Why the big hype about “social trading”?
Over the past few years we’ve seen a big increase of retail traders trying their luck at leveraged Forex, commodity and stock trading. The attractions with trading leveraged products is that you don’t need a lot of capital to make potential high gains (i.e. provided by the leverage). However, with potential high gains also come potential high losses. Hence there’re many more unsuccessful retail traders than successful ones. Social Trading for the first time allows investors to access the skills of those successful ones by allowing them to automatically copy what they do.
Unlike standard investment products (e.g. stock funds) which are normally only profitable when the markets go up, leveraged Forex and commodity traders can open positions in either direction. Hence you’re not dependent on the overall direction of the market, but on the skills of the traders you copy. As a retail investor only hedge funds with large minimum investment requirements would give you access to this type investment in the past.
How does it work?
There’re slightly different flavours between the various networks (all explained on the ForexLeaks.info), but in essence the process is as follows:
- you join a social trading network and open an account with one of their preferred brokers
- you authorise the network to automatically execute trades in your broker account
- you select the traders you like to copy and allocate your funds to them
- any time a trader executes a trade in their own account, this trade will be executed automatically in your account, with the size of the trade adjusted in respect of your account risk settings
Is there a delay between the trader’s and my account ?
While trades in your account are submitted electronically as soon as the trades executes a trade in their account some delays are inevitable. Delays can happen because of the social trading network connectivity or broker trade execution queues at peak times, such as scheduled news releases. If a price moves too far away from the entry price of trader you copy, the trade will not be executed anymore. Most of the times trades are executed within 1 or 2 seconds.
Do I get the same price as the trader I copy?
No, because of the small execution delays and differences in broker spreads you don’t always get the exact same price. This is called “slippage” and this can be negative or positive. Each social trading network makes the slippage you experience very transparent in your account history.
Is every trade executed?
On occasions trades of traders you copy may not be executed in case the entry price moved too much or if there would be an issue with the social trading network – broker connectivity.
How much does it cost?
The costs do depend on the social trading network you use. There are no joining costs and normally the only costs are included in your broker spreads. Only one network currently charges an annual management fee (but then they do the pre-selection of traders for you and offer a “managed” service) and a success fee which is only payable on any profit a trader makes in your account.
Do I need any prior experience to “social trade”?
If you only want to follow and copy other traders, you don’t really need much trading experience, though some basic knowledge will help. You’ll find this basic knowledge on this website or in the education sections of the social trading networks. You can always try with a free demo account first if you’re not comfortable to start investing real money.
What is the minimum amount needed to start following other traders?
This depends on the social trading network you decide to join, but starts from as low as $50.
How do I fund my real money account?
This really depends on the network and broker you’ll be using, but most will offer a variety of funding methods, so you’re sure to find one that suits you. These include wire transfer, credit card (Visa, Mastercard, Diners, Amex), PayPal, Moneybookers, Neteller, Western Union, WebMoney and MoneyGram.
I already have an account with a supported broker, can I use that account?
No, the social trading network normally requires you to sign-up again online with this broker through the network’s sign-up screens. This is because they want to ensure your account is properly linked to the social trading network and they’re identified as the “introducing broker”.
If you already have an account with the broker, it will however speed up the sign-up procedure as you’re probably not going to need to re-send any forms of identification to your broker.
Also, many investors like to keep their personal and social trading brokerage accounts separate, which makes it much easier to track performance.
Is my money safe?
Your money is directly held with the broker firm you choose. The traders you follow and copy have no access to your money. At any time you can withdraw your funds directly from your broker. Every broker is also regulated in their country of registration.
How much risk am I taking?
There’re no guarantees in Forex, commodities and share trading, and you have to ensure you understand the risks before you invest any money (and arguably never invest more than you’re prepared to lose). The past performance of the traders you copy is no guarantee of their future success. However, each social trading network has implemented some money & risk management features and controls to assist you. E.g. these may include executing trades proportionally to the risk the trader takes with their own account and/or limiting the maximum losses you can incur per trader. As these differ per network please read through the network reviews for more details.