In social trading, investors participate in a community, sharing ideas, tips, and discussions. Social trading is so-called because it works on the same lines as a social network. Investors create accounts, follow one another, post status updates, and interact on comment threads. It is a perfect form of trading for both beginners and experienced investors.
Through this new social format, copy-trading lends a new dimension altogether. Social traders do not have to be experts at the trading game—they simply need to follow traders who are. While this has led to the
#1. Choose Your Social Trading Platform
Just like Facebook, Twitter, and LinkedIn have different guiding purposes, social trading platforms differ in what they offer to investors. As an investor, you should know what assets to invest in (stock indices, currency pairs, CFDs), and if the platform supports them. Investors invest better with assets that they are better able to understand and research.
Some platforms offer demo accounts while others do not. Similarly, some platforms offer automatic trading whereas other platforms only provide manual trading options. Platforms also have minimum trading deposits to think about, and the availability of mobile apps, if that is what the investor’s lifestyle requires. Study the available sites to see which one you would prefer to work with. Asking other social traders in forums is a great way to see what the hottest, new platforms are.
#2. Begin with a Demo Account
Whether or not you are a beginner, it is best to begin with a demo account. Like Facebook and Twitter, it is so easy to follow other users that your trade feed might become clogged up with too much information, and not enough reasonable voices. Because it is a social trading platform, there will be some disagreements and long discussions on comment threads, and opposite opinions on status updates.
A demo account helps you get used to the many voices on a social trading platform, and learn how to sort through the different opinions through independent research and observation. You can also study the way traders think and trade, and begin to pick out the traders you would like to follow. A demo account makes you familiar with the site and how to use it, and helps you take enough time to study how to make the most of the social trading platform.
#3. Study Trusted Signal Providers
If you prefer to trade manually, follow the top 100 signal providers to cover all bases. Different traders have different opinions and analyses of events and how they affect the markets. Some traders will rely on signal algorithms and machine-generated tips and suggestions. Other traders prefer to follow news events from specific news providers.
While still in your demo account, study the top traders and where they get their analyses, as well as how they get them and achieve their success rates. Top traders are clear on where they look for analyses, and just as clear on how they derive them. They may trade fast, as if on instinct, but it is usually based on experience. If their rates of success are high and their analyses straightforward and clear, then you can choose whose signals you want to follow.
#4. Choose Few but Trusted Traders to Copy
If you are copy-trading, there are still certain risks involved. Remember that social copy-trading is perceived to be one of the easiest platforms to trade on, and the best for beginners. The danger of this is that new investors may become trigger-happy, and follow any trader who is making a large profit at the moment.
However, the traders you will follow have the risk of making the wrong call on whatever they are trading, like any other investor. Your risk is in following the wrong trader. Often, high-profit traders also incur high losses, and actually earn a very low net profit. It is advised to follow at least 12 month-old traders gaining average-to-medium yield every month, while incurring small losses. Their followers should have built up over time.
#5. Keep Track of Your Traders’ Strategies
Tried and tested traders, no matter how automatically they seem to work, may slip information on their trading strategies. Traders have personal challenges and stress points that may leak into their trading choices and strategies. Some traders may even become overconfident in themselves, and pay less attention to the news and tips.
A previously steady trader may go panicky and buy and sell assets without enough reason. Or, they may suddenly decide to hang onto assets stubbornly, against the market flow. Once you begin to distrust their strategies, once their analysis descriptions become muddled or unreasonable, move to a backup trader, or simply unfollow that trader. The traders to follow need to choose assets and transactions; your job is to choose traders.
#6. Think Long-term Investment, Not Lottery-style Gains
Social trading is an attractive prospect for get-rich-quick schemes. However, like any other investment, alternative or otherwise, its best chance for success is through long-term planning, with compounding gains. Investing for extremely high gains in a very short period of time maximizes risk and actually minimizes success, because what is spent trying to find large gains may compound against the gain.
The long-term investment mindset takes time to play on demo accounts, analyze which traders to follow, calculate the needed amount of initial capital, and figure the allowable losses against potential gains. This mindset sees social trading as part of an investment portfolio that will provide for the future as well as the present.
#7. Social Trading Success: Minimize Risk, Think Long-term
Overnight millionaires tend to have a long history behind them, which leads up to where they are: you only have to look at both Apple and Microsoft for examples. Their founders encountered challenges, faced ridicule, went bankrupt, and simply kept on going. The success and strength of those companies would not be the same without the firm foundations slowly built under them. In the same way, think of the slow, steady approach to social trading success as making history.
Images: “businessman show virtual people connection on world map. / Shutterstock.com“
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