Social trading, copy the professional traders

Intro: Basis for Forex Social Trading

Trading is not supposed to be an individual game. If there is any venture where two heads will always be better than one, it is forex trading. This is a major reason why institutional trading companies are very successful, and majority of retail traders are not. There is strength in numbers. When there are lots of intelligent inputs from different perspectives and from fresh sets of eyes, it is easier to come up with a rational course of action as far as trading is concerned.

Let us look at the typical setup in a proprietary trading or institutional trading firm. There is a well-defined hierarchy of traders which starts at:

  1. a) Junior Traders
  2. b) Intermediate-level Traders
  3. c) Advanced traders
  4. d) Chief Trader

The positioning of the trader in the hierarchy is a function of skill, which has to be demonstrated among peers to attain a classification. So you can be sure that with the input of several traders across the rungs of the ladder, any trades made by the trading team in the institutional trading firm will be based on sound information and will most likely produce results.

This is a system which is time-tested and has been shown to work. This is why in the mid-2000s, some companies attempted to replicate this system of having traders work in teams, with older and better traders providing mentorship to younger ones. This is how technology came together with social media innovation to create the social trading platforms. These platforms brought together the experienced and profitable traders, and connected them with traders that were inexperienced. The experienced traders provide trade alerts to the noobs within the ecosystem, and get paid for their services.

There have been several modifications to this system, but the essential elements remain the same.

Forex Social Trading: Parties Involved

A forex social trading platform is made up of the signals providers, the copiers/followers and the platform/network providers.

1. Signals Providers

Signals providers are the traders who have registered on a social trading platform to provide trade alerts to other traders, based on their profitability and trading skill. To be a Signals Provider, you have to exhibit a strong history of profitability for a period of time, usually from 6 months to one year. The social trading platform providers have algorithms which have been programmed into their platforms to calculate certain performance metrics for every trader that wants to sign up as a Signals Provider. The data so calculated, is used in positioning Signals Providers on the trading boards, from where those who intend to be Copiers or Followers can evaluate them prior to selection. These algorithms calculate the performance data on a continuous basis and update the Signals Provider leaderboard accordingly. Signals Providers are paid for their trade alerts. This can be from a subscription fee paid by Copiers following the trade alerts, or from social trading platform providers through a commission sharing structure.

2. Copiers/Followers

Traders without much trading skill, experience or who cannot sustain profitable trading can sign up to become Copiers/Followers. This represents a viable short cut approach to hit the ground running as far as profitable forex trading is concerned. There are two models to this. Strict Copiers can sign up to have trade signals generated by the Signals Providers implemented directly on their trading accounts. This removes the complications attached to manual implementation of trade signals on a platform, especially when the Copier is a total novice to forex. Those who choose to follow trade signals (i.e. the Followers) opt to receive trade alerts via email, SMS, or push/desktop notifications, then execute the signals manually. The Follower model will therefore suit traders who have some rudimentary knowledge of how to use forex platforms.

3. Social Platform Providers

The first social trading platform providers were independent companies that owned and setup the software, which were later integrated with broker platforms for seamless execution of Copy trades. Later on, forex brokers got into the business and began offering social trading to their trading clients. So we have two categories of social trading platform providers that traders can choose from.

Copy the Professional Traders

This section is directed to Copiers/Followers. If you decide to use a social trading platform, understand that you will be paying for this service. Therefore, you have to get value for your money and this can only happen when you make the best selection of professional traders to copy. Here is a guide on how to copy the professional traders.

Step 1: Account Funding

When opening a social trading account, you must fund the account appropriately, especially if you will be selecting multiple traders. This is to avoid a situation where your account starts to stretch the limits of money management as it takes on trades.

Step 2: Provider Selection

The next step is selection of professional traders to copy. This is a critical step. For new traders, it is advisable to start with one Signals Provider to enable you understand the system. Choose the Providers using these performance metrics:

  • Risk Score: The key factor here is choosing Providers whose methods will not subject your account to too much risk. Lower risk scores are good. So choose a Provider with a Risk Score of between 2/10 and 4/10. Anything higher than this will subject you to too much risk, which could be a deciding factor when a string of losses occur.
  • Profitability Graph: Choose Providers whose Profitability Graphs over time shows a steady climb and not knee-jerk, sharp spikes.
  • Profitability: Choose Providers who have lengthy profitability runs. Therefore, profitability over 6 months to one year is desirable.

Step 3: Re-evaluate at Periodic Intervals

The performance metrics of your selected Providers must be reviewed periodically to ensure that optimum performance is still being attained. This allows you to substitute Providers with underwhelming performances with upcoming ones whose trading performances are on the upswing.