Having become one of the most popular trading styles with individual traders over the past 10 years, social trading, which some will call copy trading, is an innovation that allows investors who so wish to base their investment decisions on the strategies of other active investors or traders.
LiveTrading share everything you need to know before starting trading, we will share with you the essential advice for getting started and the pitfalls that neophytes, but also more experienced investors, must imperatively avoid.
Social trading: a different way to invest in the stock market
On a social trading platform, the portfolios of those who we can qualify as gurus or leaders (widely followed traders) are completely open and all decision-making (purchase, sales, losses, gains, etc.) is therefore visible from all. The automation of the replica of the decision-making (copy trade) of the gurus is possible on certain trading platforms. Traders can base their trading decisions exclusively on copy trading or opt for trading that mixes traditional trading and copy trading.
This trend emerged through two major players in trading, ZuluTrade and then eToro . They were quickly copied and, for a few years, have been flourishing social trading platforms. This new way of trading marks a turning point in the habits of individual traders. They no longer rely solely on traditional methods of technical analysis and fundamental analysis to make their position-taking decisions. There is also what is called social financial analysis when it comes to sharing analysis rather than trades, as is the case with TradingView or CentralCharts.
According to livetrading.com, copy trading improves the performance of retail traders compared to manual trading because the greatest profits are generated first by manual traders who allocate part of their capital to gurus (or “leaders”). ), then, traders doing only copy trading, and finally manual traders.
Social trading: the reasons for success among retail traders
Social trading is becoming increasingly popular. The success of this phenomenon is quite easy to explain. Copy trading platforms put forward this shocking argument: it becomes easier to invest, without necessarily being a trading expert, and above all, the results can exceed your expectations.
But beyond this explanation based on the sole motivation of winning with more certainty, there is indeed an element that should not be overlooked which explains the reasons for the rise of this practice: the psychology of the trader. Trading is indeed a solitary activity where your screen is your only work companion. Social trading can therefore introduce user-friendliness into practice but, more importantly, social trading allows you to no longer make your investment decisions alone. We have the consent, the recommendations and the gaze (ideally benevolent and encouraging) of the community. The gaze of the other counts a lot and the gaze on the other just as much. Indeed, the essence of social networks in general and social trading in particular is to scrutinize what your neighbor is doing. Voyeurism is not new,Window on the courtyard but, unlike this masterpiece of cinema where the protagonists do not know they are being observed and therefore evolve naturally and without cheating, social networks are the place where his life is staged (on Facebook or Instagram), thoughts (on Twitter) and investments (via social trading).
Watch out, then! If we only post photos of paradisiacal vacations, obscuring the cockroaches in the rental or the fact that the desert island was a forced stopover due to a strike, for social trading, it is about the same in a lesser extent. Admittedly, if you put one of your wallets in public mode, you won’t be able to hide bad results, but you can always make only the wallets of your choice visible. Is partial information biased? Huge debate! It is therefore very important to fully understand the “positioning” of the portfolio being monitored. To do this, make sure that the person sharing their portfolio clearly and precisely states the strategy they are proposing in their profile. So favor a trader who frequently shares his strategy and points of view.