Ever since companies like Zulutrade and eToro popularized forex social trading close to a decade ago, it has become one of the trending phenomena in the forex market. Indeed, the popularity of forex social trading closely mimics the popularity of social media like Facebook, Twitter and Instagram. However, social trading has a lot more at stake because actual money is involved. That is why you cannot just follow any trader that catches your fancy the way you would follow anyone on social media. You have to do it right or your pockets/bank accounts will scream out loud.
What is a Social Trading Network ?
A social trading network is a platform where forex trading is carried out on a group or community basis. Forex social trading simply means a system where newbie or inexperienced traders follow one or two more successful traders with a view to replicating their entire trade results on a live forex trading platform. This is the element of trading as a group. So the principle is that if a group of newbie traders follow a trader who is making money trading forex, they can replicate the money-making results of the Group Leader by simply following all the trades that Leader makes. There are quite a lot of social trading networks out there now, so you will be spoiled for choice. The problem is usually in the selection of the Leader to follow. So how should you select a trader to follow on a social trading network?
Selecting a Leader on a Social Trading Network
All social trading networks are not created equal. Some have much better features and are more user-friendly than others. Some will also present a better method of measuring a trader’s performance. Some also have an automated way of copying trades directly to your account so that you do not have to do any manual executions. These are the social trading networks to follow.
While a mention of particular social networks to be on will not be made here, an attempt will be made to provide some guidelines to enable you know how to select a trader to follow.
Trader Metrics to Consider
The first thing you should consider is the profitability of the trader. This is usually easy to detect as most (if not all) forex social networks have a list of the top traders on their forex social platforms.
Each platform uses filters to populate this list, and the traders shown on this list change on a day to day basis as data is updated. Some of these filters will include data on who is the most followed, most active, oldest trader on the list, etc.
The profit percentage made by a leader on the forex social platform is not a sufficient parameter for choosing a trader to follow. It is possible that a trader may make a lot of profit, but may have taken huge risks to get there. That is where the 2nd performance metric comes in.
b) Shape of Profitability Curve
The shape of the profitability curve can give out a lot of information as to the way the traders on the Leaderboard made their profits. In other words, you will be looking for a shape that defines consistency in results.
Compare these two charts below.
A consistent, steady trading pattern
The 1st chart shows a gradual upward transition from low to high without intervening sharp declines.
Steady but not very consistent trading pattern
The 2nd chart shows a sharp period of increase, then the graph starts to flatten out. This indicates a good initial period, and then a struggle to make profits.
c) Risk Levels Used
Does the profit curve show a level of high risk or is the trader less aggressive? How aggressive or conservative a trader on the Leaderboard is will determine if that trader will last on the Leaderboard or not. There are many traders who appear on the Leaderboard in one week and disappear off it the next week. This is all about risk management.
Aggressive traders generally:
- Use a lot of risk
- Suffer heavy drawdowns
- Have spiky profitability charts
- Do not last long on the Leaderboard.
Inconsistent and overly aggressive trading pattern
Notice the boom, flat and then burst pattern displayed by this chart. Such aggressive traders should generally be avoided because they produce emotional roller coasters which many people will have a hard time coping with.
Lasting on the Forex Social Network with a Leader
The sad reality about forex social trading is that you have to continuously monitor the performance of the leader(s) whose trades you have chosen to follow. This is because performances will keep changing and you may either need to reduce the number of trades you copy from a leader or choose another one entirely. So how can you monitor leader performance?
Monitoring of leader performance is done by constantly evaluating the following parameters:
- Shape of Profitability Curve
- Drawdown Levels
- Account Balance
- Number of followers
- Trading style
- No of winning trades
- No of losing trades
- Length of time the Leader has been offering the service
- Maximum number of open trades
- Best trade (number of pips earned in the best performing trade)
- Worst trade (the number of pips lost in the worst performing trade)
This article has tried to show how to identify the trading patterns of Leaders using their performance graphs. Other information is usually available to enable you make a decision on selecting a Leader to follow. Ensure that you only use social trading networks that provide this information as it can make the difference between profitability and damaging losses.