How Does Social Trading Work? Is It Profitable?
Social trading is one of the fastest growing trends in the financial world. Due to its unique nature, many are interested in how social trading works. This article is aimed for that very purpose.
Social trading has always not been the way it is. It has come a long way and has a rich vibrant history behind its evolution.
We will explain the important elements of social trading so it will be easier for you to grasp this concept.
Let’s begin with the definition of social trading.
What Is Social Trading?
The concept of social trading is similar to that of social media. You can interact with people all over the world and share news and pictures with them in a social media. You can follow them to get updates from their life.
In social trading, the difference is, you are interacting solely with traders and exchanging trading information. You ‘follow’ a trader to get trading signals or acquire their trading strategy.
All of this is available to the trader completely free of cost. Social trading makes trading accessible and profitable to all kinds of traders.
The only cost you will have to deal with is the spreads and the trading commissions. Once you make your initial deposit, you are good to go with the platform.
You will find a list of top traders where you can copy their entire portfolio. More of this is discussed in the next section.
Social trading has many benefits over conventional trading which we have discussed in the linked article.
In this article, we are going to explain how a social trading network works. To learn more about social trading, refer this guide on social trading.
How Does Social Trading Work?
As we discussed above, social trading functions the same way as conventional social media websites such as Facebook, Twitter, and Instagram etc. The social trading network is comprised of financial traders.
The sole purpose of a social trading network is to exchange trading information, strategies, market insights, news, and discuss the latest trends.
Traders learn about trading and exchange trading information so that others can benefit from it. New traders can follow experienced traders by copying their trades.
This is great because they are able to earn passive income without any prior trading experience or knowledge.
A new trader follows few of the top traders on the social trading platform. He copies their portfolio and replicates the trades that he performs.
There is interaction between the followers and the guru to understand the reasoning behind some of the trades. This way the novices learns trading and understands the market.
They are learning along with earning. This is one of the great aspects of social trading. Experienced traders or signal providers make additional income by providing these signals.
The broker earns through various spread fees and other commission fees so everyone is making money while trading.
Below, we are going to discuss the important elements of a social trading network to better explain how it works.
Key Elements Of A Social Trading Network
Here are the key elements of a social trading network:
The market is where you carry out your trading activities. It is where you and sell financial assets.
This is where traders exchange trading assets such as currencies, commodities, stocks, shares, indices, cryptos, and much more.
The forex market is by far, the largest financial market. On an average, more than $5 trillion worth of currency pairs is being traded on a daily basis.
These financial markets are very volatile and it requires deep financial knowledge and vast trading experience to be consistently successful.
Even the best of traders lose money on their trades from time to time. A new trader certainly faces a lot of obstructions when trading.
He is not sure about what assets to trade, what is trade volume should be, he cannot accurately assess his risk and faces many other difficulties when trading.
This is where social trading proves to be extremely useful for new traders. Social trading proves to be advantageous than conventional trading in this case.
The Broker & Trading Platform
The broker is someone who provides you access to the market that you wish to trade in. He acts like the middleman between you and the market.
Through it, you are placing and executing your trades. So it is very important that the broker that you choose offers the best features such as regulation, reliable trading platform, low spread fees, zero commission, demo accounts, and security, fast and secure transactions etc.
The trading platform is the software where you conduct your trading. The platform can be web-based, desktop app or a mobile app. The platform is provided and maintained by the broker.
The Social Trading Company
This is the organization that provides the social trading service as a whole. It provides you with brokers to trade with, provide their own trading platform, interface for traders to communicate with, and connect all the elements to function as one unit as a whole.
Some companies provide third-party brokers while some companies such as eToro act as broker themselves.
The website is usually the medium of interaction for traders. On the website, there is a list of top traders or signal providers so you can know who the best performing traders are.
Transparency is a big factor in social trading so information as trader’s trade history, profit over a period of time, and portfolio are shown on their profile so that others traders can assess this traders performance and decide if they want to follow him or not.
The two main participants in a social trading network are the signal providers and followers.
The Signal Provider
Signal provider is the one provides trading signals to other traders. They are experienced traders who are either representing a firm or trade on their own.
Either way, they have years of trading experience under their belt, have a concrete understanding of the market, and utilize various trading analysis tools to form strategies.
They adjust their trading strategy according to the market conditions and financial stability. Basically, they don’t trade on luck but with proper planning and strategy.
This is reflected in their trading results. The top traders on social trading networks have consistent positive gains and win most of their trades.
The interesting thing about social trading is the connection between signal providers and followers is not just sending and receiving trading signals, but much more than that.
Instead of blindly copying your provider, you have the ability to interact with them using direct messaging and ask them your questions and doubts.
Signal providers earn from providing trading signals. This income can come in the form of a fixed income or from a percentage of follower’s AUM (Assets Under Management), or a percentage of their profits.
A follower is anyone who trades on the basis of trading signals sent by signal providers. They lack the ability to understand the complexities of the market and the risks associated with it.
Followers represent the majority of the social trading network. It is usually comprised of novice and inexperienced traders.
The financial success of a follower depends on the success of his signal provider. Therefore, it is important for a trader to carefully choose his signal provider.
Some social trading companies compensate the follower if their expert trader makes them lose money on a trade.
Does Social Trading Work? Is It Profitable?
We have seen the important components of social trading and how they combine together to and make social trading work.
There have been many doubters of social trading ever since it was introduced. Some even questioned “does social trading work?”
The biggest proof of social trading’s success is the growth of social trading network and beginner traders making money and learning trading from social trading platform.
Nowhere else have new traders been able to earn consistently. Social trading platforms are the only place where you will be able to continuously be able to monitor the actions of top traders.
There are so many trading courses and training materials that offer to teach trading in exchange for thousands of dollars.
In contrary, you learn directly from the actions of other traders in social trading at free of cost. The fact that you can earn and learn at the same time for free is the very proof that social trading is a glaring success.
Social trading is taking over the world of financial trading by storm and is touted to be the future of trading.
In this article, you learned how social trading works. It’s a social network for traders that allows traders from all over the globe to connect and share trading ideas.
The element of a social trading network includes the market, a broker, the company behind it, signal providers, and the traders. All of these combine to make a seamless network of social trading.
The new trader then takes a look at the traders that are performing well and then chooses to follow a trader of his choice.
If the trader whom he follows makes money, he makes money too. The trader pays a share of the profit to the expert trader and keeps the rest. This is the premise of social trading.
It is an effective method of learning and earning at the same time. Social trading makes trading accessible to all.