anyone has the ability to buy and sell stocks, currencies, commodities and other financial instruments, this hardly means everyone also has the necessary skills.
It is here that social social trading platforms come into play, for retail traders can see, evaluate and follow the successful strategies and investment advice of other traders.
Not all platforms were created equal, however.
When choosing to invest through social trading platforms, traders should pay attention to two main aspects: trading strategies and social trading activities conducted on social trading platforms.
Choosing a trading platform.
Deciding which trading platform to use is the first thing traders need to pay attention to, because a reputable and powerful platform is a prerequisite to picking quality trading strategies.
For a platform to be acceptable it should at least meet the following conditions:
- Have a database of high-quality strategy providers. This shows that the social trading platform is being widely used by other traders.
- The platform’s operations are transparent. Trading activities must be visible as traders should know where their money is invested.
- You can start and stop following (copy) trading strategies at any time. Traders should be able to choose to follow or stop using the strategy at any time. In other words, traders should be able to control their funds.
- Enhanced risk management and analysis. This is chiefly because it is doing analysis that allows traders to make informed decisions about their investments, and proper risk management can protect traders’ funds.
When choosing an investment strategy, traders should pay attention to the following elements:
- Strategic performance. There is little doubt that traders tend to prefer long-term sustainable strategies. A strategy that has been losing money for one year, but recovering all the losses of the previous year in just one month, and still making a considerable profit may not be an ideal choice, even if technically profitable.
- Risk profile. Traders need to assess the risk appetite of the strategy provider and ensure that they are in line with their own needs.
- Has a strategy stood the test of time? Traders should choose well-tested strategies. It is not wise to use the profit made using a strategy for only two weeks as a gauge of its true profitability.
- Transparency. The more traders know about the strategy provider and the strategy itself, the better. Traders can choose strategies provided by reputable providers or and study their trading philosophy and goals.
Social trading is an innovative form of trading, which allows traders to make investments with higher risks but higher returns. It is definitely an option worth considering for traders who have funds and are looking to trade them, but do not have the time to do transactions, or cannot access traditional mutual funds and hedge funds.