Social trading is a form of investing that allows investors to observe and discuss the trading behaviour of their peers.
September 15, 2021
Whatis ‘Social Trading’ and can it be profitable?
Social trading is a form ofinvesting that allows investors to observe, and discuss, the trading behaviourof their peers. The concept of social trading, is great, the execution ispoor, as much like on social media sites, the wrong people make the most noiseand that can be very damaging for those involved.
Listening to experts is a goodthing. Listening to just anyone, is not, and there are no filters on thesesites to differentiate between the two. This gives those who can gather enough‘followers’ a lot of power to influence.
It reached a pinnacle of disasterlast year when the reddit crowd (a social trading forum) managed to ‘pump anddump’ a stock so dramatically, that GameStop went from $11 a share, to $300 ashare.
They claimed this was to stick it tothe hedge funds, but the facts are that most funds made a lot of money cashingin on the move. One fund made $700m before selling out and several others cashedin on their convertible debt in AMC after a similar move. Wall Street made afortune.
The group initiating this movement,also sold out and made millions. They created memes and war cries in order toget more and more people to buy stock, to pump the stock as high as they could,before taking their money and running. Before the world of social media, thishad to be done Wolf of Wall Street style, by phoning round and persuadingpeople to buy stock you had already bought, and it is very illegal.
Share prices aren’t a joke and theeconomy isn’t a game. Bitcoin has a lot to answer for by fuelling thismentality, as teenage multi-millionaires pass on their trading tips on how toget rich; as far as I can tell, the skill lies in buying it, telling everyoneelse to buy it, and then crossing your fingers.
Those who bought early on, took achance and made money, for those who bought up at $60,000, they are alreadydown 38%. It’s worth bearing in mind that nobody ever talks about the losingtrades, and buying into a market you’ve only ever seen go up, isn’t a strategy,it’s a recipe for disaster.
As with GameStop, millions will bemade for a few, but entire savings will be lost for the many.
Social trading is an area of tradingwhich, its proponents say, democratises trading by making information moreaccessible to less-experienced traders and investors, and this isn’t wrong, buttraders without experience, shouldn’t be trading at all. Trading is aprofession and it takes years to become good enough to make regular returns.
As we have stated, the principle ofsocial trading, is to be commended, but the execution to be abhorred. If onlythey were actually used to help people.
The first thing you see when youGoogle eToro (the largest social trading site in the world), is that 67% oftheir users, lose money. They have just past the 20 million users mark, whichby our calculations, means they are helping 13.4 million people lose moneyevery day.
Who are these people and why do theykeep going to what can only be described as a gambling site? Or is that in factthe answer, they don’t see it as investing at all, merely gambling.
So, who are the ‘traders’ on thesesites offering advice and ‘helping’ people lose money? What is their tradingexperience and why would anyone listen to them?
We looked at one platform, IXSocial, that actually advertised a trading strategy by ‘Money Maker Robo’ thathad an annual return of -171.25%. That is not a ‘dash’ in front of the return,that is a minus sign. A negative return of 171.25%, and it still had 220followers.
If a portfolio loses 100%, it is nolonger a portfolio. People need to stop thinking of this as quick way to makemoney. Conviction and comfort in groups, does not necessarily mean you’remaking the right decisions; it just means you might be making the wrong oneswith other people.
Cansocial trading and ‘Copy Trading’ be profitable?
Absolutely, but only if you fullyunderstand everything you’re looking at. And this needs an expert, to spot andexpert which is exactly what we have done at ThePortfolio Platform.
MIT Computer Scientist andresearcher Yaniv Altshuler described social trading networks and ‘autotrading’as complex adaptive systems, and in his 2014 research on his paper concludesthat ‘social trading provides much better opportunities for profiting comparedwith individual trading," but that users do not make "optimaldecisions” in selecting experts’ that they follow.
This is spot on. In short, he issaying exactly what we are saying: the theory is sound and it should help, butultimately people make the wrong decisions on who to link their accounts tobecause they don’t understand what they’re looking at.
A strategy posting returns of 300% amonth is not something that a professional trader with any experience wouldever even look at. To make that kind of return, that trader is playing rouletteand eventually they will lose everything.
Returns of 100% in a year can bedone; on The Portfolio Platform, we had 3 traders manage it. But it is veryhard to do and it isn’t done without increased risk. Managing risk is the mostimportant aspect of a long-term trading strategy and the Trader Selection Panelat TPP know exactly what they’re looking for.
This is why The Portfolio Platform was built. Our traderselection panel is made up of traders with a minimum of 15 years’ experienceeach. As we have said, the theory of following other traders is a good one butit needs expert traders to recognise the risk reward ratios in otherstrategies, and build a selection of best performing traders from around theworld.
The key to a profitable platformlike this, is to not even offer strategies that take too much risk. That gameis for the likes of eToro, not for serious investors looking to increase theirreturns and make their capital grow.
A 2015 World EconomicForum report described trading sites like TPP as disruptors, which"have emerged to provide low-cost, sophisticated alternatives totraditional wealth managers. These solutions cater to a broader customer baseand empower customers to have more control of their wealth management,"and "pose a tangible threat to the traditional practices of the wealthmanagement industry".
This is exactly right, and it’s whatwe at TPP are striving to make a reality. We give investorschoice, transparency, and the chance to make increased returns. Strategiesavailable for trading start from as little as £50 per month. The traditionalWealth Management system is archaic. IFA’s charge for meetings you don’t need,Investment Managers charge management fees, but then just stick all your moneyon a platform with someone else.
To link to some of the best traders,all you have to do is register, and link your account to as manytraders as you want. That’s it, the rest is automated. Choose 5-10 traders andbuild your own online hedge fund with potential results you could only dreamof. It’s modern investing, but it’s now being done properly, by professionals.
Economist Nouriel Roubini’sthinktank predicted in 2016 that "newer forms of investment, such associally responsible investments and social trading will bring some of thelargest industry growth in the coming years’ and we are already seeing thisfilter through.
While TPP is not a ‘social trading’ platform, it isbuilt around the same concept, but refined to make it a better by cutting outthe bad noise created by bad traders. On the back of this concept, it isgrowing fast and users are loving it.
Social trading may potentially alsochange how much risk investors take. A recent experimental study argues thatmerely providing information on the success of others may lead to a significantincrease in risk taking. This increase in risk taking may even be larger whensubjects are provided with the option to directly copy others.
Taking risk isn’t necessarily a badthing. How do the rich get rich in the first place? What we advocate is takingrisk at the right time, for the right reasons, to reach the right goals. Ourtraders know what they’re doing. Everyone has bad days, weeks or months, butover time, if you just look at the performances, you’ll see our traders deliver.
We don’t showcase bad traders, andif anyone questions our risk assessments, they don’t make it onto the platform.It’s time to harness the technology being used by irresponsible social tradingplatforms, and use it to make people money on responsible ones.
Taking a good idea, and improving itfor the user, is surely why The Portfolio Platform will only grow. Technologyhas improved most sectors, now it has improved investing, but only for theinvestor, which is surely a move in the right direction.
The top 3 instruments traded oneToro are Bitcoin, Ethereum and Amazon. That is the mark of retail, notprofessional trading. The top 3 traded on TPP are the FTSE, the Dax and theS&P. Only the technology links these platforms, otherwise, the divide inthe execution is enormous.
The average new account size oneToro is around $1,000, and a majority of it is lost. While small accounts areaccepted at TPP, the average new account size is closer to $100,000 as realinvestors look to rehome their portfolios.
One is a game for excitablemillennials hoping to win big, the other is an advanced platform for savvyinvestors looking for more from their capital.
If you would like to know more abouthow to set up an account with The Portfolio Platform, please do click hereand get in touch; we’d be happy to help.
“TPP might just be about to revolutionise investment for the retail market.”
- London Stock Exchange 2020