I have noticed a number of brokers popping up all over the Internet promoting “Copy trade” or “Shadow trading”.
Some of you may have heard of or seen what I am talking about. But what is it exactly?
The generally accepted industrial term is “Social trading”. Which is pretty much self-explanatory!
Social trading, is a method of trading in short-term financial markets where you, the client, selects a “master trader/lead trader” to follow. These trades are then fully automated. So when the Pro hits the BUY button, your account will trade in the same relative size.
What this means, is that even if the master trader has an account of R500 000 and you only have an account of R50 000, if he risks 5% of his cash on a trade, you will automatically only risk 5% of your capital.
It’s a rather clever system.
The “master trader” does not have direct access to your account, it is simply an automated trading instruction to “do exactly what he does”
I quite like the concept. In fact, many of my clients are getting involved because they either do not have the knowledge, or the time to trade on their own. The most important thing to note here is that you need to understand the risk. If the master trader loses money, so do you. He cannot be held responsible because technically, you chose to follow him.
For someone who wants to take some risk with very little trading knowledge, it’s probably a good option because you can automatically follow a winning trader. In fact, you can follow multiple professional traders.
What I see as a benefit is the fact that you don’t need in depth knowledge of shares, CFD’s, Forex, indices, or commodities. You don’t even need knowledge of online trading platforms, systems or even know how to trade at all.
Interestingly, a recent research study conducted by Dr. Yaniv Altshuler of the Massachusetts Institute of Technology, an expert in collective intelligence methods, found that copying a suggested master trader, fared 10% better than those trading individually and without guidance. Now that might not sound like a lot but let me assure you, when it comes to short term trading, any odds that are tilted your favour are good odds.
This type of trading does not guarantee that you will make money but it assists in avoiding the mistakes that beginner traders make. You are copying a professional after all.
Bear in mind though, that even professionals lose money but what I like about the concept is that if the “master trader” you are copying does not perform, you simply hop across to the next guy.
If you are someone who likes to “have a punt” but don’t have the necessary skills, this is a pretty cool way to get involved.
Just make sure you choose a good service provider.