Social trading is the practice of embracing social media and the crowd in day trading. Using the approach, one can copy trades from other experienced professionals and leverage their success. It also refers to the idea of getting trading tips from popular social media platforms like Twitter, Reddit, and StockTwits. In this article, we will look at what social trading is and how you can embrace it in the market.
Social media and day trading
Social networks have played a critical role in the financial market. For one, some social media platforms like Twitter and Reddit have become the first sources of news on all assets like cryptocurrencies, stocks, and equities. For example, in 2021, Elon Musk’s tweets were known to move Dogecoin and Bitcoin. During his presidency, Donald Trump used to move the market using his tweets.
Another example of the role of social media in the market was in early 2021, when activity in Reddit and StockTwits led to a major short squeeze in stocks like AMC Entertainment and GameStop.
Therefore, as a day trader, one idea of social networking is to pay close attention to major platforms to find news on top assets. For example, as a forex trader, you can use a platform like Twitter to find for analysis or news on key currency pairs. The following chart shows a quick search of EURUSD on Twitter.
Using Twitter to find data
Another platform that plays a role in social trading is TradingView. While the platform is well-known for its excellent chart tools, it is also ideal for social trading. For example, the chart below shows the results when you look at the EUR/USD pair.
On the left side, you will find some technical analysis ideas from traders using different strategies. In the middle, you find news that is compiled by TradingView. And on the right side, you will find ideas streamed from traders.
TradingView social tools
Other popular platforms you can use to day trade are Reddit, Investing.com, and StockTwits.
Social trading and copy trading
Another concept of social trading is known as copy trading. It is an idea that has been around for a few years and is widely promoted by some of the most popular trading platforms.
Copy trading is a practice that allows people to copy traders who have achieved some success. Because of modern trading technology, taking up day trading is a relatively easy process. Some platforms like eToro and OctaFX have made activating the whole process a matter of seconds. It is ideal for all types of day traders like:
- Experienced traders. They can copy trades from other traders as part of their portfolio allocation.
- New traders. Traders without any trading experience can make money copying trades from professionals.
- Part-time traders. Traders with full-time day jobs can embrace copy trading because of their limited hours.
How copy trading works
There are three sides to copy trading. First, there is a company that provides the platform that is used to copy trading. Some of the most popular brokers that have these tools are eToro, OctaFX, FxPro, and easyMarkets.
Second, there is the experienced trader who offers these services. These people sign-up to offer copy trading services and come up with the terms. After being accepted, they will continue with their trading as usual. They will make money from this trading and any commissions that they generate from their copiers.
The third part of copy traders are people who want to copy trades from traders. For them, they just need to create an account, deposit their funds, and select the traders to copy trades from. After this, they will keep making money so long as their professionals make money. The chart below shows the dashboard of the copy-trading platform offered by OctaFX.
Copytrading dashboard
The process of copy trading is a relatively easy one. All you need to do is sign up in a broker that offers the service, deposit your cash, and then select the professional you want to copy. Most traders using the strategy divide their funds and then allocate them to several traders to diversify their risks. The chart below shows these steps simplified in eToro.
Copytrading process in eToro
Tips to be a successful copier
An important thing you need to note is that copy trading is not a risk-free trading strategy. No matter the experience of the traders you are copying, it is possible to lose money. Therefore, there are several things you need to do to minimize the risks.
- Study the traders’ performance. First, look at the performance of the trader in detail. Look at their past trades and how they performed. Most importantly, look at their profit-loss ratio.
- Diversified portfolio. Have a diversified portfolio by copying at least three traders. For example, if you have $5,000, you can allocate $1,000 to each trader.
- Risk management. Always ensure that you have quality risk management strategies to minimize losses. These include your leverage, position-sizing, and using stops.
- Maturity. As a copy trader, you should always wait for the trades to mature. A mistake many people make is close loss-making trades before they mature.
- Look at the fees. Since professionals charge a commission, you should choose those that have a good performance and low fees.
Summary
Copy trading is a popular social trading strategy. It has many advantages. For example, you can leverage the experience and expertise of many traders. You can also continue doing your normal activities while making money. Further, it is a less expensive way to trade the financial market. As an experienced trader, you can copy more traders to diversify your earnings.
However, it also has some risks. For example, copy trading could expose you to losses if your professionals go through an extended period of a losing streak. It can also be an expensive process since you will pay some commissions to the broker and exchange.
