Thursday June 22, 2017 - 12:16:38 GMT
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A brief history of social trading
The concept of social trading is a very interesting one, especially in the Forex market. Simply put, social trading involves the copying of other traders’ actions in your own trading. The internet has made everything more social, so it was only natural that trading in the financial markets would follow suit.
How does social trading work?
In general, social trading involves one trader making their trades based on information from other traders. In this sense, social trading can happen in various ways. The most basic involves online forums where traders discuss trading ideas, and make decisions based on those discussions.
As time went by, social trading became automated, with web applications actually initializing the trades on behalf of the traders. The initial methods of social trading, through forums and discussions, still exist, but they are no longer considered to be social trading
To initiate the trades, social trading applications can get the trading information either from other more experienced traders or through trading robots/algorithms. The choice should be made by the trader subscribed to the social trading platform, and they choose based on its historic performance. Essentially, to get started with social trading, you need access to a certain platform and, sometimes, have an account with an eligible broker. To make your life easier, it is best to use one of the aggregators that explain various perks of the platforms. So far we have seen some great selection of social trading brokers by Investoo, these brokers tend to be legitimate and technologically advanced.
When did social trading start?
The exact year when social trading became a thing cannot be determined; mainly because traders were discussing investment ideas long before the term social trading was coined. What we can determine is the year around which the first social trading platforms were created, and that is around 2005.
At around this time, brokers like AGEA had integrated a social trading feature within their trading platform streamster. The social trading aspect of their trading platform showed discussions about trading from other traders, but it did not actually initiate the trades. That same year, Tradency expanded on social trading by allowing their application to make the trades automatically. Since then, social trading became more popular, with various companies coming up to provide the same services as AGEA and Tradency.
Why did social trading grow so rapidly?
Social trading, as mentioned before, was bound to happen as long as there were platforms for traders to discuss ideas. Also as Forex trading became more accessible by novice traders, the need for experts grew, and thus, social trading.
The main catalyst for the boom in social trading, though, was the use of similar trading platforms. AGEA, as a broker, had the right idea, but their social trading platform was limited to their proprietary trading software. Many brokers still do it this way, with some notable brands being eToro and Tradeo who offer social trading through their brokerage companies.
However, when MetaTrader became an industry standard, suddenly social trading became even more possible. Thanks to MetaTrader’s popularity, companies like ZuluTrade, Tradency, Myfxbook and Ayondo were able to provide their services to even more traders. These companies provide social trading features to any trader running MetaTrader regardless of their broker.
The MetaTrader community also came together to form the MQL5 Community through which traders can broadcast trading signals. These signals can be subscribed to by any trader with MetaTrader to activate social trading. Any trader can also broadcast their own trading signal and have it copied by other traders.
How successful is social trading?
In just over a decade since social trading started being practiced, a high number of traders now practice it, although not as high as it was expected. Some social trading companies like eToro, ZuluTrade and Tradeo boast of having hundreds of thousands of clients, but that number is low when the total number of traders is taken into account.
Another example from Oanda’s experience with social trading. The company first introduced fxUnity, but shut it down after a short-lived existence. Then Oanda bought Currensee which was first launched in 2008 but had to shut this down too in less than a year. Considering how large and successful Oanda is, their experience with social trading shows that there is a huge number of traders uninterested in the idea.
On the other hand, some companies continue to thrive in this sector, so what is it that makes social trading such a mixed bag. Perhaps the problem lies with the target audience. Social trading seems to be favoured by inexperienced traders, while more experienced ones prefer to do the investment themselves. Therefore, despite the huge number of subscribers quoted by providers of social trading, the service may not be as impactful as it may seem.
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