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Social trading is booming, but investors who are interested in it usually have a lot of questions. The attempt to critically examine the advantages and disadvantages.
Parallel to our current tests of the most interesting social trading providers with real money accounts (to the ayondo and OANDA conclusion), we also want to try a critical look at the advantages and disadvantages of this form of investment. As a basis for discussion, we will use the best known arguments of critics and supporters.
Social Trading enables (hopefully) successful traders to follow up on their positions without having to manage them themselves. Basically, you get one or a combination of several fund managers for your portfolio and thus become a so-called “follower”. However, you can also execute your own trades and ideas individually with the same portfolio. Social trading is therefore intended for several purposes. Firstly, as an addition/diversification for still active traders. On the other hand as an alternative form of investment. For all previously unsuccessful traders, or those who do not want to enter this difficult terrain. With the current low interest rates but still looking for more interesting returns.
Virtual & anonymous traders
Critics regularly note that a) you don’t really know who you are entrusting your hard-earned money to, and/or b) many strategies can belong to the same trader and don’t even need to be traded with real money.
So one could register several different demo accounts and trade contrary strategies on them. One of them will work out, so that as many followers as possible become aware of it and invest.
This is really possible with the market leader eToro, for example. But other providers do it better and make it clear who is behind the strategies. And the optimum are those platforms which either clearly show which strategies are only traded with virtual money and which with real money, like ayondo. Or there are even providers such as OANDA, who ONLY allow real money traders at all, and only after a certification process lasting months.
Who does this to himself
My favorite argument: “Why should a successful trader do a stock letter or social trading to himself? Either he is so good that he could also work for a hedge fund/asset manager, or he wouldn’t need to do so financially.”
At first glance, absolutely logical. And indeed, there will be social traders who are only successful with demo accounts, but not with real money. The so-called papertraders who fail because of the spreads and slippage in real money trading or even more often because of their psyche.
But not every successful trader is in the mood for strict guidelines and daily controlled routine under one employer. Prefers therefore his independence.
Or, and this will probably be the case in the majority of cases, you do not yet have such a large capital stock to live on your trading alone, taking into account the monthly withdrawals and drawdown phases. This can apply to intelligent students as well as to late entrants who start trading on the side, but already have a good nose.
Professional asset managers are also already active on platforms such as wikifolio. This is simply because they take care of the entire processing and marketing for them, and a larger audience becomes aware of good strategies.
And let’s be honest: Who would refuse to earn additional income if absolutely no additional work is necessary? You just let your trades be copied if someone wants to, and that’s it. I, for one, would be there if I was good enough for it (Forex trading is not my thing, but on most platforms only currencies can be copied reasonably).
Slippage & time delay
In my experience, this is in fact the greatest challenge for providers. Take the Trader patternicus from ayondo as an example, the successful hobbyhorse there. He very actively trades the Dax30 index with about 800 followers. Each of his orders is automatically followed up as quickly as possible on the accounts of his fans. The bigger the fan community now and the later you have attached yourself to your account, the greater the time delay in executing your order. Our first real money tests show that the delay is minimal. Nevertheless, with volatile underlyings such as the Dax30 index, this quickly results in 1-2 points slippage, as it is simply not as liquid as the EUR/USD currency pair, for example. This adds up over time, of course. Positive slippage is also possible, meaning that the follower gets a better price than the trader himself. However, as a rule, you will lose out on breakouts and price slides.
The principle of social trading then becomes impossible for shares, especially small caps. Here, fair execution can simply no longer be guaranteed, or popular traders would even become price drivers on the stock exchange. For this reason, most providers generally only provide foreign exchange trading. Courageous providers, who also offer the most important indices and commodities, allow a whole range of other interesting strategies and admixtures. Each follower must simply judge for himself after the first handful of copied trades whether the slippage is acceptable for him. In the end, the only important thing is that a positive performance is recorded.
I like social trading. The implementation is usually solved in a very simple way, without administrative effort or high minimum deposits. You won’t find any miracle traders that will give you nice returns until retirement. But if you keep an eye on your traders and look out for rising stars, you can beat even the best funds. I don’t trade extremely actively myself, so social trading is an interesting addition for me to achieve an exciting diversification and performance, especially through Forextrader.