Social Trading. What Is It and Why People Do It?

04 May 2016
By Anton Berezin, Senior Developer

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Modern internet technologies are constantly changing the way people communicate with each other. Various platforms and resources successfully connect producers and consumers, employers and job applicants, buyers and sellers. Social networks create communities and unite people who share common interests, from hobbies to business. The trading community is no exception.

It is natural for people to unite and discuss trading strategies, analyze outcomes of historic trades and repeat trades that other traders have implemented. It was inevitable that some advanced infrastructure to facilitate such cooperation would appear. Today social trading networks provide this type of infrastructure, allowing people to trade and explore trading platforms together.

What benefits can social trading networks offer individuals? Very often people who want to begin trading aren’t sufficiently familiar with the market and don’t know which broker to choose or how to execute operations. That’s where social trading networks come into play. They introduce individual traders to market venues and provide access to shared knowledge about basics as well as more sophisticated theoretical and practical topics.

Moreover, social trading networks give users the ability to follow or copy other traders (also known as signal providers) – this means that if a selected trader executes a trade, the follower immediately does the same but with a smaller volume that is proportional to the original trade. This can be helpful for beginners who have not yet developed their own strategies and wish to rely on more experienced traders with good reputations.

In order to choose the right signal provider, the user can refer to customizable ranking systems, which analyze the performance of each participant using several indicators. Traders can choose between the signal providers with the best performance based on their own criteria. Some social trading networks pay the most popular signal providers bonuses based on the number of followers.

Another tool that can benefit beginners is the sandbox. In these sandboxes, all participants can use virtual money to trade on real instruments using actual prices. These sandboxes can be viewed as simulation platforms for educational purposes.

Brokers also benefit from social trading networks which is a good source of active users. Some social networks such as eToro were initially created as additional resources for brokerage services. Some of the networks are owned by the same company as the brokers (for example – ZuluTrade network and AAAfx broker), but they usually provide access to other brokers and receive a fee for the recommendation.

There are many social trading networks competing with each other and satisfying the various needs of both traders and platform owners. The networks do not execute trades on their own, but they facilitate communication between different parties and directly impact the market.

Sophisticated ranking engines make it easier to analyze the market, reducing the learning curve for beginners and serving as convenient tools for experienced users. This is why social trading networks also influence on how people trade. Attracting new people to the markets, social trading networks increase liquidity and change participant behavior. Although they have existed for several years, social trading networks continue to rapidly evolve and transform the world of trading.

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