Social trading platforms have changed the overall landscape. In the past, if you wanted to make a strategic trade, you had two options. One was to pay a fund manager. However, fund managers don’t always invest in what they recommend. Therefore, if you ever choose to go this route, make sure the fund manager invests in what he/she recommends. The other option was to do your own research. This would include looking at balance sheets, studying 10-Qs and 10-Ks, and reading press releases. With a social trading app, you no longer need to do any of that.
A social platform is a way to share ideas. That’s the concept, but it’s really about layman traders following experts in an effort to make money without doing any work. This strategy has been successful for many people. This is the case for stock, currency, and commodity trading. Think of it this way. Go back to your school days. It can be at any level. Who is the smartest person you knew throughout your school experience? This is someone who would ace almost every test and knew the answer to every question. Imagine you could copy that person on every test without penalty. Apply that to trading and that is the opportunity that social platforms present. Since the rise in popularity of social trading platforms, you don’t need to be the best in the world; you just need to know who to follow. However, there are some tips you should follow.
Following the Right Path
In some cases, top traders will charge you for being able to see their account. There would be no sense in paying because there are many pros that don’t charge you. When you’re searching for someone to follow, don’t fall into the trap of choosing someone who only has one or two examples and made a lot of money. This ‘expert’ did well with a couple trades, but past performance doesn’t guarantee future success. That last sentence is a common saying in this financial landscape, and though true, someone who delivers consistently is more likely to deliver in the future.
That brings us to the other end of the spectrum. You might find someone who has had a lot of success over many trades. This might lead you to think you have found the right person to follow. However, this is actually a problem. The reason is because if you make all the same moves, you’re going to be paying fees on every one, on both the buy side and the sell side. Furthermore, any gains will be taxed as short-term capital gains, which means you will be paying more in taxes.
The best players to follow aren’t traders at all; they’re investors. You want to find someone who sits on five or ten investments per year and has delivered for several years on those. This is likely someone who is doing deep-dive research on companies and has a knack for spotting trends. If you find someone like this and you feel comfortable following them after doing your own due diligence, you can use what is called mirror trading. This means you can automatically buy, hold, or sell along with them. You’re basically on auto-pilot.
Investing with Trends
If you want to be the leader opposed to a follower, all you need to do is follow consumer trends. If there is a new type of clothing that you see everyone starting to wear, then you should strongly consider investing in that company. If there is a new wearable technology that is moving beyond the fitness community and into the world of the everyday consumer, the same applies. If there is a commodity that is gaining momentum due to a new U.S. president and the policies they plan to implement, then you should look into investing in that commodity. Investing is all about logic.
There is another type of trend in play here. Social trading platforms have become so popular that positions can be influenced by money flowing into a specific stock. If you follow the money, you’re likely to go along for the ride. At the same time, this is more likely to be a short-term trade than an investment and the risk is going to be much higher than an investment you plan on making for at least one year. A lot will depend on your risk appetite. It’s often wise to use the majority of your capital for safer long-term investments and a small percentage of your capital for higher-risk investments.