Social trading is the process through which online financial investors rely on user generated financial content gathered from various Web 2.0 applications as the major information source for making financial trading decisions. Social trading introduces a new way of analyzing financial data by providing a ground to compare and copy trades, techniques and strategies. Prior to the advent of social trading, investors and traders were relying on fundamental or technical analysis to form their investment decisions. Using social trading investors and traders could integrate into their investment decision-process social indicators from trading data-feeds of other traders. These social trading networks can be considered a subcategory of online social networks.
Social trading allows traders to trade online with the help of others and some have claimed shortens the learning curve from novice to experienced Forex trader. Traders can interact with others, watch others take trades, then duplicate their trades and learn what prompted the top performer to take a trade in the first place. By copying trades, traders can learn which strategies work and which do not work.
Despite the influx of new social trading platforms in the early 2010s, numbers still continued to increase as brokers see them as new growth engines for converting new and retaining old clients. Social trading has increases participation in the market and led to a greater volume of trades going through.
Prior to the emergence of the Internet, financial trading was characterized by the relationship between customers and brokers and was centered upon the physical locations of bourses and exchanges. Traditional notions of social trading consisted of people following successful traders via newsletters. As the internet has gathered momentum, electronic trading has become a major focus for the trade in financial assets amongst individual investors. The widespread adoption of social media websites, like Facebook and Twitter, was followed in the financial trading industry with financial traders making use of the knowledge-sharing capacities provided. Financial traders and investors use these services as additional sources of information.
Online financial trading companies have exploited the popularity of new social networking channels, enabling fully fledged social trading networks to emerge and use social networks as their model. Among the first such networks were eToro and ZuluTrade.
With the assimilation of Web 2.0 properties in almost every trading platform, financial traders have begun to follow information that is accessible through social rather than financial services. By being a part of a social trading community, traders can use detailed statistics and historical analysis of trade performance to evaluate which traders to follow and copy. This is done either explicitly by intentionally following the trading activities of one or more selected traders, either manually or automatically, or implicitly, as one's trading decisions are unintentionally influenced by the trading activities of other traders.
Social trading networks are now offering bridges and plug-ins, allowing traders to directly connect to their trading platform. In October 2012, MetaQuotes Software, maker of popular trading platforms MetaTrader 4 (MT4) and MetaTrader 5 (MT5) announced the ability to combine the abilities of signals copying within social trading on via their platforms.
Information Flow - Social trading involves the free flow of information between individual financial investors. Unencumbered access to information is held to be of premium importance in financial trading and that makes the free exchange of information of interest to small scale as well as individual investors.
Cooperative Trading - Social trading offers traders the opportunity to work together in trading teams which can trade the markets collaboratively, whether by pooling funds, dividing research or through sharing information.
Monetization - As with social networks in the broader sense, the monetization strategies are not always clear. At launch, Currensee’s sole recorded revenue source was an introducing brokers deal it negotiated with AvaFX (now known as AvaTrade). As with social networks in general, it is possible, however, that the long-term worth of such websites may come from the variety and depth of data about their users which their active communities are likely to generate.
Transparency - Social trading platforms like eToro or investFeed reveal traders' performance stats, open and past positions, and market sentiment, giving members complete information to assess the credibility of the contributors they follow on the platform.
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