The size of the crypto market is fluctuating yet remains staggeringly huge. Even with a significant reduction in the trading volume and prices, the evaluation continues hovering above $1.1 trillion. Over 190 million active users of BTC create a dynamic web of investors utilizing cryptographic tokens for speculation, retail purchases, and many other purposes.
What is a social trading platform?
Several important aspects allow us to define a certain brokerage service provider, a centralized crypto exchange, or an automation vendor as a social trading platform. Each of these aspects must be present in the product offered by any of the aforementioned online businesses.
- Always online. Socialization suggests a continuous connection to other individuals. A contemporary service provider wanting to deliver a strong copy trade app to its users must follow the principle of web 2.0 development.
- Interconnectedness. While some brokers and centralized exchanges may provide a sizeable catalogue of experts to follow, there should be other ways to utilize the abundance of retail traders performing extremely well. Multiple interconnected platforms make for a great experience for everyone!
- The multiplicity of choice. A client should be able to select a certain trader, gain access to their performance across various time spans, and communicate with them if necessary. While the latter is not absolute, the ability to talk to a trader or manager is a great way to build confidence in your investment plan or start doubting its feasibility.
The idea behind all social trading platforms is quite simple. Since many retail traders do not have any prior experience with the market (over 85% come to the crypto industry without any knowledge about it), companies should offer them guidance and education. However, the vast majority of novice investors simply do not pay attention to any useful information until it’s too late.
Social trading is a great example of a web 2.0 concept bringing apparent value to a specific market. User-generated content is driving many media industries, but it also can be utilized in such niche sectors as financial markets. Retail traders who outperform the market due to their wisdom, analytical prowess, or sheer luck can generate investment strategies that may be used by others.
It creates a bridge between veterans and newcomers creating an environment where beginners can make expert-level market decisions without diving into the bottomless pit of knowledge required for a successful career as a retail trader.
Hallmarks of social trading must include communication and learning together with others. A good example would be an online celebrity trader with a solid track record sharing their knowledge and expertise with others for a fee. While it is not the best strategy to follow someone just because they exist on social media, it can be a better path to wealth for those who do not have any knowledge about crypto or finances in general.
What is copy trading?
When we say “social trading platforms”, we often mean websites or apps that allow users to see what other traders are doing with their portfolios at any given moment. Users may choose to follow their actions and copy them manually or simply ignore them and wait for an opportunity that makes more sense to them.
Social copy trading is slightly different. You will need to focus more on preemptively selecting retail traders and managers who perform well and start following them automatically. Highly specialized bots will copy all actions of any followed trader and place equivalent market orders in your name on the exchange of your choice.
This is a very straightforward approach that excludes any fidgeting on your part while providing the whole range of control over a dedicated portion of your portfolio to another person. This method can be incredibly useful for newcomers who do not have enough knowledge and expertise to make money on the market without any external help.
We can describe a typical copy-trading operation as follows:
- An investor goes to the platform where they can browse through a catalogue of managers;
- An investor analyzes past performances of managers they like and starts following them;
- A special bot or trading script will start monitoring the market actions of chosen managers;
- When they place any orders or make changes to their portfolios, bots will repeat their actions.
Several important factors determine the quality of the outcome. You should be aware of all of them.
Social trading VS copy trading
While there is a singular distinct difference between these two trading concepts, they still share a lot of commonalities. We will start from things that are similar and tough upon differences later on. It is important to understand their similarities to make sure that you can extract the maximum amount of value from either of them.
Selecting the right manager
Independent retail traders, institutional investors, and specialized analysts can all provide their services on various exchanges and automation services. It means that you will have a wide range of choices. Some choices are better than others. Making a correct decision at the very beginning of your journey is the singular most important action you will take.
Whenever you are presented with a list of traders to follow, you need to contemplate the following:
- The performance history. It is the most important aspect. Do not limit your analysis to only comparing recent gains. Take a look at a longer time span than a couple of months. The best approach is to look at profitability from a lifetime perspective. While a manager could be making over 100% per year right now, their three-year history could be riddled with huge dips and losses of capital.
- Their chosen platform. Different brokers and exchanges offer similar yet still quite important terms to their clients. Some platforms will collect fixed fees for any placed orders. Others will take a cut from your profits (spread fee). You should be working with traders that prefer platforms that you are familiar with.
- Transparency and honesty. Many retail traders will provide their social media pages and other means of communication to potential followers. You should know the retail traders you want to copy. It is a good idea to talk to them via private messaging systems on social media platforms or at least view some of their content and check out what other users think of them.
Past successes do not promise a bright future
Survivorship bias is something we all fall for. Among top managers, you will often find people who do not have a long history. These are often lucky guys who managed to hit a lucky streak and may not be able to repeat their glorious achievements in the future. People who want to successfully copy crypto traders should strongly focus on choosing those who can deliver consistent results.
Another issue with social trading is that some managers are shady individuals who may simply run multiple accounts placing risky market orders and showing off their gains in percentage points. In reality, they can be using fractions of their overall portfolio. Some platforms may allow such behaviours. Others will not. It depends on the policies employed by the administration.
Finally, some retail traders may appear consistent yet still make blunders when stress or hesitation makes them nervous and irrational. The human factor is the reason why 90% of market decisions are doomed to fail. As mentioned before, check out the whole history to identify traders who are worthy of your attention.
A couple of valuable tips:
- Just like in the case of trust funds and managers, you should be paying attention to the long-term profitability of any retail trader on a social trading platform. Do not look at advertised numbers with triple-digits profits. Pick out performers who managed to survive with their portfolios intact throughout several years.
- Erratic profitability graphs often indicate that a trader is using high-risk/high-reward strategies meaning that their results are inconsistent and may ruin your portfolio depending on the timing. You may lose all faith right before they turn things around or start following them right before their next dip.
- Convergence is a thing. If too many people start following the same trader, the market may react if the volume of orders starts swaying the price. Imagine that a popular trader places a sell order and a thousand of their followers do the same instantly. The market may be swayed to start selling diminishing your returns. Look for reliable yet relatively unknown traders to follow.
Advanced social trading strategies
Any contemporary investor knows about diversification and risk reduction. These concepts apply to social trading very well. Imagine the cohort of managers as a pool of financial assets. Some of them are risky yet promise huge returns while others stick to conservative trading tactics and deliver steady yet unimpressive gains.
Try to balance your portfolio around different managers and search for a good equilibrium between risk and profit.
How to do social trading smartly
First and foremost, focus on following multiple traders at once. There are several reasons to lean toward this particular approach:
- You will be able to see the actual performance of any given trader by keeping track of your portfolio and practical results. It is a much better way to gauge the quality of the expertise that attracted you in the first place.
- Diversifying the list of followed traders can be a great way to offset higher risks with safe consistency. The rule is to not put all your eggs in one basket and ensure that your overall portfolio is protected from unforeseen circumstances.
- Some platforms allow you to control the level of risk by automatically placing specific stop-loss and take-profit limits whenever you copy a trade. Use this feature to further improve the resilience of your portfolio to market volatility and unexpected risks.
Controlling results and reducing inconsistency
The final technique that an aspiring investor needs to learn is to how split a portfolio between multiple followed traders. Most platforms have this feature. However, some outdated brokerage service providers still require clients to create separate accounts for each followed trader.
You may adjust the percentage of your portfolio that will be dedicated to following a particular trader. For example, automation vendors like WunderTrading offer you total control over how much of your assets will be allowed for copy trading.
Calculating potential risks can be a tedious task and requires some advanced knowledge of statistics. However, you don’t need to spend countless hours to come up with a perfect ratio. The golden rule is simple: to reduce risks dedicate a smaller portion of your portfolio too risky traders with huge returns.
A good approach to forming consistent copy trading strategies is to combine the idea of using the services of multiple retail traders with the ability to change the proportions of portfolios regarding distribution among followed managers.
Choose whose advice to use
Unlike direct copy trading, social trading is a little bit less involved from an investor’s point of view. The data for future decisions is gathered by analyzing the performances of other retail traders, browsing internet forums for tips, and consuming content produced by influential analysts. Since many exchanges and brokers allow their users to communicate and share experiences, novices may enjoy access to a potentially unlimited ocean of useful information.
While this approach is less efficient in the sense that it does not automate any decision-making, it is still a good way for novices to dive into the world of financial markets and cryptocurrencies. The selection of the right people to learn from is crucial.
Use other tools to make better decisions
Using charting tools like TradingView or MetaTrader can be an excellent method of distinction between alphas and omegas. There are two approaches that you can use to identify whether advice from people you decide to follow is legit:
- Verify the information. Take a look at the post history of an influencer or a respected analyst and identify some of their tips and when they were made. Go to the price chart and simply scroll back to find that moment in time. See how many of their predictions turned out to be true. Are they consistent or simply have a community that forgets about their blunders?
- Back-test their strategies. Many analysts and retail traders who offer their services to investors have trading systems that they share. Some of them are “constructed” on specific price charts or use approaches that deliver average yet consistent results (swing strategy using RSI is a good example). Use their proposed strategies and test them against the price history. Do they work at all on multiple price charts? Do these systems fall in line with the performance history of a retail trader you follow?
- Social trading requires more dedication and effort on the part of an investor meaning that it also has a slightly higher skill ceiling and entry barrier. It may not work for people who either want to create a fully automated investment strategy or do not have the necessary expertise to identify managers that won’t deliver the desired outcome.
Should you use copy trading strategies?
It depends on your current knowledge about the crypto industry and financial markets in general. Copy trading with risk control is the best way to get acquainted with the basic principles of crypto trading while not compromising the process of building a portfolio. Choosing the right platform to use is essential. There are many interesting companies to choose from. Among copy trading platforms offering their services to crypto traders, one stands out thanks to its approach to copy trading in particular. WunderTrading has a neat feature that allows you to pick retail traders working on different exchanges and even using different types of accounts. Some traders specialize in spot markets while others prefer relying on leverage. The list of available traders features people who will charge as little as $10 to allow users to follow them. Some managers have much higher fees. However, the fixed monthly payment is a good choice for someone new to the cryptocurrency world. You can find several managers who perform well and pay a small fee while enjoying much higher returns. On the contrary, paying a fixed fee is a good way to reduce the consequences of market activities that cause losses. With a relatively small capital, you can still create a profitable portfolio with copy trading techniques while paying fixed amounts per month. It is a fine choice for someone who is not comfortable with using their expertise and knowledge to enter the market with confidence.
Is copy trading profitable?
The profitability heavily depends on a multitude of factors. If a 100% reliable investment strategy existed, everyone would’ve been using it and the world would run out of money to pay out to these smart investors. For someone to earn money, someone must lose it. It is the law of the financial world.
Copying a smart crypto trader can lead to impressive results, but it can be detrimental to your portfolio if risks are not reduced with diversification and portfolio distribution.
Here are some factors determining the potential profitability of either social or copy trading:
- The average expertise, knowledge, and luck of followed managers. If you trust someone blindly or use copy-trading techniques, you will have very little control over your own portfolio. Using custom stop-loss and take-profit orders can be a solution, but you need to learn how to adjust them according to the individual performances of traders you follow.
- The size of your portfolio. A large portfolio that does not require using any leverage will be generating consistent results with sufficient diversification. However, someone with a grand total of $100 will not enjoy the benefits of any risk aversion methods. The bigger your capital, the safer you are.
- Market volatility. Some events in the financial world and the crypto industry are simply unpredictable. The FTX fiasco was a great example of a house of cards falling down unexpectedly and crashing the whole market. The cryptocurrency community recovered yet shockwaves remained noticeable for months. Everyone lost money and it was impossible to predict a year in advance.
Where should you start copy trading?
The choice of the main platform is just as important as finding the right people to follow. WunderTrading is a good destination for people who are interested in social trading and automation in general. The marketplace for managers is quite diverse and features all sorts of interesting retail traders that you can start copying with a couple of clicks.
You can also try limiting yourself to just a couple of bots that will copy the actions of other traders. However, this approach will significantly diminish your ability to diversify properly while narrowing down your field for experimentation and exploration to the bare minimum.
Selecting a reliable, both technologically and in terms of trustworthiness, platform is the foundation for your future copy trading endeavours. Working with independent automation vendors is a good idea since you won’t be limiting yourself to a single crypto exchange or a brokerage service provider.
