April 21, 2019 | 05:12 PM


27.07.2018Social copy trading: The benefits - and risks

"Social trading", as it is known, is a method which allows a trader to copy the trades placed by someone else.

When it comes to finances, online trading has been one of the biggest developments of the tech revolution. For many traders, the low barriers to entry mean that a trading account is something that can be set up at home in just a few hours. For brokers, the demand for easy trading which can be completed online in the comfort of the home has revealed a profitable and lucrative business opportunity.

But as with all aspects of the switch to tech, some providers have decided to take trading technology a big step further by making it as automatic, stress-free and easy as possible. “Social trading”, as it is known, is a method which allows a trader to copy the trades placed by someone else. This means their fortunes rise and fall in proportion to those of the trader being copied. This article will explore what social trading is, along with its risks and benefits.

What is social trading?

Social trading is a method which allows the trader to cut down on the amount of time they spend researching and placing a trade. When choosing a trader to copy, traders can use filters based on a range of features including past trading success, appetite for risk and more. Once a trader to copy has been found, the new trader’s investment deposit will be traded in the same way as theirs. So if the super trader makes a profit, so does the new trader. But if they lose, so does the newbie.

Who are the main providers?

There are plenty of social trading providers out there, and it’s important to find one that suits the individual trader’s needs. The main name in this space at the moment is eToro, and it has led the way with social trading innovations like crypto copy trading and more. However, there are plenty of alternatives including Pepperstone, Darwinex and AvaTrade, too. Remember, brokers in Australia are regulated by the Australian Securities and Investments Commission (ASIC). Traders shouldn’t sign up to a broker or place a trade unless the broker in question is covered by this regulator and authorised by them to operate.

What are the benefits?

The main benefit to copy trading is, of course, convenience. All a trader has to do to get started is find a trader they’d like to copy and begin the process. Another benefit is that traders get access to experts who know what they’re doing. While this doesn’t mitigate all the risks, it does mean that a new trader is likely to have their trades managed by somebody who knows the market better than they do themselves.

And what are the risks?

In some senses, there are no additional risks associated with copy trading. Provided a new trader chooses a super trader who matches their own risk profile, it’s unlikely they’ll be doing anything more dangerous with their investment than if they managed it themselves. The problems with copy trading lie more in the way the platforms work.

Some traders, for example, have called for the platforms to allow successful traders to add their trading history to their profile, which would make comparing and contrasting traders to copy much easier. But this would also mean the traders looking to be copied could cherry pick their best performing periods in order to look better – a phenomenon known as instant history bias. Another downside is that not all of these platforms offer all financial instruments. This presents the possibility that a trader will find an interface that suits them, but which doesn’t offer the crypto or commodity instruments they want to copy trade.

Copy trading is a great innovation that many traders around the world are benefitting from. By understanding the specific benefits and potential risks, those who are new to this space can develop a social copy trading career which suits their needs.

Top Stories on FatCat.com.au

Measuring the return of an investment property Renting out an investment property for $700 a week doesn't mean a thing, unless you understand how to calculate your...

News from TheBull.com.au

© Copyright 2019, FatCat.com.au. All right reserved.