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What is ‘Social Trading’ and can it be profitable?

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What is ‘Social Trading’ and can it be profitable?

Social trading is a form of investing that allows investors to observe, the trading behaviour of their peers.

September 26, 2021

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Social trading is a form of investing that allows investors to observe, and discuss, the trading behaviour of their peers. The concept of social trading, is great, the execution is poor, as much like on social media sites, the wrong people make the most noise and that can be very damaging for those involved.  

Listening to experts is a good thing. Listening to just anyone, is not, and there are no filters on these sites to differentiate between the two. This gives those who can gather enough ‘followers’ a lot of power to influence.
It reached a pinnacle of disaster last year when the reddit crowd (a social trading forum) managed to ‘pump and dump’ a stock so dramatically, that GameStop went from $11 a share, to $300 a share.  

They claimed this was to stick it to the hedge funds, but the facts are that most funds made a lot of money cashing in on the move. One fund made $700m before selling out and several others cashed in on their convertible debt in AMC after a similar move. Wall Street made a fortune.

The group initiating this movement, also sold out and made millions. They created memes and war cries in order to get 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, this had to be done Wolf of Wall Street style, by phoning round and persuading people to buy stock you had already bought, and it is very illegal.

Share prices aren’t a joke and the economy isn’t a game. Bitcoin has a lot to answer for by fuelling this mentality, as teenage multi-millionaires pass on their trading tips on how to get rich; as far as I can tell, the skill lies in buying it, telling everyone else to buy it, and then crossing your fingers.  

Those who bought early on, took a chance and made money, for those who bought up at $60,000, they are already down 38%. It’s worth bearing in mind that nobody ever talks about the losing trades, 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 be made for a few, but entire savings will be lost for the many.  

Social trading is an area of trading which, its proponents say, democratises trading by making information more accessible to less-experienced traders and investors, and this isn’t wrong, but traders without experience, shouldn’t be trading at all. Trading is a profession and it takes years to become good enough to make regular returns.  

As we have stated, the principle of social trading, is to be commended, but the execution to be abhorred. If only they were actually used to help people.  

The first thing you see when you Google eToro (the largest social trading site in the world), is that 67% of their users, lose money. They have just past the 20 million users mark, which by our calculations, means they are helping 13.4 million people lose money every day.  

Who are these people and why do they keep going to what can only be described as a gambling site? Or is that in fact the answer, they don’t see it as investing at all, merely gambling.  

So, who are the ‘traders’ on these sites offering advice and ‘helping’ people lose money? What is their trading experience and why would anyone listen to them?

We looked at one platform, IX Social, that actually advertised a trading strategy by ‘Money Maker Robo’ that had 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 220 followers.  

If a portfolio loses 100%, it is no longer a portfolio. People need to stop thinking of this as quick way to make money. Conviction and comfort in groups, does not necessarily mean you’re making the right decisions; it just means you might be making the wrong ones with other people.  

Can social trading and ‘Copy Trading’ be profitable?

Absolutely, but only if you fully understand everything you’re looking at. And this needs an expert, to spot and expert which is exactly what we have done at The Portfolio Platform.  

MIT Computer Scientist and researcher Yaniv Altshuler described social trading networks and ‘autotrading’ as complex adaptive systems, and in his 2014 research on his paper concludes that ‘social trading provides much better opportunities for profiting compared with individual trading," but that users do not make "optimal decisions” in selecting experts’ that they follow.

This is spot on. In short, he is saying exactly what we are saying: the theory is sound and it should help, but ultimately people make the wrong decisions on who to link their accounts to because they don’t understand what they’re looking at.  

A strategy posting returns of 300% a month is not something that a professional trader with any experience would ever even look at. To make that kind of return, that trader is playing roulette and eventually they will lose everything.  

Returns of 100% in a year can be done; on The Portfolio Platform, we had 3 traders manage it. But it is very hard to do and it isn’t done without increased risk. Managing risk is the most important aspect of a long-term trading strategy and the Trader Selection Panel at TPP know exactly what they’re looking for.  

This is why The Portfolio Platform was built. Our trader selection panel is made up of traders with a minimum of 15 years’ experience each. As we have said, the theory of following other traders is a good one but it needs expert traders to recognise the risk reward ratios in other strategies, and build a selection of best performing traders from around the world.  

The key to a profitable platform like this, is to not even offer strategies that take too much risk. That game is for the likes of eToro, not for serious investors looking to increase their returns and make their capital grow.  
A 2015 World Economic Forum report described trading sites like TPP as disruptors, which "have emerged to provide low-cost, sophisticated alternatives to traditional wealth managers. These solutions cater to a broader customer base and empower customers to have more control of their wealth management," and "pose a tangible threat to the traditional practices of the wealth management industry".  

This is exactly right, and it’s what we at TPP are striving to make a reality. We give investors choice, transparency, and the chance to make increased returns. Strategies available for trading start from as little as £50 per month. The traditional Wealth Management system is archaic. IFA’s charge for meetings you don’t need, Investment Managers charge management fees, but then just stick all your money on 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 many traders as you want. That’s it, the rest is automated. Choose 5-10 traders and build your own online hedge fund with potential results you could only dream of.  

It’s modern investing, but it’s now being done properly, by professionals.  
Economist Nouriel Roubini’s thinktank predicted in 2016 that "newer forms of investment, such as socially responsible investments and social trading will bring some of the largest industry growth in the coming years’ and we are already seeing this filter through.

While TPP is not a ‘social trading’ platform, it is built around the same concept, but refined to make it a better by cutting out the bad noise created by bad traders. On the back of this concept, it is growing fast and users are loving it.  

Social trading may potentially also change how much risk investors take. A recent experimental study argues that merely providing information on the success of others may lead to a significant increase in risk taking. This increase in risk taking may even be larger when subjects are provided with the option to directly copy others.  

Taking risk isn’t necessarily a bad thing. How do the rich get rich in the first place? What we advocate is taking risk at the right time, for the right reasons, to reach the right goals. Our traders know what they’re doing. Everyone has bad days, weeks or months, but over time, if you just look at the performances, you’ll see our traders deliver.

We don’t showcase bad traders, and if 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 trading platforms, and use it to make people money on responsible ones.  

Taking a good idea, and improving it for the user, is surely why The Portfolio Platform will only grow. Technology has improved most sectors, now it has improved investing, but only for the investor, which is surely a move in the right direction.  

The top 3 instruments traded on eToro are Bitcoin, Ethereum and Amazon. That is the mark of retail, not professional trading. The top 3 traded on TPP are the FTSE, the Dax and the S&P. Only the technology links these platforms, otherwise, the divide in the execution is enormous.

The average new account size on eToro is around $1,000, and a majority of it is lost. While small accounts are accepted at TPP, the average new account size is closer to $100,000 as real investors look to rehome their portfolios.  

One is a game for excitable millennials hoping to win big, the other is an advanced platform for savvy investors looking for more from their capital.  
If you would like to know more about how to set up an account with The Portfolio Platform, please do click here and get in touch; we’d be happy to help.
Click here to book in a call with one of our expert traders or directors, to discuss how to go about setting up your own portfolio with The Portfolio Platform.

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- London Stock Exchange 2020