What is Forex Social Trading?
In a nutshell, it provides a network of experienced Forex traders from around the world who offer the ability for someone else (whether they be a beginner or an experienced trader themselves) to trade off and literally copy the the Forex trades they execute. Thus somebody who has little knowledge, experience or understanding of the Forex market can hook onto the experienced trader and automatically copy the trades that have executed.
This opens up the opportunity for people to enter the forex trading market without trading experience. Without social trading in order to have a good chance of making money from Forex trading would require a lot of study of the markets and trading strategies.
As well as following other traders, participants in Forex Social Trading networks can analyse, provide feedback and comment on trades executed by other traders, which helps both the seasoned professional and beginner shared experience and ideas and ultimately learn and improve their trading ability.
The network can also be used to help the inexperienced trader put in place their own strategy off the back of the shared experience and lessons they have gained through participating in the Social Trading network.
It essentially works like a social platform where successful traders also share their trading experiences with others. The idea being that the shared ideas of the many is more effective than the individual working on their own. By allowing people to view, analyze and share comments on the performance of live traders, the network binds traders just like the way Facebook, LinkedIn or Twitter does for family, friends and colleagues.
What Forex Social Trading Platforms are there?
The largest and most successful Forex Social Trading Platforms are eToro and Zulu Trade. Other platforms include Tradeo, and Copyop.
How does it work?
Each Forex Social Trading platform will display a list of current traders with details of their track record and how they have performed. These are normally done in descending order of performance with the most successful ones at the top. You are free to follow any trader you like from the list. You can also participate in the various forums on offer to express your opinion, ask questions, and read and review the views of others. That way you can actively engage and exchange ideas with a wide variety of Forex trading participants.
As one would expect, the trader who is being followed will earn a commission from the Social Trading platform. So the follower gains by having access to a skilled experienced trader, the trader benefits from the commission and the platform benefits from the increased volume and resultant revenue.
What are the risks involved in Forex Social Trading?
Forex Social Trading has opened up the market to those that otherwise would not have had the confidence to participate on their own and a significant change in how people learn to trade in the first place. That is not to say though that there are no risks involved. When mirroring other peoples trades, no matter how experienced and successful they have been in the past, you are also mirroring the risk they take. All traders can and do lose. There is also a danger that by blindly following experienced traders, you will not build up the foundation knowledge required to enable effective decision making, even if that decision making is just which trader to follow, and when to stop following a particular trader.
‘Broker Independent’ vs ‘Own Broker’ Forex Social Trading Platforms
There are two types of business models that Forex Social Trading networks work under.
- Broker Independent. These provide the social trading element of the experience, but partner with other brokerages for actual trade execution. The Social Trading platform will be paid by the brokerage for whom they introduce business based on activity volume. They can also charge the user a commission. The benefit to the trader of the broker independent model is that it gives flexibility as to which brokerage to participate with. Thus they can differentiate based on bid/offer spreads, service level etc.
- Act as both Broker and Forex social trading network. All trades are therefore executed within the network, who perform the brokerage role. The commissions for this business model are all built into the bid offer spread and there are no direct commissions or other such fees charged.
What to look out for when deciding which Forex Social Trading network to use
- Cost. This is one of the most important attributes. Over the long term what can seem a small difference in cost between different networks can accumulate to make a material difference. You should therefore make sure that you are clear as to the cost charged for each trade executed and comparing that across networks. Similarly brokerage costs will also be different across brokerages in terms of bid offer spreads and brokerage commissions.
- Quality of Trader. Validate the quality of the trader (aka Signal Provider). You should make sure you have an understanding of the risk profile of the trader and make sure it matches yours. This is less of a problem within a larger social trading network where you will find a larger range of traders with whom to participate. But it can be a problem with the smaller networks.
- Deposit size. Each Social Forex trading network will have their own minimum deposit rules.
Try out the Demonstration Version. Each site will have a demo version that allows you to participate without risking real money This will give you an idea on the look, feel and functionality of the system, and whether social trading really is for you. It also allows you to evaluate the quality of traders available on the network.