Quick-Fire Explainer to Social Trading

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​Social trading describes a type of investing where you copy the trades of more experienced traders (often called strategy providers or strategy managers). There are two forms: copy trading and mirror trading. 

Both are similar in that they involve you imitating the positions of other traders on a dedicated platform. Yet, copy trading is the popular option because it's more accessible and requires lower capital.

The goal of social trading is to piggyback the success of others without doing the trading yourself. Yet, even active traders can participate in social trading to diversify.

Thus, social trading provides benefits for both sides.

• New traders can profit without knowledge or experience.

• Successful traders can share their success and get compensated.

How does social trading work?

Social trading aims to gather investors in a single interface where they can view portfolios, share strategies, and, most importantly, copy trades.

Investors looking for someone to copy can search for a strategy provider, study their past performance and interact. They can follow and eventually copy that person's positions once they align with their preferences. The investor has to deposit a certain minimum, which remains in their account.

Another crucial part of social trading platforms is analytics. They should provide advanced statistics about a trader's history to assess their profitability.

The other element of social trading is an efficient automatic copying system. Here, the platform proportionally replicates the trades from the provider's account in real-time to the investor's account.

For example, if the former risks 1% of their equity, the platform must ensure the exact allocation on the other side. Also, it should mirror further details of the trades, like Stop Loss and Take Profit levels.

Finally, social trading platforms have a commission structure to compensate strategy providers, usually:

• A small set percentage of the profits generated for the investors (i.e., performance fee).

• A portion of their trading volume.

• A set monthly fee which they charge to investors for following them.

A popular social trading platform is Trading Signals by MetaTrader embedded directly into MT4 and MT5. Here, you have the choice of 3000+ free and commercial deals you can copy on a demo or live account.

It is recommended to use a VPS to reap the full benefits of copy trading here. With this affordable tool, you ensure the fastest execution, allowing you to take maximum advantage of all opportunities 24/5.

Alternatives to traditional social trading

Of course, social trading is not the only way to earn without active trading.

Signals

Here, you receive trading recommendations from a signal provider to place a trade in a certain market with defined parameters.

For instance: EUR/USD, SELL at 1.10500, Stop Loss at 1.10750, Take Profit at 1.10000

The one major advantage of signals is the signal receiver can choose which trades to use and has more flexibility in managing them. On the downside, signals need manual processing, which is time-consuming.

Expert advisors (EAs)

An expert advisor (or robot) is software for automated trading. The link between EAs and social trading is that strategy providers may use them for investors to copy. Social trading services don't only have discretionary strategies but automated ones as well. 

Like the former, EAs serve the purpose of trading without human-driven execution. Yet, the industry around EAs is less safe, and robots can be quite expensive.

Summary: pros and cons of social trading

Ultimately, social trading is excellent for new traders to get started investing with little time and knowledge. They can earn while learning about the ins and outs of trading.

Experienced traders can become strategy providers to earn extra income. Unlike signals, social trading is more automatic. And contrary to robots, there is more regulation and transparency.

But, as with anything trading-related, there are downsides. The most significant is a familiar one: past performance doesn't guarantee future results. 

While investors can view someone's trading history, they will have losses. This can be more frightening if they don't understand the risks, bringing us to the second disadvantage.

Many investors don't learn about trading or investing and often copy willy-nilly. This means they must study more about what makes a strategy manager the smartest choice.

Otherwise, social trading is beneficial for different types of traders. Investors should understand the risks, choose the best strategy providers, and use reputable platforms.

This article is brought to you by Fozzy​​: a fast and reliable Forex VPS provider.