Being social keeps traders ahead

Before the advent of social media, trad­ing could be a lone­ly busi­ness. But now, thanks to the rise of social media plat­forms such as Twit­ter and the advent of the smart­phone, indi­vid­u­als can eas­i­ly con­nect with fel­low traders around the globe. Wel­come to the world of social invest­ment net­works.

CMC Mar­kets is one exam­ple. It has been involved in the spread-bet­ting indus­try for more than 22 years and recent­ly launched an aggre­gat­ed Twit­ter feed, which com­bines the feeds of dozens finan­cial com­men­ta­tors. The firm claims this means that its clients can expe­ri­ence a flow of infor­ma­tion akin to sit­ting on a trad­ing floor in the City.

“Some traders pick this feed over the more tra­di­tion­al news net­works to gauge sen­ti­ment before items get picked up on more offi­cial chan­nels,” says CMC’s Craig Inglis.

Oth­er firms take a dif­fer­ent approach. eToro, which in 2007 was the first firm to com­bine a social net­work with a pro­pri­etary trad­ing plat­form, allows users to copy each other’s trades with ease.

Every per­son who opens an invest­ment pub­lish­es that invest­ment on its net­work in real time. Every trade and invest­ment is auto­mat­i­cal­ly pub­lished on the trader’s “wall” so all eToro’s users can view each other’s activ­i­ty at the click of a but­ton.

“Traders can search for and fol­low oth­er traders whose strate­gies and track records they like – a suc­cess­ful tech investor in Ham­burg or a cur­ren­cy investor in Madrid,” says Nadav Avi­dan of eToro.

Copy trad­ing has proved to be extreme­ly pop­u­lar, both as a way of prof­it­ing from oth­ers’ exper­tise and as a way of learn­ing from them

“They can be updat­ed when­ev­er these traders invest or close a posi­tion and can auto­mat­i­cal­ly copy their trades, invest­ing auto­mat­i­cal­ly in their strate­gies.”

Mr Avi­dan explains that most eToro traders copy mul­ti­ple traders, invest a few hun­dred dol­lars in each, and copy their trades in to their accounts. If a copied trad­er makes 20 per cent, so does the trad­er copy­ing him or her.

The firm says its copy trad­ing fea­ture has proved to be extreme­ly pop­u­lar, both as a way of prof­it­ing from oth­ers’ exper­tise and as a way of learn­ing from them.

BITCOIN TRADING

eToro is also one of a num­ber of plat­forms that now allow social trad­ing in “cryp­to cur­ren­cy” Bit­coin, which itself was born of the “social rev­o­lu­tion”.

Social trad­ing tools low­er non-finan­cial bar­ri­ers to entry in for­eign exchange trad­ing. Mr Inglis says the amount of pre­cur­sor train­ing has cer­tain­ly been reduced, and news and analy­sis is now more focused, as well as acces­si­ble, than ever before.

“Traders are being pre­sent­ed with addi­tion­al poten­tial set-ups, with greater amounts of effec­tive sup­port­ing data, to help them when mak­ing deci­sions,” he says. “When I first start­ed in the City, almost ten years ago, tech­ni­cal analy­sis and chart­ing was a skill that took years to mas­ter, now rel­a­tive­ly new traders can under­stand the core sig­nals with­out need­ing to know the in-depth cal­cu­la­tions or how to apply them.”

How­ev­er, as with all trad­ing, it is vital to be aware of the risks. Just as any trade should have cor­rect risk man­age­ment at its heart, so social trad­ing should be done with an aware­ness of the fun­da­men­tal pit­falls.

“Oth­er traders may have dif­fer­ent time-frames or risk tol­er­ances and blind­ly fol­low­ing them is as dan­ger­ous as under­tak­ing a trade with­out prop­er research,” warns Chris Beauchamp of IG. “Also, be aware of look­ing just at per­for­mance records. Many of these tend to just take closed trades into account, ignor­ing any open trades that could be run­ning loss­es. Check out the open posi­tions and include them in per­for­mance as well as the suc­cess­ful closed trades.”

While Mr Beauchamp con­cedes there is the risk that traders could lose some of their ana­lyt­i­cal abil­i­ty in sim­ply aping exist­ing sys­tems, he believes the inde­pen­dent streak many pos­sess means suc­cess­ful traders will see social trad­ing as anoth­er weapon in their armoury and not as a whole­sale replace­ment for their research. “The adage ‘do you own research’ still applies,” he notes.