To understand how social trading has been around and how it’s becoming the future leader of financial trading, you must understand the history and process that led to its growth. However, we need to first look at what “social trading” is before its history and the process that led to its evolution.
What is Social Trading?
It is a form of investing that allows traders or investors to study, copy, and execute their colleagues’ strategies and experienced investors or traders. Some traders perform their fundamental and financial analyses because a class of traders prefers to study and copy others’ trading analyses.
Social trading is often thought of as a social network that enables traders to interact with themselves, watch and study each others’ trade analysis and learn about decision-making processes. Generally, social trading is just like a social network, but it is used for trading ideas, strategies, trading analysis, and tips for traders.
The Beginning of Social Trading
Social trading started through emails. Yes, it was email that paved the way for modern social trading platforms. They used emails as the medium of communication anytime they wanted to open or close a trade. The experienced trader normally sends an email to his peers to open trade while others would follow suit and when it was time to close the trade, a similar email would be sent back to them to be aware that it is time to close the trade. During this period, email was the earliest means of social trading.
Social Trading – The Development
Even though the email was active and normally sent immediately, there is a huge difference between a trader drafting email, sending across the receiver receiving the mail, and finally reading it. The whole process may take a few minutes, but even a few seconds matter to a trader in the world of trading. This may be too late or even counterproductive by the time the receiver opens a trade.
However, this led to the demand for faster means of communication between traders. Eventually, trading rooms got an entry into the world of trading. The trading room is a virtual room and a chat room; this is where traders meet to communicate, share strategies, tips, and exchange trading information. The transfer of information happens faster than sending emails to each other in the trading world. Virtual room proves to be more effective than sending emails, and some other advantages of virtual rooms include back and forth communication and immediate responses.
The Approach of Mirror and Copy Trading
Traders couldn’t wait any longer and were tired of paying for chat room services. Also, the brokers realized this, and for their good, they began to move into the social trading platform. They eliminated the act of having to wait for trading signals by introducing the first automated signal generating system. However, Tradency was the first company to offer an automated social trading platform. In the year 2005, Tradency introduced “Mirror Trader,” which generates automated signals for traders, and depending on the success and their performance, they could host their trading strategy. All the traders across the globe can access this, and from the varieties of trading strategies, they could choose one to follow. However, this proved to be a big hit among traders, and it became a trend quickly; thus, this form of algorithmic trading was called Mirror Trading.
This method was refined as the mirroring process, and this allowed traders to copy the trades made by a trader directly. Thus, it was known as copy trading from that moment. The new method proved to be more effective for newbie traders because they didn’t have to engage in a decision like when to open or close the trades, and it removed the component of human emotions when it comes to decision making. Even at that, the mirror trading system had a setback. It makes the processing time-consuming for traders. This created a lack of social interaction among traders and demanded new development for a social platform.
The Birth of Social Trading
The limitations of mirror and copy trading are what eventually led to the birth of social trading. Mirror trading and copy trading didn’t yield to the traders’ actions because the latter wanted not only social interaction but also a certain level of transparency between the traders and users of a specific platform. As such, traders don’t have to wait for a longer period to submit their trading strategy and wait for the approval. Thanks to some more refining, social trading now implied a simple link of the personal account of a trader with their trading portfolio. This increases trust and transparency among themselves, and also, their trading history would become visible to others that would like to learn from them. However, this method is safe, and it promotes complete transparency between traders on the platforms.
In social trading, the followers can ask questions from the traders they wish to follow. A social trading platform is just like a social network. The only difference is that social trading platform is primarily used for exchanging trading information and strategies.
However, it is completely revolutionized the trading industry. A newbie trader can join a social trading network and start copying trades from the top traders. A newbie trader may decide to copy the entire portfolio, and not only the newbie trader that can benefit from social trading, the professional and experienced traders also earn money from individuals copying their portfolio.
When the newbie traders earn profits, the experienced traders also earn a portion of the profits. The top traders have thousands of copiers and followers on leading social trading platforms like eToro. These platforms have introduced different innovative features that have attracted millions of traders (both experienced and newbie) to their platforms.
The Downsides of Social Trading
Social trading such as the eToro platform and other leading platforms offer previously unseen accessibility alongside the ability to make money with no specific time or capital outlays. However, some substantial drawbacks must be considered before investing in social trading. The major problem is that some individuals are investing their money based on what they heard or the decisions of inexperienced traders, particularly on social media platforms where there is no performance history. Also, some individuals are tempted to get a loan to boost their investments, most especially in the foreign exchange market. No matter how smart the professional traders the newbie traders copied, there is always a potential for the investment to fall in price or value in social trading. More than 60% of people polled by the website Social Trading Gurus said they had lost cash due to the lack of patience and rapid use of loan shouldering part of the blame.
However, the newbie traders should reduce early investment, choose a lower risk, and carefully leverage while investing. Use this opportunity to copy the experienced traders so that any loss may be balanced out. Also, to have the right financial education to make financial decisions and be familiar with the ground rules such as portfolio diversification before you start investing.
This article discussed the brief history of social trading and the evolutionary process that led to its growth. Social trading had improved more than when it started. Trading platforms such as eToro have become packed with features and tools that allow newbie traders to copy professional traders’ portfolios. Also, it makes trading faster, efficient, interactive, and productive.