- Social trading is a form of investing in which investors can copy and take cues from both their peers and expert traders, allowing them to learn while also earning.
- The social trading strategy allows novice investors to tail the trades of experts and successively traders to earn profits even without any in-depth knowledge of the market.
- This however can also pose risks as social traders are likely not entirely aware of what they’re trading or what strategies they’re copying.
Have you ever felt like the barrier to entry to trading was simply far too high for you to breach? Retail trading can often feel like a zero-sum game, one in which your loss is often someone else’s gain. It is often hard to know sources of information to trust, or how to identify which piece of news is trying to create FUD or FOMO for a certain coin. While this would be a largely fair description of the market for most of its history, social trading has changed the game by creating a structure in which traders can actually work together to earn money.
What is social trading?
Social trading is an investing strategy in which traders analyze market data by looking at the performance of other successful traders and copying their techniques and strategies. Proponents of crypto social trading claim that by tailing or copying a more experienced trader (or group of traders), novice traders can learn which strategies work and which fail through practical observation–while also avoiding the pitfalls of early losses that most new traders experience.
The core principle behind social trading is cooperation, not competition, where instead of pitting oneself against each other, social traders work together to share strategies, opportunities, and profitable investments. Tight-knit social trading networks may also expand this into pooling funds and dividing research tasks.
These networks can exist on an app or a brokerage website, but it can also exist organically, best seen in the GameStop case in January 2021 whereby users from a subreddit r/WallStreetBets coordinated a surge in buying up stocks of GameStop, causing price to spike and triggering large losses for short sellers.
Social trading vs mirror trading: What’s the difference?
Also known as copy and paste trading, mirror trading allows investors to copy successful traders and implement the same trades. Through the social trading tools offered by social trading platforms, mirror trading can be implemented in near real-time. Though initially only offered to institutional clients by big brokerages, mirror trading has since been democratized by the advent of social networks and online communities.
Social trading can be seen as an offshoot of mirror trading. The difference is that while mirror trading is only concerned with copying the actual trades themselves in an automated manner, social trading is far more expansive and, as the term implies, “social” in that it typically involves active participation and learning in a community.
In this sense, mirror trading can be viewed as a bit more “old school”, as it focuses on copying successful strategies through raw analysis and technical indicators, while social trading is largely concerned with “human” trading.
We are often told that the only way to profit in the market is to have knowledge that other people don’t. Given that this is a principle that fundamentally contradicts the idea of social trading, you might find yourself asking questions such as, “Does social trading work?” “Is social trading really profitable?” As with any strategy, it is important to understand the pros and cons of social trading before you attempt it yourself.
Pros of social trading
- Reduced emotional trading: One of the most common pitfalls for novice investors is that they’re too emotionally invested in the day-to-day performance of their assets. One bad day, and they may feel an urgency to sell or abandon their current strategy. By tailing an experienced and seasoned trader, novice investors can instead focus on learning the right strategies and principles. Instead of obsessively checking their account several times a day, investors can instead just check in every few days and decide if they want to keep mirroring the trader that they’re following.
- Track record: Social crypto trading platforms typically provide full transparency on trader performance, open positions, and past positions so that members can assess the competency of contributors. As such, you are always able to analyze the long-term performance of any trader that you decide to mirror and learn from.
- Learn and earn: Even the most experienced of traders will tell you that they lost money when they first started out. Social trading offers novice investors the unique opportunity of learning the techniques and strategies that are generating profits as they earn. Many crypto social trading platforms allow users to ask questions and discuss the strategies that they’re copying.
Cons of social trading
- Lack of agency: The biggest advantage of social trading is also its greatest drawback. While we always have the ability to reevaluate our trading strategies, it can be more difficult to respond to market events in a timely manner with social trading. This is because social trading ultimately means placing your trust in the expertise of another trader. While you may benefit from their successes, you are also sure to get burned by any of their mistakes. This can lead to situations where you end up losing money simply by hitching yourself to the wrong horse.
- Unclear risk: Although it may be clear whether a social trading contributor is currently in the green, it is much more difficult to understand the risks that may have been required to make that profit. For example, a strategy that generated 200% returns over a period of several months may have required taking out huge amounts of leverage. This is a particular issue for social trading as many copy traders are novices who do not have the adequate expertise to analyze the soundness of a strategy for their own financial situation.
- Less pain, less gain: Some investors argue that while painful, the process of losing money as you start out turns you into a better trader. Critics claim that social trading can shield traders from the pain of mistakes that would have otherwise driven them to learn trading skills that will benefit them down the road.
Three ways to take full advantage of social trading
Before getting started on this section, it is important to understand that social trading is by no means a sure thing. While social trading has received praise for democratizing finance, it has also been criticized for obfuscating the expertise and knowledge required to properly navigate the market.
Never allow yourself to believe that engaging in social trading means that you are safe from risk. Even the best traders in the world will lose money from time to time. As a social trader, you are trusting the judgment of a third party while also taking on all of their risk. At the same time, here is how you can leverage it to your advantage.
Adapt strategies to your own needs
One of the best ways you can reduce risk and ensure that you’re learning is to adapt strategies to your own needs instead of mirroring them directly. Keep in mind that whatever strategy you’re copying was likely tailored for the specified needs of the trader that created it. Over time, use the knowledge that you’ve picked up from the social trading platform to adapt the strategy to your own trading principles and risk appetite. This will help you make progress as a trader and protect you from excessive risk exposure.
Mix in technical analysis
Even as you’re mirroring someone else’s strategy, it is prudent to start performing your own technical analysis as you learn more about the market. Not only does this help you figure out why a strategy is working or failing, but it can also provide you with the ability to perform your own independent analysis. The eventual goal of learning through social trading should be to gain the skills necessary to succeed on your own.
Some of the most common trading indicators used in crypto are:
- Simple Moving Average (SMA)
- Relative Strength Index (RSI)
- Moving Average Convergence Divergence (MACD)
Exercise critical thinking
Before deciding on a trader or strategy to copy, make sure that you have done your own research first. The best social trading platforms should provide you with full transparency over the current and past performance of the contributors you’re considering, along with disclaimers on how these traders benefit from being on the platform. While some contributors may simply participate out of a love of the trade, many platforms offer incentives such as a portion of funds deposited by users joining to copy their trades.
Always remain critical of the strategies and traders that you are copying. Even when you’re in the green, you will benefit from both an educational and risk management perspective by constantly evaluating and re-evaluating the strategies you’re copying and making sure they’re the best for you, your investment or trading goals and your personal risk appetite.
Crypto social trading can help novice investors dip their toes in the market without being overwhelmed by its complexity. However, novice investors should remember that there is still inherent risk in any type of trading strategy. The ultimate goal should be to learn as you earn. The best way to get something out of social trading is to identify an experienced and reliable trader, and learn from them the skills you need to become a confident and independent trader in your own right.