How Does Social Trading Work? A Guide for Novice Traders

January 13, 2022

0 3 minutes read

Social trading is a marriage of social media and investing that makes it possible to communicate with professional traders and copy their strategies.

Multiple social trading platforms have emerged in recent years, making it simple and convenient for novices to track traders’ activities and make the same moves with their own portfolio.

The idea is related to copy trading, but there’s a big difference. With social trading, users can not only study investors who perform well and mirror their trades, but also interact with them and learn, enhancing their own knowledge until such a time as they may want to strike out on their own.

How does social trading work?

At its core, social trading brings investors together within a common platform where they’re able to share their ideas, thoughts and strategies. Such platforms make it easy for users to search for top investors through a professional trader service or investor rankings table. Then, they can study that trader’s activity, read through their news feed for insights and tips, post comments and even ask questions. It’s entirely up to the user if they want to adopt that trader’s strategy and mirror their market moves.

Platforms such as eToro and NAGA make social trading as easy as possible, allowing users to copy the most successful traders on their platforms with a single click. That way, their own portfolio will reflect their chosen trader’s activity.

The concept has big appeal not only for beginners who lack full understanding of how the financial markets operate, but even more experienced investors who’re looking to benefit from others’ experience. For profitable traders, there’s an incentive too as they can earn extra money from those who copy their trades. Many also get a kick out of sharing their knowledge and expertise.

Another big benefit for every user is the growing community on social trading platforms. They serve as a forum for successful investors to share strategies and bounce ideas off of other users. It’s this interaction that sets social trading apart from traditional copy trading.

How safe is social trading?

Users should be aware that even though they’re copying successful traders who’ve shown themselves to be profitable, it’s not entirely without risk. A previously successful trader might suddenly make some losing trades, which would be reflected in the portfolio of anyone copying them.

Another risk is that by following someone, users may end up buying assets that don’t fit their time horizon or risk tolerance for investing. So users should exercise caution while choosing an investor to follow by studying their history carefully to make sure they’re a good fit.

Users should also consider what assets they want to trade, as not every social trading platform is the same. If they’re interested in trading cryptocurrencies – known for their volatility and high risk/reward ratio – then they’ll need to choose a platform that offers it, such as eToro, TD Ameritrade or NAGA.

How to get started with social trading?

For those who’re willing to take the plunge and try to earn a profit off the back of others, the very first step is to choose the most appropriate platform. One of the main limitations to consider is platform availability. In the U.S. for instance, many platforms are banned and even the likes of eToro only allow users to trade certain kinds of assets.

The second consideration is functionality. One of the main advantages of a platform such as NAGA Trader is its integration of NAGA coin – its very own cryptocurrency – which enables users to pay lower fees to copy trades and also participate in governance and its wider ecosystem of DeFi apps. Like eToro, NAGA also makes it very easy to follow successful traders with its Autocopy feature, so users can study their profiles and if they like what they see, begin copying them with a single click.

Users are advised that going all in with their entire savings from the start is probably not a smart idea, even if a trader has a long track record of profitability. Rather, it’s advisable to spend a few weeks just observing and interacting with different traders to learn about their specific strategies.

One of the most useful features on eToro, NAGA and other platforms is the top trader rankings, which showcase their most successful traders and provide in-depth analytics for users to drill down into their investment strategies.

Some key metrics to look out for include checking how often a trader’s investment picks pay off, how many unprofitable trades have they made, how much risk they are taking on with their trades, and how those picks balance against their overall returns. By studying a few promising users carefully and the kinds of assets they trade, it will be easier for beginners to find a trader whose strategy aligns with their own goals.

A final consideration for beginners relates to how much of their portfolio they want to commit to social trading. Bear in mind that aside from doing due diligence, social trading is almost entirely reliant on the actions of others. Beginners therefore might want to protect themselves from unexpected losses by committing only a small portion of their savings to following their chosen investors.