This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
Social trading as a strategy means making your trading decisions based on the actions of other traders, typically through a platform that displays the performance, positions, and risk metrics of the top traders on the platform. The trader selects a trader or a group of traders to follow, and the platform automatically copies the selected traders' positions into the follower's account.
The approach is most useful for beginners who do not have a tested strategy of their own, and for traders who want to diversify across multiple strategies without managing each position individually. The approach is less useful for experienced traders who have a tested strategy, because the social trader's performance is often not consistent over time.
How social trading works
A social trading platform shows a feed of traders, their performance statistics, their open positions, their risk metrics, and their trading history. The follower selects a trader based on the metrics, and the platform copies the trader's positions into the follower's account at a specified ratio (for example, 0.5× if the follower wants to take half the risk).
The copying is done automatically by the platform. When the followed trader opens a position, the platform opens the same position in the follower's account at the specified ratio. When the followed trader closes the position, the platform closes the copy. The follower does not make any trading decisions; the follower's trading is entirely based on the followed trader's decisions.
The social trading platform is different from copy trading (where the follower selects a specific strategy or portfolio rather than a trader) and from mirror trading (where the follower copies a single trade based on a signal). Social trading is about following a trader, not a strategy.
The metrics that matter
The most important metric is the maximum drawdown, not the return. A trader who has produced a 50% return over the past year with a 40% drawdown is more likely to draw down another 40% in the next year than a trader who has produced a 20% return with a 10% drawdown. The drawdown is the metric that tells the follower what the worst-case experience looks like.
The second metric is the number of trades. A trader with 500 trades over the past year has a more reliable track record than a trader with 20 trades over the same period. The sample size is the basis of the statistical reliability of the metrics.
The third metric is the trader's skin in the game. A trader who is also trading their own capital alongside the followers is more aligned with the followers' interest than a trader who is only trading the followers' capital. The skin in the game is the most important governance mechanism on a social trading platform.
The risks of social trading
The first risk is the survivorship bias. The traders who are visible on the platform are the ones who have survived long enough to build a track record. The traders who blew up their accounts are not visible, and the follower is seeing only the best-case examples of the social trading model.
The second risk is the copy delay. On most platforms, the follower's positions are opened and closed with a delay of a few seconds to a few minutes after the followed trader's positions. In a fast market, the delay can produce a significant difference in the entry and exit prices, and the difference erodes the copy's performance relative to the original.
The third risk is the platform risk. The social trading platform is a third-party service that is integrated with the broker. If the platform goes offline, the follower's copying is interrupted. If the platform goes out of business, the follower's copying history and the relationship with the followed trader may be lost.
The fourth risk is the over-diversification. A follower who copies 10 different traders may end up with a portfolio that is so diversified that the individual trader's edge is diluted. The net effect can be close to zero, with the follower paying the fees of the social trading platform without producing a return.
How to use social trading as a strategy
The honest answer is to use social trading as a starting point, not as a permanent strategy. A trader who follows a social trader for 6-12 months learns about the trader's strategy, the trader's risk management, and the trader's behaviour in different market conditions. The follower can then decide whether to adopt the strategy, to modify it, or to develop their own.
The follower should also use the social trading platform as a learning tool, not as a delegation tool. The follower should study the followed trader's decisions, understand the reasoning, and apply the lessons to the follower's own trading. The social trading platform is a classroom, not a portfolio manager.
Related resources
Where to start
If you are evaluating social trading as a strategy, the most useful features to compare are the trader selection metrics, the copy delay, the fee structure, and the platform's integration with your broker. Our broker comparison lists the brokers that offer social trading and the available features, which together tell you what the platform looks like before you follow your first trader.