An Introduction to Social Trading

A number of Forex brokerages have introduced social trading into their offering or they have built there entire business around it. Well known social trading website ZuluTrade is now partnered with a total of 65 different brokerages and it appears that social trading is here to stay. So it appears that social trading is here to stay. Here at Made To Trade we hope to give you the total lowdown to social trading. 

 
What is Social Trading? 
Social Trading allows traders to see what positions other traders are opening in real time thus allowing them to copy the particular trade or all the trades undertaken by that individual. This is the kind of social trading on offer at brokerages such as eToro.
 
The idea is simple, Social trading allows individuals to piggy-back on the success of certain well performing traders and signal producers. In turn these signal providers and traders receive compensation for bringing trade to the brokerage, giving these traders a reason to share their trading techniques with others.  
 
Why is social trading attractive? 
It makes the process of trading financial instruments much simpler. Before the advent of social trading one would have to learn about trading techniques, keep up to date with the current financial news etc. before being able to undertake trades, but now one can trade simply by following a number of high performing traders. It also attracts a new breed of traders, those who are excited at the prospect of making money through trading but don’t want to put in the effort of developing a trading strategy.  
 
How does social trading work? 
Social trading is heavily reliant on the developments in web based technologies in the last few years. ZuluTrade launched in 2006, by entrepreneur Leon Yohai allows traders to follow the signals of certain signal providers. In return these signal providers receive a broker rebate every time someone following them places a real money trade. ZuluTrade ranks these different signal providers through a propitiatory algorithm known as Zulu rank, which grades traders in a number of different ways.  
 
The situation is similar at eToro, with you being able to see who are the most profitable traders over certain set periods of time, as well as seing how risky their strategy is. The filtering and ranking system at eToro isn’t as sophisticated as at ZuluTrade, but their is still the possibility of following some particularly successful traders.  
 
How do you start social trading? 
Many of the social trading sites out there allow you to open a demo account before depositing real money funds. This lets you try out social trading and see whether it is for you, before you part with your hard earned cash. 
 
When it comes to starting to trade for real some sites such as eToro will let you start with as little as $50. It is probably recommended that you deposit more than this amount as the greater your starting capital the more likely you are to succeed at social trading. At ZuluTrade the amount needed to start trading varies between the different brokers on offer and one should do serious research before opting which broker to plump with. 
 
Tips for Social Trading? 
Do your research before placing your trust in a particular trader or signal provider. Look for signal providers who have generated long and steady profits. But remember that past performance is not an indicator of future success. Some traders may look very successful but in fact may be engaging in high risk strategies which could very well blow up in their face, leaving you at risk of losing all of your capital. 
 
Don’t put your eggs all in one basket, following around three different traders can lead to you not being so reliant on the performance of one particular trader. However you have to take the possibility of having several different positions opened at the same time which may put more strain on your account. eToro allows you to assign no more than 20% of your capital to one particular trader, this is designed to prevent traders lumping all their money into following on particular trader.  
 
Can you really make money from social trading? 
Yes, some traders have made very significant amounts of money from social trading, while others have lost significant sums of money through bad luck and ill thought out decisions. Social trading may be a very good opportunity for those who are very diligent and actively monitor how their portfolios. Social trading moves a trader into a position more similar to being a fund manager than a trader. Remember that all trading carries significant risk and social trading is no exception, never trade money you can’t afford to lose.

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