Social Trading Guide

Richard Montana | October 21, 2022

What is Social 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 social 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.

How Does Copy Trading Work?

Copy trading is a popular method of automated trading where trade positions are copied from one trading account to another. Copy trading is actually quite straightforward for traders, especially when compared to some more complex forms of investing. Traders can add their desired investment amount, select a trader to copy, and then the copy trading platform will replicate all the selected trader’s positions into their trading account. The 3 main components of copy trading are:

Signal provider

A signal provider is someone who makes their trading account and activity available on a copy trading platform for other traders to copy. Signal providers are usually compensated for the trading activity they bring to the broker who is providing the platform. Some will also get a success fee depending on how well their trading signals perform.

Signal follower

A signal follower can join a copy trading platform and choose from the signal providers for those who they wish to copy trades from. As a follower, you can choose to copy trades of one or multiple providers and also set your desired risk level. You should be able to add or remove signals at any time.

Copy Trading Platform

The key component that brings the signal provider and signal followers together, is the copy trading platform. This is where the providers can share their trading signals and where the followers can find traders to copy. Some copy trading platforms will have a handful of signal providers and others may have thousands. You should be able to filter signal providers according to various factors such as how long they have been trading, returns, drawdowns, risk, instruments traded, trading style and more. If you wish to copy trades, you will need to ensure that the broker supports copy trading on their platforms.

What are the Types of Copy Trading?

There are various brokers who offer copy trading functionality – some are semi-automated, automated, or manual.

Automated copy trading

Fully automated copy trading is when you select the traders to follow according to your personal trading requirements and risk preferences. From then on, all positions from the traders that you are following, will be copied into your own trading account without any human intervention.

Semi-automated copy trading

Semi-automated copy trading involves adding an extra step to the process. In this instance, you are able to decide in real time if you would like to copy each trade, or not. On the traders that you do decide to copy, you are free to manage and close them at anytime in which you wish to do so. Alternatively, you can let them run and they will still be managed automatically by the signal provider.

Manual copy trading

This method of copy trading is the closest to normal trading, with the addition of access to the knowledge and strategies of other traders. You can analyse their previous trading experience and get some insight in to what factors prompted them to enter or exit trade positions. You can then decide who you would like to manually follow and which of their trades you would like to copy for yourself.

Why is Copy Trading so Popular?

In recent years, copy trading platforms have gained increasing popularity amongst retail traders all around the globe. This is primarily due to the advancements in technologies that have enabled numerous brokerage firms to offer copy trading services to their clientele.

It presents a way for users of all experience levels to trade the financial markets without needing to allocate the time to do it themselves. However, copy trading is not just a solution for beginners. Even the more experienced investors can copy traders in order to diversify their portfolio and learn new trading strategies from other traders.

Advantages of Copy Trading

With so many traders choosing to use copy trading platforms and follow signal providers, there are clearly some advantages to doing so. Some of the main advantages of copy trading are as follows:

  • Trade various financial markets online without needing the time, knowledge or skills usually required.
  • Copy trading can free up time for those who have another career or wish to allocate time to learning how to trade online
  • Copy trading allows traders to choose signal providers with a trading style that suits their own individual risk tolerance and trading goals.
  • Copy trading could also be considered a way to diversify an overall trading portfolio. You can still trade manually if you wish to do so and also follow signal providers juts for some inspiration for your own trading activity. When copy trading, some traders may select different signal providers in order to hedge trading risks in case different trading strategies become successful in different market conditions.

Risks of Copy Trading

On the surface, copy trading may seem like a way to trade online by taking advantage of others experience. However, there are significant risks involved with copy trading that all aspiring traders need to be aware of. Some of the inherent risks associated with copy trading include:

  • As with any trading or investment strategy, you can lose all of your capital. Copy trading is considered high risk with absolutely no guarantees of past performance repeating itself. You should never take historical results as an indication of future results as anything can happen in trading. It is imperative that you have a clear understanding of the significant risks involved with trading online and never ever risk more than you can afford to lose.
  • Choosing a consistent trader to copy is not an easy task. A trader who is having a good streak at the moment, may hit a rough patch. If you are not careful, drawdowns can catch you off guard and result in big losses.
  • Copy trading does not take into consideration your personal financial circumstances or investment goals. You are effectively relying on a third party for trading decisions but absorbing full liability and responsibility in the case something was to go wrong.
  • There are also signal provider risks. The signal provider may discontinue their copy trading service without notice, or get margin called by their broker, and this could inconvenience you if you so not have an alternative plan in place. The trader you have chosen to copy may also change their strategies to become more aggressive, and this could mean riskier trades without your knowledge.
  • If the broker providing the copy trading platform was to go out of business, you may not be able to copy trading signals like you were before.

Choosing a Social Trading Platform

We will now look at what social trading platforms are used for and the most important factors to consider when looking for a reliable social trading platform.

Regulation

It is important to ensure that the social trading platform is regulated by one of the most respected regulatory authorities. 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. Most experts and professionals would only trade with a regulated broker. If you use an unregulated broker and something went wrong, there may be no recourse.

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. This can include Forex, Commodities, Cryptocurrency, Stocks, Indices, Options, ETFs, CFDs and Futures.

Community

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. Some platforms will have a handful of signal providers whereas others will have hundreds or even thousands. The more signal providers there are, the more choice you will have to find trading signals to copy that fit within your preferred trading style and objectives. Just always remember that past performance is by no means any guarantee of what will happen in the future.

Tools

The platforms built-in trading tools can be useful to assist you with filtering signal providers, adding/removing signals, analysing markets, managing account and more. Most social 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. The more trading tools available, the more comprehensive the overall copy trading experience can be.

Fees

The majority of social 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 social trading platform that has advanced functionality. There can also be swap fees for holding trades overnight, inactivity fees, funding fees and other fees. As broker fees can vary and change, it is important that you check and are clear about all of the fees involved. If you are looking to save as much as possible on your trading costs, you can take a look at our best discount brokers.

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.

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.

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 social trading brokers offer swap free Islamic trading accounts that conform with Sharia law which allows Muslims to engage in online trading through their platforms.

Other Fees

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.

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. You will find that there are lots of MetaTrader brokers which is one of the most user-friendly platforms that can be used for manual, automated and copy trading. It even has an integrated marketplace where you can subscribe to trading signals.

Whilst most copy trading platforms tend to have a sleek and modern user interface, some are more intuitive than others. You may wish to try and a few different platforms to see which layout and features you prefer the most. Some will be more complex than others with an abundance of tools in addition to copy trading. Then there may be those that are strictly for copy trading whereas others may also allow you to trade manually. Also consider if the platform is available for desktop, web and mobile devices. Which platform you choose, will depend on your own personal needs.

Leverage

Most social 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). Whilst this may seem tempting and can increase potential profit, it can also greatly increase the risk. It is therefore of the upmost importance that you have a clear understanding of leverage and how it works before trading leveraged positions. If you require a certain leverage level, you should check to ensure that the copy trading broker provides it.

Education

Some copy trading brokers will include educational resources to help teach users not just about how to use the platform but also trading in general. 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. If you are new to trading and need as much guidance as possible, you might want to explore our best brokers for beginners.

Requirements

You will need to make sure that the social 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.

There are copy trading brokers who will have a minimum deposit requirement in order to be able to use their platform. Whilst some brokers have a minimum requirement of just $1, others can require $200 or more. Most brokers tend to also offer demo trading accounts which can be a good way to practice using the copy trading platform before investing.

Signal providers also need to be wary about the minimum requirements. If you are planning to offer trading signals, the broker may require you to provide historical results over a sustained period of time on a real live trading account. This can help to filter out the professional and novice signal providers.

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, whilst some will accept e-wallets. These methods may be more convenient for some traders. It is therefore worth considering what payment options are available and if they meet your needs.

Support

It can be frustrating to require support and have to wait forever for an answer. It is therefore important to check how responsive the brokers customer support team is. 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. Not only should they be quick to respond, they should also be polite and clear in their responses.

How to Join a Copy Trading Platform?

If you have made it this far, you should now have a clear understanding of copy trading and what to look for in a copy trading platform. You may be ready to open a copy trading account in order to start following signal providers, or to provide your own signals. This can be a quick and easy process that involves the following steps:

1. Choose a copy trading platform

2. Open a social trading account

3. Start following or providing trading signals!

It is that simple! Although, please always keep in mind the risks involved with copy trading online that we discussed within this article.

Conclusion

In this social trading platform guide, we have covered what we consider to be the best social trading platforms and some of the things that you can look out for when choosing the best copy trading platform for your own individual needs.

You can follow and copy trades from popular traders using third-party services while learning how to improve your own trading. Social trading can be a good way to get access to trade the markets utilising the skills of other traders for those of you who do not currently have the time or skills required to trade online.

However, there can be no guarantee of how any signal copying service will perform. Past results are not an indication of what will happen in the future.

It is important to remember that you choose a trading broker and platform that meets your requirements and use this information only for educational purposes and not as advice. Take your time to research and conduct your own due diligence.

You can even test a copy trading platform with a free demo account to see if they are suitable before making a commitment. Please feel free to view our best social trading platforms if you need some further inspiration.

About the Author

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Richard Montana
Richard has many years of experience in broker research, testing, analysis and reviews. He knows what to look for through years of trading himself with different brokers and listening to the feedback of others.

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For all of our broker reviews, we research, validate, analyse and compare what we deem to be the most important factors to consider when choosing a broker. This includes pros, cons and an overall rating based on our findings. We aim to help you find the best broker according to your own needs. You can read more about our review process.


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