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Social trading has exhibited tremendous growth over the past decade, with significant absorption in the past couple of years. Let’s face it, why wouldn’t it? It’s truly an incredible tool. Traders who use social trading exclusively as a means of trading see profits 311% higher than traders who don’t use social trading. Social trading is a great tool for traders to keep a pulse on the market, as they analyze other traders’ activities to the same extent they analyze news reports, forecasts and charts. For beginner traders, social trading can assist them in designing a strategy that includes watching successful masters trade, learning from them and if they decide to do so, copy their activity.

As the Forex trading industry continues to improve and social trading continues to flourish, the need for transparency has increased and become a key factor for traders, pushing regulating entities around the world to adapt their legal framework to cover social trading. Several European regulators have tightened the reigns on copy trading, effectively overhauling the social trading landscape.

How then, does a regulation-compliance social trading community benefit traders?

  1. Limit risk and exposure. Regulating entities require social trading operators to limit a trader’s risk and exposure by setting appropriate Stop Loss levels and diversifying the investment between social and traditional trading as well as allocating appropriate amounts of investment per master. Traders are categorized according to their risk aversion level, which is determined by a questionnaire covering a trader’s perception of risk and financial stability.
  2. Through advanced masters’ matrixes, traders are to be matched with masters that best match their trading approach.
  3. Traders receive warnings as they approach certain risk thresholds or are about to perform an activity that represents higher risk than what is advised to them.
  4. Oversight. As part of the regulation, brokers are required to have portfolio managers on site in order to help traders manage their risk and prevent fraud, so traders have an extra level of protection.  

Having a social regulated community is not the only way in which social trading is advancing. Platform providers are keeping up with the demand generated by traders and brokers for a more sophisticated tool. According to Gadi Rosenfeld, social trading Product Manager at tech provider Leverate, some of the features traders can expect to see in the near future are:

  • Cross-community. “More robust platforms which are cross-community, meaning traders are no longer confined to one community of traders, but rather are part of a much larger community comprised of traders from multiple brokerages, are indispensable for a more engaging and interactive trading experience”, said Rosenfeld
  • More non-textual social tools, such as the ability to “like” a master or a trade, share technical analysis or recommend a position to a friend.
  • Social trading platforms will become a hub for investments. MAMs, portfolio managers, hedge funds, robots, etc can be integrated into the network for added choice variety to the trader.