What is social trading?
Each investor chooses a more or less complex investment strategy. Some make their decisions on the basis of fundamental factors and a thorough analysis of financial reports, others try to predict future quotations of instruments by observing their behavior in the past, while others, based on the latest information, follow the principle of “buy gossip, sell the facts” or “buy panic,” sell euphoria. ” Some also take into account the opinions of other traders, it is enough to note how many people consider the opinion of Warren Buffet. It was on the basis of sharing experiences and exchanging information between investors that a mechanism known as social trading was created.
Social trading combines a social network and a trading platform in an interesting way. Its operation is based on sharing order history and allowing automatic copying of orders made by experienced investors. For beginner traders, it is a great way to learn, they can also use other people’s games as a basis for their own strategy, while “old-timers” receive additional funds through commissions and build their own brand. The benefits also affect the broker, as it gains new clients and is perceived as a company implementing innovations.
My several months of tests.
Introducing institutions that use social trading should undoubtedly start with eToro, one of the largest brokerage houses in terms of turnover that uses the social trading mechanism. He is currently running a very interesting advertising campaign and attracts the attention of many customers, also on the Polish market. The trading platform creates many opportunities, in addition to copying the strategies of other investors, players can also choose from market funds, built on the basis of algorithms, and partner funds prepared by specialists cooperating with eToro. I decided to test the broker product, for this purpose I opened a virtual account worth $ 100,000. On August 17, 2019, I started by copying the strategy of one market fund (FoodDrink), one partner fund (Napoleon-X) and one individual investor (YoniAssia). A month later, I decided to diversify my portfolio by adding another 5 strategies – 4 players and one partner fund.
As of January 29, 2020 the following graphic is presented:
At first glance, the strategy from the user YoniAssia is missing, it is due to the fact that he disables the ability to copy plays. It is worth noting that copying investors with a more conservative approach brings better results, the risk indicator for each portfolio can be seen below:
Future and regulations.
Despite the selection of several strategies with a different approach to risk, so far I have not been able to profit, but I intend to continue my observations.
Another social trading platform is ZuluTrade. It is currently used by many brokers such as IC Markets, Pepperstone and FXCM. The so-called “Social charts”. To the right of the graph is the events section, where all user activities are reported, e.g. closed items, comments or responses, also visible under the graph. Under the events, you can apply appropriate filters, we have a choice of comments on the current situation or comments for the games of the best suppliers.
Platforms such as eToro and ZuluTrade face a very serious obstacle that must be faced by anyone introducing innovations in the category of sharing and collaborative economy, i.e. state regulation. In Poland, the PFSA recognizes social trading as managing someone else’s funds, and an appropriate license is required for this. In this situation, eToro enables the use of social trading not by a Polish company, but by a Cypriot company, which in turn creates legal inconvenience for customers and causes tax drain from the country.
What is the future of social trading? Will it prove to be a great way to passively multiply your wealth or will it be forgotten over time? On the one hand, social trading is becoming more and more popular, especially in the US, on the other, none of the major brokers, apart from the aforementioned eToro, do not include this service in their offer, some even, such as XTB, withdraw from this idea.
What do you think about social trading?
Would you like to know the methods of other brokers?
Feel free to discuss in the comments.
The co-author of the article is my friend, a trader, MikoĊaj Kopycki.
Cheers,
LSZ