One major difference between Forex trading and other financial markets is its global nature. Sure, something like the stock market too can be accessed globally, but not with the same flexibility. Thanks to this feature of the Forex market, it has allowed traders from all over the world to interact, and this has borne social trading in the industry. Now, traders are able to talk freely about their trades and share ideas to help one another out. To some extent, you could say that Forex traders just like the stock traders we see in movies, are proud and like to brag about their earnings. That would explain why social trading platforms are always lively with debates, wouldn’t it – a clash of egos. Nevertheless, it does not take away from the fact that many traders on such sites know their stuff. That is why, in this post, you are going to learn what characteristics make for the best social trading Forex brokers. After that, you should be able to make a good choice for yourself.
Simply put, social trading is the act of making trades based on input from other traders. Typically, a trader is expected to do their analysis of the markets and place trades based on their findings. Social trading is the opposite because a trader relies on others to make a decision. The input is usually shared through various social trading platforms, but the top social trading broker will have the most reliable information. The practice of social trading has only recently become popular in the Forex market, but it is growing fast because traders are realizing its benefits.
Forex brokers conduct most of the social trading operations in the Forex market since the trades have to be executed by them. here are several structures they could use, but the most common one is the PAMM account. A broker’s client who feels confident in their skills creates a PAMM account. Once the account is created, other clients of the broker make a deposit into the account while the PAMM account holder executes all the trades. To get their money back, clients request a withdrawal, and the amount is calculated in proportion to their initial deposit compared with the entire account capital.
There are also other forms of social trading that are more direct. These usually involve traders getting tips from their peers through social media, forums and blogs. Some Forex brokers also provide this service, although it is often for their VIP/Gold accounts. Nevertheless, this too is a form of social trading.
One of the main reasons people opt for copy trading Forex is to increase their profits. Whether it is a novice trader or an experienced trader, social trading can increase profits either way. For the former, social trading generates revenue while they are still learning the ropes. In the latter case, social trading can be used as a form of hedging. For example, an experienced trader may dedicate a portion of their capital to social trading while they too are making trades. This ensures that they always make a profit and limit the losses simultaneously.
Another advantage to social trading is in education. There is no better teacher than experience, even if it is just by observation. If a novice trader engages in social trading, they get to observe and learn from the best FX traders out there. Afterwards, they can mimic the same trading strategies they observed in order to become better traders themselves. Furthermore, they may even learn from the mistakes of their peers and know how to avoid them in their own trading careers.
Finally, the providers of social trading signals are paid as well, providing them with a secondary source of income. The most popular providers can have hundreds of traders, all of who pay for the service, and that can be a good return. Besides, having a large pool of capital to work within, say, a PAMM account can allow such a provider to make larger trades and make more money for themselves as well as their clients.
These and several other benefits have made social trading to grow exponentially over the past few years. Today, there are very many Forex brokers social trading to choose from, which is a good thing. The presence of multiple choices provides alternatives to choose from and find the best match, but it also makes it difficult to tell the good from the bad. To help you in this quest, these are the five main considerations you have to make before choosing which broker suits your needs best.
Of course, you want to make money and not lose it, which is why you even considered social trading. Consequently, you have to make sure that the service is actually profitable. Profitability is usually indicated in percentage, where the higher the better. However, you still need to consider other factors that led to those profits, such as the drawdown and risk appetite. Some traders can be very profitable simply because they took huge risks, but these risks could also be their downfall. Like Warren Buffet said, the long-term game is usually the most profitable. Nevertheless, if you feel like you’re willing to take a risk, go for it, just as long as you are aware of the risks.
The most important factor to consider when choosing the best is the security of your capital. This has to do with the company itself. A good company will provide you with good service and vice versa. For example, if the Forex broker providing social trading services cannot be trusted, then your money will never be safe in their hands. There are a lot of Forex scams being carried out by brokers who seem like legitimate companies, but their victims learned otherwise the hard way. Therefore, you need to conduct an in-depth analysis of the company and, most importantly, if they are regulated. Forex regulation provides more cover to your capital since it makes it possible to seek legal recourse when you’re wrong. Only regulated social trading Forex brokers can offer you this protection.
When it comes to resources, this has to do with both human and technological resources. For the former to be adequate, the Forex broker must have a large enough number of traders among whom you can choose. The best forex social networks have hundreds of traders to choose from, giving you the flexibility you desire. Besides flexibility, having a large pool of traders providing the same service generates a sense of competition, motivating them to do better in order to gain more followers.
Then the company must have adequate technological resources to handle the entire system. As described above, social trading is a fairly complex system that requires plenty of computing power to handle all the operations adequately. For example, use of signals may require that traders use a VPS service. Virtual Private Servers (VPS) act like virtual computers that run continuously 24/7 to execute hundreds or even thousands of trades. Obviously, this will require that the broker have adequate technology to create these VPS servers and execute all the trades. A lack thereof will create bottlenecks, lags and eventually the whole system will collapse. As a result, a trader should ensure that their social trading broker is capable of handling the service.
FX brokers social trading do not offer the service for free, as there is almost always a charge incurred. In rare cases, there may be free social trading services, but these are usually not good quality services. In such cases, the broker is usually just seeking to attract new clients to their platform, which means they may not have the necessary resources required as described in the previous section. Therefore, when you are choosing your preferred social trading provider, the issue of charges must be considered.
Typically, the largest portion goes directly to the trader generating the trading signals. They may either charge a portion of the profits or a flat monthly fee. The former is more recommended because you only get to pay if you make money. Furthermore, monthly charges may add up over time and take away from your profits. For example, say a 5% premium is charged upon withdrawal, and you happened to have made $1,000, your total charge would be $50. On the other hand, if the flat monthly fee is $20 and it took a year to make the profit, you would fork out $240.
The best choice will depend on the fee structure, which you need to consider very carefully. Your best option will depend on the length of time you plan to invest and the initial capital you deposit. For example, if you have a small capital, it is better to be charged a commission rather than pay a monthly charge that may reduce your capital over time.
Every social trading platform will have its own rules regarding withdrawals. The top social trading FX brokers will allow withdrawals immediately upon request at any time. However, others will have a lock-in period like the one seen with hedge funds. In this kind of structure, funds dedicated to social trading may be unavailable for deposit until a certain time limit is reached. Obviously, this may be inconvenient when you happen to see yourself making losses but are unable to close the trades. On the other hand, social trading systems that allow immediate withdrawals may still charge a penalty for doing so, which means you have to decide what option you would be more comfortable with.
Since Forex brokers usually offer social trading, the best way to find such services is by first identifying the best Forex brokers. Once you have identified your top choices of a Forex broker, you should then consider the above criteria to narrow them down and find the best option. It may be a daunting task at first, but the effort is going to yield results that you will enjoy for years.
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