The theory and realities of copy trading


Can you earn a living by taking advantage of the upsurge in social trading networks? Is their existence and the mimicking of other successful traders a guarantee for success and financial gains? These and other similar questions are raised when trying to analyze the increased penetration and appeal of social trading networks and the ease with which they make copy trading available to all traders.

In theory, most such venues where developed with the view of allowing anyone, even those who know nothing at all about the markets and how the work, to be able to sit in the comfort of their own home and record profits simply by mimicking the trading decisions of others, thus leading them to a newfound independence and a source of additional income. The mere existence of such social trading networks is especially appealing to normal folks who would love the chance to make some money on the side, working parents, retired persons etc, but also for people who have an interest and perhaps some knowledge of the financial markets but don’t fit into the hardcore, full-time working environment of the corporate world.

In a nutshell, the proposition on which eToro, ZuluTrade, Currensee and other similar social trading networks have developed is offering a solution to bypassing the hassle of following markets, news and indicators in order to be able to trade online and instead to be able to pull in extra income by copying the bets placed by “expert, professional, seasoned” traders with a proven track record of gains and trading success.

In theory then, social trading takes away the hard part of trading and the many challenges and pitfalls it poses and instead offers an easy, convenient and very accessible venue for all to benefit from the exciting opportunities that the trading world has to offer.

The reality of using social trading platforms however, is not as rosy, since if you are to succeed then you are compelled to perform quite a thorough analysis of the “successful” traders before you can choose who to follow.

make money with social trading

In terms of ease of access and ease of use most social trading venues can be argued to score high marks since opening an account and signing up to such networks is straightforward and above all, free. Some, such as eToro, offer an integrated solution since they act as brokers themselves and thus you can have your trading account and copy trading facility in one venue. Others, such as ZuluTrade, only operate as social trading venues and thus you also need to open an account with a third party broker as well, to be able to perform your trading.

Before choosing which social trading network to join, it would be interesting to know how the traders featured there, called popular investors on eToro or “signal providers” on ZuluTrade, are rewarded: On ZuluTrade“Signal providers” receive a commission for each trade executed by a live follower account, while eToro rewards “popular investors” based on the number of copiers they attract. Another popular social trading network, Currensee, charges a 2pc service fee on the average capital in a user’s account.

Although social trading has been gaining traction it is fair to admit that many users have lost big amounts when the person they were following placed unsuccessful trades. Over the years social trading networks have worked to improve the risk protection measures and risk management tools they make available to users exactly to avoid such disasters.

If you are a novice in trading then the prospect of a social trading platform may look very appealing. Currently, the biggest social trading platform is eToro, which boasts an impressive number of users worldwide exceeding three million users worldwide. According to a Reuters report, “eToro have applied a “Facebook meets Twitter”- like approach in which users build communities to share and discuss trades, while sites rank top players and offer the chance to duplicate the trades of the most successful peers.”

The firm itself points to the fact that they are in fact a place where people can communicate, follow and copy each other, allowing those with less understanding of the markets to see what more experienced investors are doing. Moreover, they stress that their aim is to help all people discover the wisdom of the crowds, since by copying other traders people gain a better understanding of the markets. eToro also claims that research findings reveal that eToro users are consistently more profitable than people who just trade manually.

However, as compelling and convincing as all these may sound, when joining a social trading network all users need to be cautious and aware that some of the people may opt to follow may just be there out to make some quick money and may not be solid traders to copy. Moreover, although they may display very impressive gains and performance it is quite possible that they are also holding on to a number of losing positions that they have not closed yet in the hope the trades will bounce back.

In short, if you do decide to join you still have to do your homework and spend time in order to choose the right traders to follow and copy. This can be achieved through employing careful risk assessment methods and the good news is that all social trading networks seem to be going to great lengths in order to put at the disposal of users as much detail as possible regarding the performance of the “expert traders” in a manner that is transparent and are also improving the process of searching for and locating the most appropriate “guru” to follow for the needs and requirements of each user.

Resorting to social trading may not make you from ignorant and novice trader to super rich overnight, however, it is indeed a very powerful weapon and an extremely useful tool and if used correctly it can indeed propel your way to trading success. If you develop the skills necessary to make the right choices when it comes to who to copy and follow, and if you cultivate the quick reflexes to escape if things start to go wrong and if you have the teeth and patience to persevere, then you may well become one of the numerous of success stories of people who not only make gains from their trading through copy trading, but who also gain extra income by acquiring their own followers and copiers.