Social Trading in practice - The art of choosing a signal provider

Deciding to invest using Social Trading or technology PAMM, we entrust the most difficult task of concluding transactions to other traders. Thus, the selection of appropriate signal providers becomes our most difficult task. Our financial result will depend mainly on this. Contrary to appearances, it is not enough to check which trader achieves the highest rate of return, and then connect three of the leaders. It is not enough because the results achieved in the past do not guarantee the generation of similar ones in the future. Therefore, you need to pay attention to more factors on the basis of which you can conclude how perspective a given trader is. But from the beginning.

What is social trading?

Social investment is copying the games of other traders. The decision, which may seem to be the most important for many, is shifted to the shoulders of the trader who trades on his account, and we only duplicate his actions. As can be quickly deduced, the choice of the duplicate person and aspects of capital management remain with the investor.

Frequently Asked Questions:

1. Is social trading legal?
   Yes, brokers offering social trading operate fully legally and have the appropriate financial supervision licenses for such activities.
2. Can you earn on social trading?
   This is not a quick and easy way to profit, but if we learn to effectively choose signal providers who diversify our portfolio, profit is most likely.
3. What brokers offer social trading?
   The most popular brokers that enable social trading are eToro and ZuluTrade.
4. Can anyone become a signal provider?
   Yes, social trading platforms allow everyone to do that. However, you have to take into account the fact that only with satisfactory results other investors will be willing to copy us.

Moving capital

Contrary to appearances, the most important parameter when choosing a signal provider is not the rate of return a Drawdown (DD), i.e., just losing capital. Withholding capital is information that tells us how much the value of the account in history has dropped. It is expressed as a percentage of the account value or in monetary units. If the account started with 10 000 USD capital and at the beginning started to note losses that brought the capital level to 7000 USD, this means that the subsidence was 30% or 3000 USD. If the account first earns 1000 USD, and only then went down to the 7000 USD level, then the drawdown would be over 36%, ie 4000 USD (from the 11 000 USD level).

This parameter informs us about the risk associated with the investment. Large capital shifts suggest that the trader plays aggressively at high risk and may have poor performance or holds loss positions. Often, a high DD goes hand in hand with a high rate of return. However, you have to answer the question yourself, are we ready to risk x% to be able to earn y%.

A low capital overlap means that the investment will be less risky and you can expect that revenues will be smaller, but more stable. This does not mean, however, that it will always be profitable to make such an action. Here too, you need to compare the ratio DD to the rate of return.

If, on a yearly basis, the maximum subsidence was 15% and the rate of return was 30%, this means that we could earn 2 more times than we risked. This is not such a bad result. However, if DD was only 5%, and the 2,5% gain, this investment was not profitable, even though the risk was low.

Social trading and the rate of return

This is the parameter most of which most often draws its full attention. Thanks to him, they immediately estimate how much they could earn in a given period of time, and yet the financial markets are mainly about earning. When choosing a supplier based on the rate of return it is necessary to pay attention to the time in which it was worked out. If we have statistics from the account only from the last month, where the rate of return amounted to as much as 100%, it would be naive to recognize that every month such percentage will be worked out. If the trader looks promising, however, the account history is relatively short, it's better to just wait and observe the developments.

In the case of a history of results from a few years, you can average the rate of return and this will give us an even better view of what you can expect. If a trader has been investing since 3 for years and recorded at that time profits in the amount of 25%, 12% and 27%, on average it gives us about 21% and this should be the reference point.

Number of transactions

Another thing that needs special attention when analyzing the account history is the number of transactions concluded in a given time period. A small amount of transactions may not tell us much about how a trader trades and what to expect from it. If on average there are only a few transactions per month, it would be appropriate to have access to at least the results of several months. It is not necessary to cross out the trader who opens the position occasionally, because it can be a long-term investor. Therefore, it is difficult to indicate the minimum number of transactions that should be concluded. In our case, if we want to choose a good signal provider, we can say that the more transactions the better.

Average transaction volume and the amount of pips earned

Profit in the currency market can be expressed in several different ways:

• in earned pips,
• in the deposit currency of our account,
• as the rate of return (in percent).

We will not always have access to all these data, but only an analysis of the whole will tell us what actually happened on the bill. The low rate of return may be due to the low transaction volume of the game, while the profit in pips could be very substantial. The reverse may also be the case. The high rate of return was due to the large volume used, while the number of pips scraped was small.

Not necessarily one of these options may be bad, but the latter may suggest excessive risk taking by the trader. It is worth paying attention to the ratio of earned pips in relation to the rate of return and the average transaction volume used. Better prospects will be in the account, where earnings in pips is significant at a small volume. It is here that we still have the opportunity to increase the flight while maintaining a rational risk and while generating more revenue.

There is also the question of the trader's effectiveness (the ratio of profitable transactions to all positions). High efficiency is difficult to maintain and usually involves many positions ending with a small profit (Break Even, shifted SL). This is not bad, however, we should not be as interested as the proportions between the average Take Profit and Stop Loss and choosing the volume relative to capital. If the trader skillfully manages funds, it is definitely worth attention.

The appearance of the capital curve

Contrary to appearances, sometimes it is also worth assessing something "by eye" - in this case, it is about the appearance of the capital curve. If you can see dynamic, irregular jumps, it is a signal that from time to time (or maybe only once) a transaction is more successful, and the others are only its background. The ideal is for the capital curve to look like a geometric function increasing (over time, it increases more and more clearly upwards). The stable route of the line proves good capital management and at the same time making the right investment decisions, without unnecessary combining. It will definitely have a positive effect on our well-being.

Brokers offering Social Trading

Na Forex market we can distinguish two leaders in the category of social trading. These are eToro and ZuluTrade brokers. Their platforms differ significantly from each other. The differences can be seen both in terms of transparency and functionality, as well as available assets for investment. In this last respect eToro is gaining a lot, offering ready investment portfolios, cryptocurrency instruments, and shares. ZuluTrade he is much more focused on the "classic" Forex market.

TEST SOCIAL TRADING

76% of retail investor accounts lose money when trading CFDs with this provider. Consider whether you can afford the high risk of losing your money.

CHECK ZULUTRADE

Summation

Choosing the right signal provider is not a simple task. This is an activity of a similar degree of complexity as the analysis of the situation on a currency pair. We should not decide quickly and hastily looking at just one or two parameters. You should pay attention to many factors that suggest what we can expect from a given trader. Our task does not end there. After deciding on a certain provider, it is appropriate to monitor his activities. These are just people who also have better and worse times. We have to react to their actions and if they start too much "scheming", disconnect them from our account.

eToro is a multi-asset platform that offers both stock investing and CFD trading.

Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford the high risk of losing your money.

Past performance is not indicative of future performance. The trading history shown is less than 5 full years and may not be sufficient as a basis for an investment decision.

Copy Trading is not synonymous with investment advice. The value of your investment may go up or down. Your capital is at risk.

eToro USA LLC does not offer CFDs and does not make any representations or be responsible for the accuracy or completeness of the content of this publication, which was prepared by our partner using publicly available information about eToro that is not specific to entities.