Following on from our best social trading platforms of 2020, we will now look at what social trading platforms are used for and the most important factors to consider when looking for a reliable copy trading platform.
Best Social Trading Platforms: Copy Trading
An online social trading platform allows traders around the globe to discuss and share trading strategies and signals with each other. Similar to any other social network, a social trading platform can have a personal profile, followers/following list, news feed and more.
The main advantage of a social trading platform is that you can choose to copy trading signals of other traders directly into your own trading account. This allows traders with little experience to benefit from the trading skills and expertise of professional traders. Most copy trading platforms will allow you to sort and filter signals so that you can select only those that meet your individual investor goals and preferences. You should be able to add or remove signals at any time whilst setting your desired risk level.
What makes a good copy trading platform?
Social trading platform regulation
It is important to ensure that the social trading platform is regulated by one of the most respected regulatory authorities. Some of the most significant government regulatory authorities to look out for are the Australian Securities and Investment Commission (ASIC), Cyprus Securities and Exchange Commission (CySEC) and the Financial Conduct Authority (FCA) in the United Kingdom.
By using a regulated broker, investors have some form of protection should something go wrong. Regulators put in place strict rules and regulations that the broker must abide by which can ensure traders that they are using a social trading platform which is operating with the upmost integrity. You can verify if a broker is regulated by checking the regulatory license number with the relevant authorities to ensure that the regulation is legitimate and up to date.
Social trading platform instruments
As each online brokerage can offer a range of different asset classes to trade via their online social trading platforms, you should check to make sure that they offer the particular markets that you are interested in trading. You may plan to diversify your investment portfolio in the future so consider the product range as it could make it easier to expand your portfolio when the time is right to do so.
Social trading platform users
One of the main concepts of social trading is to copy trading signals (follow) of other traders. The larger the user base of a social trading platform, the greater your choice of signals will be. However, it is important to not just consider the quantity of traders but also the quality of their trading strategies. You can usually do this by checking the performance of the various signals offered from within the social trading platform.
Social trading platform tools
Most copy trading platforms will contain some important tools for searching and analysing the different trading signals that they offer. Check that these tools are freely available and sufficient enough to filter results according to your own requirements. Some users may need more specific statistics compared to others who might just want to see the overall profits and drawdowns. You may also require a specific tool that is important to enhance your personal social trading experience. Thus, check that the platform incorporates these tools.
Social trading platform fees
The majority of copy trading platforms will charge a fee to either the signal provider, follower or both. Some fees may be fixed and others may be performance based. It is important to understand what fees are charged and to calculate them within your money management and trading strategy. If you plan to also conduct self-directed online trading, you should be aware of the spreads, commissions, swaps and any other fees.
There may be a fee to pay just for using the social trading platform although this is rare and most are provided free of charge. You will only usually pay depending on your trade activity unless using a specialist copy trading platform that has advanced functionality.
Social trading platform commissions
The commission you pay for your trading activity can vary from broker to broker. Some trading strategies such as scalping rely on small price movements and thus performance can be affected by commission. It is important to consider the overall costs you will incur and the affect that will have on your trading strategy.
Social trading platform spreads
The spread is the difference between the buy and sell (bid/ask) price which can vary depending on the volume of liquidity and quality of liquidity providers that an online broker has. Some brokers offer fixed and variable spread accounts, some will offer commission free accounts but instead mark up the spread to make up for this. In general, the more liquidity that the broker has, the tighter the spreads can be. It is important to account for the spread when planning your trading strategy, especially if you are planning on following or providing a scalping strategy.
Social trading platform swaps
If you hold a position with your online broker overnight then you will probably need to pay a swap fee. This is an interest fee for the procedure of moving open positions from one day to another, also known as the rollover. This is another cost to factor in to your money management and trading strategy. Some copy trading brokers offer swap free Islamic trading accounts that conform with Sharia law which allows Muslims to engage in online trading through their platforms.
In addition to the platform, spread, commission and overnight swap fees, there may be additional fees for account inactivity, funding and more. You should check to ensure that you are aware of and understand all of the potential fees that you can incur.
Social trading platform usability
Some social trading platforms are built around technology that you may already be familiar with, such as the MetaTrader platform. However, some social trading platforms are unique to a particular broker and will require some practice to familiarise yourself with how it works. Ensure that it is a platform that you find use friendly and ideally has plenty of online tutorials to help you understand how it works.
Social trading platform leverage
Most copy trading platforms will offer leverage to traders. In a nutshell, leverage allows you to open a position larger than you could with your current balance. For example, if you had leverage of 1:30 and a trading account balance of $10,000, you could effectively open a position size of $300,000 (10,000 x 30 = 300,000). Check that the copy trading broker offers a leverage which you require.
Whilst leverage can increase your potential profits, it can also greatly increase your risk exposure and lead to large losses. It is very important that you have a clear understanding of what exactly leverage is and the significant risks that it entails before you start trading online.
Social trading platform education
If you are the type of trader who prefers to be directed and shown how to use certain software and tools, it could be a good idea to make sure that you choose a social trading platform which has an abundance of tutorial videos and guides to teach you how to use the platform.
Social trading platform minimum requirements
You will need to make sure that the copy trading platform will run on your computer, VPS or mobile device by checking the specification requirements. Some platforms will run directly in your web browser so make sure it is compatible. Each online social trading platform will also have a minimum deposit requirement which is worth considering.
Social trading platform funding
Each social trading platform will offer different options for making deposits and withdrawals to and from your online trading account. Most brokers will accept bank wire transfers and credit/debit cards. If you prefer to use an online payment processor then you should check if these are readily available.
Social trading platform customer service
If you have a general or technical question then ideally you would want to get a quick and helpful response from the customer support team. You can check what support options are provided as online chat can usually be the fastest and most convenient for most traders. Customer service hours are also worth considering as is the brokers time zone. If you trade from the UK during the day time then you would ideally want a broker who has an EU office that is open during normal working hours. If you trade from Australia primarily during the evening, you may consider a broker that has support available 24 hour per day. Also make sure support is offered in a language that you are familiar with.
Best Copy Trading Platforms: Trading Signals
Now that you have had a brief overview of what social trading platforms are and some of the most important things to look out for, you may be considering using an online copy trading account. This can be a quick and easy process that requires usually requires completing a short online application form. Simply choose the social trading platform that meets your needs and follow the account opening process. Once your account has been verified, you will be able to gain access their copy trading platform and connect with other traders.