Social media has become an integral part of today’s life. Indeed, in the past few years, companies like Facebook, Snap, and Twitter have become multibillion dollar empires. The same platforms have become essential in the financial market.
In this article, we will look at the concept of social trading and how you can use it well in the market.
What Social Trading is
Social trading is one of the most important aspects in the market today. This allows traders to trade amongst themselves globally and share trading ideas. Using the numerous social trading platforms in the market, a novice trader can copy strategies of a rockstar trader and make sweet returns.
In the internet, there are many applications and platforms that promote crowd sharing of financial matters. For instance, there are platforms which allow anyone to predict the next market moves.
Traditionally, analysts forecasts only focused on top analysts in leading financial institutions such as JP Morgan, Morgan Stanley and Citi among others.
Today, anyone can easily make their own predictions and take part in changing the way the market operate. A tool such as Yodlee claims to have more accurate market data than the one from the leading analysts.
In addition, it is possible for any novice trader to copy trades from other experienced traders using tools such as eToro. Indeed, eToro, a pioneer in the social trading industry, is on track to go public on a $10 billion deal.
Many people have made good money by copying these trades while others have lost significantly.
The first thing to understand in social trading is that it does not always work out for you as a trader. A common disclosure in all the social platforms is that the past performance will not determine the future performance.
For this reason, it is possible to follow and copy excellent traders but still lose all your investment.
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A common question is on the type of assets that are available to trade. It is possible to trade all assets like stocks, cryptocurrencies, and forex provided that they are offered by a broker.
In most cases, copy trading is usually available for the forex market.
Social trading vs Copy trading
The most popular social trading strategy is known as copy trading. The concept behind it is relatively simple to understand. It is a strategy where traders copy trades from other experienced traders. Several forex and CFD brokers provide this as a service.
It works in a relatively easy way. After creating your account, you will analyze the accounts you want to track, and then copy them. In most cases, the whole process can take less than 5 minutes to complete.
After that, your account will mirror all trades that are implemented by the trader. In return, you will give them a small portion of the profits.
Copy trading is also known as mirror trading since a trader replicates trades of another person. While this strategy is simple to use, it has some limitations.
For example, it only works when the trader is profitable. Also, the master trader can decide to take a day or week off during which you will not be making any money.
Another disadvantage of copy-trading is that it is not provided by all brokers. Only a handful of forex and CFD brokers provide the service.
What you need to know about copy trading
There are three main things you need to know about copy-trading, including:
- You are at the mercy of the master trader - With copy-trading, your success is determined by the performance of the master trader.
- You don’t eliminate risks- While copy-trading is a safe process, it does not eliminate risks in trading.
- It is possible to lose money - It is possible to lose money when using copy trading.
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Using social media for day trading
The social trading definition explained is the most popular. However, we can also view social trading as the process of using social media to find trading ideas and even lessons.
A good example of this is what happened in 2021, when social media users in platforms like Reddit shook the financial market. They did this by pumping some of the then hated companies like GameStop and AMC. You can read our complete guide on Wall Street Bets here.
Today, many day traders and experienced traders are relying in social media than ever. Some use the platforms to find trading ideas while others use them to validate their ideas. Others, on the other hand, use the platforms to find education.
Some of the most popular social media platforms for traders are:
- YouTube – Our company, DTTW™, hosts the TraderTV, where our traders offer educational and live trading content.
- Reddit – Users create or follow pages that are fully dedicated to day trading like Wall Street Bets.
- Twitter – It is a platform where people share their trading ideas. This post could help you to built your Twitter feed.
- StockTwits – It is a Twitter-like platform that is dedicated to stocks and other assets.
Best social trading strategies
In the financial market, before you decide to do anything, it is important for you to conduct personal research and come up with a solid conclusion. This research should be both on a fundamental and technical level.
In fundamental analysis, you simply conduct research on the instrument you want to go long or short and make your financial decision. In technical analysis, you simply look at the charts, conduct an analysis, and then make a decision on how the market will move.
The purpose of doing this research is to make your own decision before following another trader.
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Another key important issue on social trading is on time. There are traders who open trades with a purpose of going long or short for a considerable amount of time such as weeks or days. To achieve this, they have huge sums in their accounts. Also, they use very small volumes.
When copying these trades, it is important to assess if your account has sufficient funds to withstand a long dive or a long hike.
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When copying trades, it is important to have your own strategy which will help you mitigate risks. As We have explained in our previous articles, having a solid trading strategy will help you minimize risks.
Some of the main strategies in trading include:
You should have a lot of information on the strategy you use. Additionally, the trader you copy from should use the strategy which you have knowledge on.
It is wrong to copy trades blindly because your goal is to be a leading trader where people will copy from you.
Many social trading platforms have regular competitions where traders compete to win a certain amount of money. As a day trader, you should participate in these competitions because it will challenge you make better financial decisions. It will also help you assess your strengths and weaknesses and then come up with strategies to improve.
Since this industry is in its infancy years, as a day trader, you need to take action to be the best in it. Doing this will help you become successful.
Summary: Is Social Trading profitable?
A common question among new traders is whether social trading is a profitable strategy. In general, when used well, like all day trading strategies, social trading can work well.
All it takes is to do your research, find a good trader to copy trades from, and manage your risk well.
You should not ignore the useful risk management strategies like position sizing, leverage, and having a stop loss. Also, you should read the terms of the person you are copying from well.
Social Trading - Other resources
- Best Social Trading Networks
- An useful arcticle on medium