Complete Guide To Social Trading vs. Copy Trading

Complete Guide To Social Trading vs. Copy Trading

Since the pandemic, there has been a growing interest in investing, technical analysis, and copy trading. This article is written to create awareness on the basic principles of trading and and provide clarity as to how social copy trading works.

Content

Social Copy Trading
Social Copy Trading

Social copy trading is a practice many people latch on to in the beginning stages of their trading journey. For novice traders, social trading can be a revelatory experience, exposing them to how a live market operates. For a trader with more experience, social trading can be used to cross reference, backtest, and ultimately learn from other traders.

So, what is social trading exactly?

Social trading is when a person copies a trade placed by another trader.

Clarity

To make the concepts easy to digest, for our purposes, we will refer to social copy trading simply as “social trading” or “copy trading” interchangeably.

Additionally, traders who publicly post their trades are identified as the “original trader,” “public trader,” and “OG trader” for short. The person who copies the trades will be referred to as “trader” and “copy trader.” Now that we have squared away, let’s dive in further.

Social Trading Mechanics

For social trading to work, the original trader will post their trade setup publicly. The most important aspects of the trade are the entry price, stop loss, take-profit target zones, and risk-to-reward ratios.

Entry price 

The entry price is the price of the digital asset (whether stock, cryptocurrency, forex pair or other form commodities) the OG trader agrees to purchase. If a digital asset fluctuates between $100-$102, the OG trader can place an order to enter the market at $100. The OG trader only becomes the digital asset owner if the market comes down to its entry-level.

Stop Loss

The stop loss is the price of the digital asset the OG trader uses to manage their risk. If an asset is purchased at $100 with a stop loss at $95, there is a 5% risk attached to the trade. Stop Loss is a crucial factor of every trade that can be used to monitor a trader’s performance.

Take-profit target zones

Take-profit target zones are pretty straightforward; The price of digital asset price will be sold in the future once in profit. If the take-profit target zone is $110 and the trader’s entry price is $100, then a 10% reward accompanies the trade.

Risk-to-reward ratio

Using the components mentioned above, you get the risk-to-reward ratio. A 10% risk with a 5% stop loss sets up a 2-1 risk-to-reward ratio. High risk-to-reward ratios are difficult to materialize.

Lower risk-to-reward ratios are considered safer bets, but a trader will need to win many trades to see a substantial profit. Let’s talk about the different types of social traders.

Social Traders: Sharks Guppies & Data Collectors

Sharks

There are people in the social trading world who are solely involved in making a profit. These kinds of traders are referred to in the trading world as Sharks. Sharks don’t care about trading techniques, improving their technical analysis or anything else involved in the art of trading. Sharks are solely in the market for the gains.

Guppies

The other kind of trader is an individual looking to gain knowledge through a hands-on approach to trading. In the social trading copy context, these individuals are referred to as Guppies.

Gups will usually pay more attention to the technical analysis and trading style of the OG trader, hoping to eventually learn enough from it to branch out and begin trading on their own.

Data collectors

Some individuals use social trading to collect data. These individuals carry on much like Guppies but intend to collect enough data to form their own opinion about a trading method. Eventually, with enough data, the person can create a revised trading method with tailored ingredients for their specific needs.

While there are many more subcategories and types of people involved with social trading, these Sharks, Guppies, and data collectors are at the base of the social trading ecosystem. Now let’s look at social trading through a historical and cultural lens.

History of Social Trading

Social trading has been around for many years. In the technical analysis book Technical Analysis for the Trading Professional, author Constance Brown mentions how traders often mimic her analysis when approaching the S&P 500 Index.

The world-renowned trader also mentions how she would cross reference her work with legendary Elliott Wave investor and author Robert Prechter during volatile moments in the market.

Social trading in the modern world

Social trading can be found on nearly all social media platforms. Public traders will often post their trade setups on Twitter with the hashtag #NotFinancialAdvice for liability purposes.

Instagram and Facebook will often show successful traders advertising their portfolio, win/loss ratio and other trading statistics to entice other traders to follow.

Some public traders will freely post their trades, while others restrict access and require a paid subscription. Patreon, Substack, and – believe it or not – OnlyFans are some places where you can find public traders offering paid subscription services.

Social Trading Websites

There are a variety of trading websites out there that provide copy-trading services. Myfxbook.com is a social trading website that is well-known amongst Forex traders. Bybit.com and MEXC are cryptocurrency exchanges that provide copy trading features. EToro is a reputable website for commodities and stocks.

Throughout this thread, we have mainly focused on the main proponent of copy trading, which is to mimic the public trader’s trade setup. However, there is another form of social trading that has developed in recent years.

Further reading

Contrarian Social Trading

Contrarian social trading is when a trader takes the opposite form of the trade that the public trader posts. If a public trader has an entry to buy an asset at $100 and sell at $105, the contrarian trader will bet against that trade.

To keep it simple, the contrarian will be in profit the more the digital asset falls beneath $100. The contrarian approach adapts Pareto’s principle, with a bias that 80% of the traders on the same side of the trade will lose.

Taking the opposite side of the trade will inevitably lead to being on the right side of the trade eventually. There are also contrarian data collectors who will collect data from a public trader to formulate their own trading approach.

It’s pretty crazy to believe, but as unethical and controversial as it sounds, contrarian trading and data collecting with antagonist intentions is completely legal. Consider it a byproduct of human nature within a free market economy. Now that we have a better picture of social trading, let’s finalize this conversation by going over the pros and the con of copy trading

Advantages of Social Trading

Profit 

For the sharks, social trading is pretty easy to comprehend. Keep it simple, and make a profit through trading with minimal effort involved. Sharks simply copy the trade, and if they make out with a larger portfolio on the week, month, or year, that is a success.

Hands-on experience

The Guppies appreciate social trading for its intrinsic value. Like many life skills, the art of trading requires hands-on experience. Traders can mimic professional public traders and gain exposure to how a market works. Mirroring a professional trader’s trade setup reveals many key ingredients of what it takes to be a successful trader.

Data

Social trading is also a way for traders to accrue important data. A trading strategy can reveal many dynamics that go overlooked, such as managing risk, when to secure profit, and how long a trade takes to hit a target. The accuracy of a trade setup can also be interpreted with enough data over time.

Know thyself

Finally, one of the most important benefits of social trading is assessing one’s own emotions that may or may not be involved when opening a trade. Traders using real money in their accounts will quickly understand the risk they take by mirroring another trader’s strategy.

Emotion is a finite resource, and gauging one’s supply during wins and losses is a vital nutrient that demo trading cannot provide.

Further reading

Disadvantages of Social Trading

As wonderful as the many benefits of social trading sound, traders should also be aware of the possible negative impacts of social trading.

negative impacts of social trading

Lack of hands-on experience

For one, sharks who utilize social trading solely for profit will never retain the hands-on experience needed to dive deeper into their trading strategy.

Often, the details that transport a decent win to a grand slam homerun lie in the moments before and after the trade is entered and exited. A trader solely in it for the gains will often overlook these intricate details.

Codependency

The second disadvantage is that social trading can become a crutch. Traders can succumb to a follow-the-herd mentality, only taking a trade when the public trader openly shares their position.

Being too reliant on copy trading can weigh heavily on one’s opportunity cost. At some point, to be successful, a trader must take off their codependent training wheels.

Losses

The last disadvantage to social trading is the losses one will accrue. Many public traders have a win/ratio of 70% and higher. Still, every trade is inherently different from the next.

While a trader’s track record proves their ability over time, every trader experiences abnormal losses and periods of persistent losing streaks. A trader could get involved with a social trader whose strategy normally works well but underperforms due to harsh market conditions.

Final thoughts

Social trading is a dynamic entity ingrained into the art of investing and trading at nearly every level. While there are both positives and negatives involved in the field, ultimately, an individual should utilize social trading at the threshold of their own discretion.

Most importantly, the grand rule of trading must always be emphasized: “Never bite off more than you can chew – don’t invest what you can’t afford to lose”.

Brokers like Deriv provide copy trading. Read the Deriv review.

Further reading