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.
Copy Trading is fast gaining momentum with investors – it is a fantastic amalgamation of Forex trading, portfolio management and social networking – and obviously if the trader you handpick does nicely, so will you – simple as that! And if your trader is not doing so well – you switch.
#1. It is imperative that you know how to trade as Forex and currency has a propensity of being complicated. Furthermore the markets are driven by numerous factors. The markets can also experience sudden fluctuations and moves which are measured by many technical indicators to forecast future moves. Moves are netted by trading with real currency on projected points such as currency futures, spot Forex as well as CFD’s. Be warned that these fiscal products are extremely leveraged and can clean out the largest account or else offer unlimited returns.
#2. Not all platforms are born equal. Usually the features differ – additionally they don’t back the same brokers and don’t all have the capabilities to implement auto-trades. Do your homework well before diving in.
#3. Top websites usually have a setting where traders are able to associate with each other. They also have leader boards; alternatively they will have a couple of ways of checking out a couple of possibilities to follow.
#4. So the big question here is – how exactly do Social Trading platforms make any money? After all, it is usually free to sign up! The answer is quite straightforward, really. Social trading platforms have partnerships with brokers and every time the website generates a trade with one of its supported brokers, they get paid! High-quality traders are attracted to these Copy Trading platforms by sharing in their profits. Always be on the lookout for scam artists, though.
#5. Being in the loop and keeping your finger on the pulse is all-important. Know the trader you are following so do your homework really, really carefully at all times.
#6. Copy trading is as vibrant as other trading that is why it is important to check on your accounts every day; keep your eye on the ball at all times – after all it’s your money others are investing in.
It is imperative that investors are disciplined about Copy Trading and must critically review their investments to keep them up to date and the proverbial finger on the pulse at all times.