Social Trading: Hot Alternative Trading Style
By Lawrence
Social trading is the new hot trend in retail trading that can only happen in dreams before the Internet. As oppose to just following the advice of market gurus or newsletters, people are taking this to the next level. Let’s take a look at the idea itself and see if it is something that you should consider.
Social Trading Is Matching Unknown Gurus With Followers On Steroids
Unlike traditional brokerages where the trading activities of a client must stay confidential, brokerages offering social trading focus on the idea that some people like to tell everyone what they are doing with their trading accounts. As a client you can choose to show everyone what you are doing and how you are doing with your trading. You can also follow the activities of a peer trader and even copy their trades.
The goal is to connect people together and encourage them to trade more (isn’t that expected?) as they can find the smart trading peers to copy from.
In order to attract people to open up their trading activities to the others, brokerages offer various kinds of incentives to encourage their customers to open their books. From offering monthly fees per certain number of people copying your trades to sharing a small part of the fees the brokerages are collecting, you name it, I’ve probably seen it. Obviously, this concept so far has been working quite well and has even attracted traditional brokerages to start adding social connection elements to their websites.
Main Attraction Is Transparency
Unlike analysts, gurus and billionaire investors you see on TV or other mainstream media who have no accountability whatsoever to what they say, the social trading gurus are just trading their own account and taking risk just like other normal people. Since their performance is openly available for the other traders to see, there is no use to tout their positions if they are not doing great with their own trades. Truth is just one click away.
By browsing through the performance of the higher ranked traders within a brokerage, you can pick and choose which ones to follow. Some of the brokerages even offer ways to automatically copy the trades with a specific percentage or amount of your capital, making it possible for you to combine the performance of multiple traders with your own rules.
In another words, you are managing your own micro fund with star traders to choose from. Isn’t that exciting?
Limitations
As expected, it is easier for forex and CFD brokerages to offer this type of trading environment first. These firms profit from the spread they offer to their clients as oppose to low commission structure like the cutthroat stock discount brokerage business. Thus profit sharing with the star traders of the firms is still viable.
Since these firms are forex and CFD trading firms, you will have limited access to markets outside of forex. This is especially true if you prefer trading local stocks over other markets like commodities and stock market indices. The reason for this limitation is that stock market is heavily regulated worldwide thus making it more difficult to offer derivative on stocks unless the firm can pass the regulatory approvals.
So far I find the markets available from these firm offering social trading are already good enough for the need of most traders. After all, as a frequent trader, it is probably better for you to focus on just a handful of markets as oppose to tracking and trading way too many markets.
Attractive Alternative To Learning To Trade Old-School Style
If the brokerage is doing its job in maintaining the transparencies, I can see that those better traders will eventually rise in their ranks over the fly-by-night bet the farm traders. Hence given enough time, the traders who do not want to spend all their time in learning to trade for whatever reason, should be able to take advantage of the concept of social trading and profit from it. The focus of these new style traders would be the selection process of the better traders to follow which is essentially what funds on funds do in the hedge fund world.
It makes sense too for traders who just start out trading to follow those traders who are consistently profitable. By copying the trades and walkthrough those trades themselves, they can learn to read the markets they are interested in more quickly. Of course, it is important that these beginners do not overleverage their trading accounts. If they simply bet the farm on the next trade he/she is following, it is just gambling and we know it will not work out at the end.
Firms That Have Social Trading
Following firms offer social trading to their clients. When I find more firms that I feel confident about their services I will add them to the list.
eToro is an independent forex and CFD brokerage that offers social trading. Its CFD markets include a number of stock market indices around the world and also a few commodity CFDs like gold, silver, and oil. It has lately expanded to offer stock CFDs too. Its trader community is extremely active with many active traders onboard.
ZuluTrade is not a forex brokerage itself. What it does is connecting you to more than 50 brokerages that you can open account with and then utilize their social trading service to follow the other traders. Many big name brokerages are on their list. Hence giving the traders the confidence to go with a brokerage firm they know instead of opening an account with a firm they have no idea about its stability.
End Notes
I will write a few more articles on social trading as this idea is so unique that it offers a number of interesting ways to profits from the concept. It also opens the door to completely different way to trade the markets that is worth writing about.
