A Simplified Guide to Social Trading in 2023
Are you interested in social trading but confused about where to start? Then you’ve come to the right place.
You’ve probably already done a fair bit of “Googling” – trying to search for the answers to all your questions.. It’s likely you were overwhelmed (or underwhelmed) with all the information out there? Don’t stress – we are here to help!
Below is a guide on all things social trading. What it is, why people are interested in it, the advantages, the risks, plus more.
What Is Social Trading?
Social trading is a way for retail traders to access the world’s financial markets and follow expert traders. Traders will copy an expert’s trades direct to their own trading platform.
It’s perfect for traders who are interested in the markets but do not have the time to analyse the market. Or for those that have little knowledge of the markets, and also for those that simply want someone to trade on their behalf.
What Are The Benefits of Social Trading?
Apart from social trading being a positive disruption to traditional financial investing, there are many other benefits. We have listed a few below;
- Very little effort or knowledge is requiredSocial trading gives you the ability to make money without too much effort or even any previous knowledge of the financial markets. If you make an informed decision and find/ follow/ copy the best traders, you could create a passive income stream with very little effort. If you’re new to the financial markets, social trading is a great way to learn from the best – watch and follow, ask questions, read live feeds and study all available information to become a better trader.
- Trading results are verifiedMost social trading brokers will only publish and use trader’s who trade on a live account with real money. It’s easy to be a big star on a demo account but when it’s your own hard-earned money on the line, the game changes and so does your decision making! Most social trading brokers will only publish trader’s who trade on a live platform and have a clear track record of results.
- Low start-up costsSocial trading, like many other online trading platforms, is a leveraged product which means you only need to place a small-ish amount of money onto your trading account to access significantly larger trade sizes (see leverage here). You can start trading with as little as $100 with most brokers.
- Diversification and more trading ideasEven the very best trader’s lack new trading ideas at times or miss trading opportunities. However with social trading, you are constantly exposed to other traders’ ideas and trading strategies – opportunities you might not have seen or thought of! This opens up endless trading opportunities and potential.
- Bench-markingYou might already be a successful trader in your own right but how do you know how good you really are? Social trading let’s you benchmark your performance against the very best! And if there’s someone else better out there, that’s good news as it means you could make more money!
- Ease of useSocial trading platforms are generally very easy to use once you’ve spent a little bit of time on them. They also offer a wide-range of features that can help you become a better trader.
How Does It Work?
Ever heard of Facebook or Instagram? LinkedIn or Twitter? We’re sure you have.. Well social trading is no different to those, except you won’t be sharing selfies of your holiday in the sun. Instead, you will be sharing trading strategies, market insights and following successful traders who have a proven trading record. You will learn from their trading methods and strategies, and hopefully become a successful trader yourself!
Following a Trader
Once you’ve conducted your research and found a trader (or two) that you enjoy following, you can then choose to follow him or her so you can watch their trades, view their commentary and learn about their trading techniques & strategies. You will learn so much from this process, plus you can ask them questions when you’re confused which will enhance your education and hopefully turn you into an expert trader one day! Our advice is to always follow traders who consistently communicate with their trading network, as they are the ones you will learn the most from.
What Are The Risks Involved?
So far, social trading seems to be pretty good right? Well don’t be fooled – online trading isn’t all plain sailing otherwise everyone would be doing it. Whilst this form of trading can be a very profitable avenue for some people, it’s important to point out that there are a number of inherent risks involved and you should carefully consider if it’s appropriate for you. Here are some of the risks involved;
You can lose a lot of money
Social trading is still financial trading! And with most things financial, there are always risks involved. Please do your research before deciding whether financial trading is for you or not – and if it’s not, stay away from it! We’d recommend testing out a few demo accounts first to test the water.
Trusting someone you don’t really know
OK, so you’ve found your ideal expert trader and have started copying their trades. This does not guarantee you success! Even the very best trader’s have bad days and if they have a bad day, and you’ve copied their trade/s – you will be liable for any losses, not the expert trader. Never forget that it’s your decision to copy someone’s trades and no-one else’s decision.
Past performance no guarantee
Like we mentioned above, even the very best trader’s have bad days and so their solid past performance is no guarantee that it will always continue. You must always be aware of the risks involved with online trading – absolutely nothing is a 100% certainty while trading.
How Do You Successfully Social Trade
There are a few considerations you should assess in order to become successful at social trading;
Find the best social trading broker
There are many social trading brokers, however only a few truly stand out. Our recommended social trading broker is Pepperstone. Always select a regulated broker, and one that has segregated client bank accounts so your trading funds are safe. Trading with an unregulated social trading broker is a massive risk. Pepperstone is fully regulated by ASIC in Australia, plus holds 6 or 7 other licences.
Pick the traders you will follow
Once you’ve opened a social trading account with a broker, you’ll need to decide who you’d like to follow. We’d recommend testing a few out on a demo account to find some traders that you enjoy following. Are they engaging? What are their trading techniques and strategies? Which markets do they trade on? What is their success rate? Do they respond to your questions? Always follow traders who communicate with their trading network on a regular basis.
Social trading costs
Another important consideration is that of trading costs – i.e. how much a broker will charge you to copy their trader’s.