What is social trading and should I participate in it?
Trading in financial markets is intimidating for many beginners. While the potential to earn strong returns is an exciting concept, the potential to experience losses is a constant concern.
Many beginners lean on the trading community for advice and recommendations related to their trading activities, whether trading in the forex, cryptocurrency, commodities, or stock markets. Online communities devoted to investing and trading bring a social element to the process.
But what exactly is social trading, how does it work, what are the pros and cons, and should you take part in it?
What Is Social Trading?
Social trading is a new form of online trading that mixes market research with social media. There are several social networking websites traders use for communication. Some are traditional social media sites like Twitter, and others are dedicated to the market, such as Stocktwits.
Social traders use social platforms for sharing information back and forth. However, unlike other online social activities, social traders center their discussions around what’s happening in the market rather than what’s happening in their personal lives.
In this way, beginners are able to connect with professional traders who point them to solid market opportunities. These experienced traders often share details of the technical analysis they used to uncover a market opportunity, fundamental data that suggests wide movements, and the strategies they plan on using in the trade.
Traders can get a deep understanding of market sentiment through the use of social media and tools that show how active the social trading community is in relation to a stock ticker, currency, cryptocurrency, or other financial asset.
How Social Trading Works
Like all forms of trading, social trading is a short-term trading concept. Many traders who use this strategy focus on day trading, meaning they never leave a position open for more than a single trading session.
The social trading process is simple:
Step #1: Choose Social Trading Apps to Try
There are several social trading platforms online — a list of the most popular options is below. You’ll need access to at least one of them to start the social trading process.
Start by digging through your options and choosing a social trading app or three to give a shot. When doing so, look into the size of the communities, who’s in the communities, and features offered to ensure the apps you choose are a good fit.
Step #2: Look for Opportunities
Use the tools available on the social network of your choice to find opportunities.
For example, if you choose to use Stocktwits, take a look at the heatmap to determine what stocks are trending. The heatmap shows large and small boxes varying in color. Size denotes how many people are talking about the stock and the brightness of the color represents the percentage gains or losses experienced in the current session.
As a trader, you’ll want to jump on the highest volatility moves with the most social activity. So, look for the largest boxes shaded in the brightest colors.
Other sites have top message activity lists, most active chat rooms, or a wide range of other lists and tools. The idea is to use those tools to find the assets that are being talked about the most.
Step #3: See What Traders Are Saying
The premise behind social trading is that people move the stock market. When a lot of people are saying the same thing, there’s a strong likelihood that they’re also acting on their thoughts, which leads to high volume in the direction the herd suggests it should go.
For example, if lots of traders see a technical sign of a rally ahead for a stock, you’ll see lots of chatter about it on your favorite social trading platform. An influx of traders hoping to enter a position in a stock all at once means more buyers than sellers, which drives the stock price up.
Take the time to read several posts on the asset’s message board to determine what the crowd expects to happen.
Step #4: Make Your Move
Once you’ve chosen an asset you want to trade, there are two ways to go about making your move:
- Do Your Own Analysis. Many traders use social media to find opportunities, then analyze the opportunities they find to see if they fit in with their strategies. These traders don’t feel comfortable blindly following others and trust in their own technical analysis skills.
- Follow the Crowd. This is by far the most dangerous option, but it’s one way that beginners work to learn the art of trading. If the overall opinion of traders is that a stock will go up, there’s a strong likelihood that increased buying will lead to upward movement. Those who lack technical analysis knowledge, or simply trust in the crowd, tend to follow the moves the masses suggest in their own trading portfolios.
Social Trading Platforms
There are several different social trading networks online, but they all can be sorted into one of two categories — social networks and social brokers. Here’s a few of the most popular:
Social networks are social media sites, such as Facebook, that give users a way to communicate online from anywhere in the world. Some social networks are geared specifically to traders, while others are popular for more general purposes. Here are the most popular options:
- Stocktwits. Stocktwits is essentially the Twitter for investors and traders. The platform hosts a message board for all stocks on major United States exchanges, a heatmap that shows which stocks are trending, and one of the largest communities of social traders online today.
- Twitter. Twitter is a popular social network for several reasons, but traders happen to be all over it. When you want to see what the masses are saying about a stock, all you need to do is add a dollar sign before its ticker symbol in the search bar. For example, you can search for mentions of Apple with $AAPL. You’ll be surprised at how much you find!
- Yahoo Finance. Yahoo Finance isn’t exactly a social network, but when you land on a stock’s dedicated page, you’ll find a tab labeled “Conversations.” Here you’ll see what Yahoo users have to say about the stock you’re interested in.
- InvestorsHub (iHub). Finally, iHub is an old-school forum with very new-school and highly successful traders in its audience. The platform features various message boards including titles like “Breakout Boards,” “Stocks,” “Commodities,” “Forex,” and “The Lounge” where traders chat and share ideas.
Seeing the value in social trading, some brokers took the concept to the next level by adding social capabilities to their platforms. Some of the best social brokers include:
- eToro. Founded in 2007, eToro has been known to use technology to its advantage, and stays on the cutting edge of trading tools. The platform has several social features, including copy trading features that allow you to copy the moves of other users.
- Zulutrade. Zulutrade is another online broker that offers several social features, including copy trading. You’ll also be able to interact with other investors, automate your portfolio, and learn from some of the best traders online here.
Social Trading vs. Copy Trading
Social trading is often coupled with copy trading, also known as mirror trading. Although copy trading is a form of social trading, social traders don’t always blindly copy others in real time, as is the case with copy trading.
Many social traders look for trading ideas based on the activities of expert traders, but instead of acting along with the herd, they take the time to analyze the opportunities on their own. These traders use technical analysis to determine the best entrance and exit points and to ensure the move fits in with their trading strategies.
Mirror traders, by contrast, often do little to no research on their moves. Instead, they find successful traders using platforms like eToro and Zulutrade and use automations to copy the moves made in their portfolios.
Pros and Cons of a Social Trading Strategy
As with any other form of investing or trading, a social trading strategy comes with benefits and drawbacks. Here’s a list of the most important to consider:
Pros of Social Trading
Social trading has become a popular strategy, and for good reasons. Here are some of the biggest pros:
- Beat the Market. Because the masses move the market through supply and demand, social trading gives you the opportunity to tap into the fastest moving assets. If done properly, there’s significant potential to beat the market using this strategy.
- Community. Because money is often a taboo topic, the finance world is often a lonely place. Social trading brings community to finance, giving beginners the opportunity to meet other like-minded traders, and allowing experts the opportunity to share their experience.
- Learning. Some people learn well by reading tutorials or watching videos, but some learn best by watching a professional work. Social trading gives newcomers the opportunity to learn about financial markets by watching and communicating with the pros.
- Simplicity. With the introduction of mirror trading, the ability to trade successfully has become far more widespread. You don’t have to be an expert to learn from an expert — and trade like one.
Cons of Social Trading
There are plenty of benefits to social trading, but there are also a few drawbacks that should be considered.
- Following the Crowd. Following the crowd isn’t always the wisest way to make investment decisions. Oftentimes, newcomers jump on an upward-trending stock just before traders take profits, leading to significant losses.
- A False Safety Net. Considering the wisdom of the community to be a safety net, many social traders (especially beginners) forgo their own analysis altogether. This false sense of security can lead to poor market decisions and losses.
- Trading Is Risky. Whether you’re social trading or using stock screeners to find your opportunities, trading is a risky concept. Trading (as opposed to investing) involves making short-term moves and banking on volatility. Unfortunately, short-term predictions tend to be inaccurate, and no trader is right 100% of the time. It’s important to understand the risks associated with trading before taking part in trading activities of any kind, social or otherwise.
Should You Be a Social Trader?
Whether you should become a social trader depends on multiple factors. These characteristics describe the best candidates for social trading:
- You’re Able to Check Emotions. Emotional trading can lead to painful declines in your portfolio. The best candidate for any form of trading has the ability to check emotions at the door and strictly adhere to a trading strategy.
- You’re Risk Tolerant. Because short-term trading is inherently risky, it’s important to have a healthy appetite for risk.
- You’re Willing to Research. Although following the crowd is an option, it’s best to do your own research prior to making any trades. If you’re not sure how to analyze a stock, learn about technical analysis before getting started. The best trading decisions tend to be those that have been well-researched.
- You’re a Social Person. The term “social trading” implies you will be interacting with others. It’s a strategy best used by socially inclined people. If you enjoy meeting new people and taking part in conversations online, you’ll likely enjoy social trading.
Social trading is an exciting concept. It gives market participants a way to tap into some of the biggest moves the market has to offer while opening the door to new relationships and educational opportunities.
However, social trading is still a form of trading, and the risks should be considered.
If you decide to take part in the process, be sure to do your research and develop a strong understanding of technical analysis. Although you can blindly follow the herd, you may follow the sheep right into a wolves’ den. Doing your own research is generally the best way to go about making your investing and trading decisions.