What is social trading - a featured post on tradeview's surfs up

What is Social Trading

Social trading is one way of investing. It allows investors to observe the trading behavior within the branches

Different ways: Copy Trading, Mirror Trading and Following a certain strategy – these are the main features of social trading.

Target Group: Perfect for starters, because rare knowledge is required. Investments do not necessarily be intense. So you can trade with small amounts!

Social trading is an alternative way of the common technical analysis approach most of the chartists follow up and another approach to macroeconomic analysis.

In Social trading we will just be looking at what and how other traders perform in order to compare and copy their approach.

First of all investors and traders were relying on  fundamental or technical analysis in order to apply a strategy.

Now with social trading so-called “Expert Advisers” Algorithms and trading patterns from other traders are available and ready for the customized daily use of a beginner.

Social trading platforms or networks can be considered a subcategory of social networking services.

Social trading is even in these times of platforms

networks, social media and chats a perfect way to stay in line with peers and receive in-time help from Experts.

Even Trading Communities are aroused out of social trading and shorten thereby the learning curve which is necessary on the long run to be a successful day trader.

The transparency of Social trading allows the real time interaction with others and duplication of “Expert Advisers” approaches.

By copying trades, traders can enhance their learning curve, because they will recognize (whilst backtesting) which strategies proved to be successful and which not. Social trading in most of the cases is applied in a speculative approach, which means that there is no evidence for short-, mid- and long term traders (investors) that their trading scheme will always be right – furthermore it is likely that after three months (expiration period of futures) there has to be a new program written to provide more or less reliable Experts Advisers Data:

The three main types of trades (Find out what kind of trader you are)

  • Single (or non-social) trade: Trades by hims/herself;
  • Copy trade: Trading exactly the same as a given trader suggests.
  • Mirror trade: Trader A automatically executes trader B’s every single trade, i.e., trader A follows exactly trader B’s trading activities.

This is not the finalized enumeration of types of traders, taking into consideration that Copy Trader sometimes do not only follow up on one trade, but on a complete portfolio (copy portfolio), or follow a trader’s dividends (copy dividends), where whenever a followed trader withdraws money from his or her account, a proportional amount of money will be withdrawn from the balance of their follower, in real time.

Other approaches are:

  • Information flow: Bloomberg for examples offers sophisticated access pieces of information concerning financial markets. Investors, Institutions and Retailers can benefit from this service once they sign up for these services. 
  • Cooperative trading: This is when traders make use of the opportunity to work together in trading teams which can trade the markets collaboratively, whether by pooling funds, dividing research or through sharing information.
  • Monetization: For example with Websites like tradingview.com you will sign up a monthly package to exchange your trading approach in a community or share other people’s knowledge, however, that the usance in a long run of such websites may come from the variety and depth of data about their users which their active communities are likely to generate.
  • Transparency: This is when traders have access to a performance dashboard of other traders. The credibility of traders offering these services is very high.

Binary Options

A binary option is a financial product where you can bet on two scenarios: 

  1. whether the option expires in the money, at the money or out of the money. Binary options depend on the outcome of a “yes or no” proposition, hence the name “binary.” Binary options have an expiry date and/or time. At the time of expiry, the price of the underlying asset must be on the correct side of the strike price (based on the trade taken) for the trader to make a profit.
  1. The rollover known from futures applies with a binary option automatically exercises, meaning the gain or loss on the trade is automatically credited or debited to the trader’s account when the option expires. In the “BUY” Option that means a binary option will either receive a payout or lose their entire investment in the trade–there is nothing in between. Conversely, in the “SELL” Option there will either be retention of buyer’s premium or be required to make the full payout.

KEY TAKEAWAYS

  • Binary options depend on the outcome of a “yes or no” proposition.
  • Traders receive a payout if the binary option expires in the money and incur a loss if it expires out of the money.
  • Binary options set a fixed payout and loss amount.
  • Binary options don’t allow traders to take a position in the underlying security.
  • Most binary options trading occurs outside the United States.

German Federal Financial Supervisory Authority (BaFin) forbid Binary Options On November 29, 2018.

With the ESMA rulings effective from 01st August 2018 the European Union and prior on 23 March 2018, The European Securities and Markets Authority, a European Union financial regulatory institution and European Supervisory Authority located in Paris, agreed to new temporary rules prohibiting the marketing, distribution or sale of binary options to retail clients. 

Only In the United States, the Securities and Exchange Commission approved exchange-traded binary options in 2008.

Trading commenced on the American Stock Exchange (AMEX) and the Chicago Board Options Exchange (CBOE) in May and June 2008. 

AMEX (now NYSE American) offers binary options on some exchange-traded funds and a few highly liquid equities such as Citigroup and Google. On the exchange binary options were called “fixed return options” (FROs). To reduce the threat of market manipulation of single stocks, FROs use a “settlement index” defined as a volume-weighted average of trades on the expiration day. AMEX and Donato A. Montanaro submitted a patent application for exchange-listed binary options using a volume-weighted settlement index in 2005. CBOE offers binary options on the S&P 500 (SPX) and the CBOE Volatility Index (VIX). The tickers for these are BSZ and BVZ, respectively. 

NADEX, a U.S.-based Commodity Futures Trading Commission (CFTC) regulated exchange, launched binary options for a range of Forex, commodities, and stock indices’ markets in June 2009. On March 30, 2010, the CFTC issued an amended Order of Designation to allow trades on NADEX to be intermediated. NADEX has since offered binary options trading between buyers and sellers. They do not participate in the trades. 

How a Binary Option Works Within Social Trading

How Does a Binary Options Trading Strategy Work? - Straight Talk About  Mortgages

A binary option may be as simple as whether the share price of ABC will be above $25 on April 22, 2021, at 10:45 a.m. The trader makes a decision, either yes (it will be higher) or no (it will be lower). 

Let’s say the trader thinks the price will be trading above $25 on that date and time and is willing to stake $100 on the trade. If ABC shares trade above $25 at that date and time, the trader receives a payout per the terms agreed. For example, if the payout was 70%, the binary broker credits the trader’s account with $70.

If the price trades below $25 at that date and time, the trader was wrong and loses their $100 investment in the trade.

Binary Options vs. Vanilla Options

A “Plain Vanilla Option” enables the holder to “Buy” or “Sell” an underlying asset at a specified price on or before the expiration date of the option. In Europe, there is a slight difference which is that the trader can only exercise that right on the expiration date.

Vanillas, or just options, enable the buyer to be the owner of the underlying asset. When buying these options, traders have a fixed risk, but profits vary depending on how far the price of the underlying asset moves.

The differentiator to Binaries is that the buyer can not be the owner of the underlying!

So this means that Binaries typically specify a fixed maximum payout, while the maximum risk is limited to the amount invested in the option. Movement in the underlying asset does not impact the payout received or loss incurred.

The profit or loss is depending on whether the price of the underlying is “in the money” which means, that the period where the price can be monetarized meets with the expiration and the anticipated price. Some Binaries can be closed before expiration, although this typically reduces the payout received (if the option is in the money). 

Binaries occasionally trade on platforms regulated by the Securities and Exchange Commission (SEC) and other agencies, but most binary options trading occurs outside the United States and may not be regulated.

So trading with a Market Maker instead of an ECN/STP can impact the pricing and may not be regulated!.

Example of a Binary Option

Nadex is a regulated binary options exchange in the U.S. Nadex binary options are based on a “yes or no” proposition and allow traders to exit before expiry. The binary option’s entry price indicates the potential profit or loss, with all options expiring worth $100 or $0.

Let’s assume stock Colgate-Palmolive is currently trading at $64.75. A binary option has a strike price of $65 and expires tomorrow at 12 p.m. The trader can buy the option for $40. If the price of the stock finishes above $65, the option expires in the money and is worth $100. The trader makes $60 ($100 – $40).

If the option expires and the price of the Colgate is below $65, the trader loses the $40 they put into the option. The potential profit and loss, combined, always equals $100 with a Nadex binary option.

If the trader wanted to make a more significant investment, they could change the number of options traded. For example, selecting three contracts, in this case, would up the risk to $120, and increase the profit potential to $180.

Non-Nadex binary options are similar, except they typically aren’t regulated in the U.S., often can’t be exited before expiry, may not trade in $100 increments, and usually have fixed percentage payout for wins (whereas Nadex payouts fluctuate based on the price paid for the option).

Social Trading, a Forex Trading Strategy?

Forex means Foreign Exchange (or FX) and the strategy behind is mostly based on USD the buy and sell of a currency in a given time.

Forex trading strategies can be based on technical analysis or fundamental, news-based events. The trader’s currency trading strategy is usually made up of trading signals that trigger buy or sell decisions. Forex trading strategies are available on the internet or maybe developed by traders themselves.

KEY TAKEAWAYS

  • Forex trading strategies are the use of specific trading techniques to generate profits from the purchase and sale of currency pairs in the forex market.
  • Manual or automated tools are used to generate trading signals in forex trading strategies.
  • Traders working on their own trading systems should backtest their strategies and paper trade them to ensure that they perform well before committing capital.

Basics of a Forex Trading Strategy

There can be a crossing SMA or another EAs involved but also simple Indicators and Oscillators may help finding the correct FX strategy. Technical analysis on the other hand would require tight watching of the price building linked to the financial markets in a long period of time, looking for trading signals and interpreting whether to buy or sell is than a manual decision. 

Automated systems involve a trader developing an algorithm that finds trading signals and executes trades on its own. The latter systems take human emotion out of the equation and may improve performance.

Traders should exercise caution when purchasing off-the-shelf forex trading strategies since it is difficult to verify their track record and many successful trading systems are kept secret.

Creating a Forex Trading Strategy

One of the most applied techniques is the Support/Resistance Level charting.

With Pivots, Fibonacci Retracements or, Elliot Waves, traders may notice that a specific currency pair tends to rebound from a particular support or resistance level. Forex traders then decide to add other elements that improve the accuracy of these trading signals over time. For instance, candlestick or chart sticks – just to see if the price rebounds from a specific support level by a certain percentage or number of pips.

There are several different components to an effective forex trading strategy:

  1. Selecting the Market: Traders must determine what currency pairs they trade and become experts at reading those currency pairs.
  2. Position Sizing: Traders must determine how large each position is to control the amount of risk taken in each individual trade.
  3. Entry Points: Traders must develop rules governing when to enter a long or short position in a given currency pair.
  4. Exit Points: Traders must develop rules telling them when to exit a long or short position, as well as when to get out of a losing position.
  5. Trading Tactics: Traders should have set rules for how to buy and sell currency pairs, including selecting the right execution technologies.

Taking into consideration that the MetaTrader makes it easy to automate rule-following trades, on the one hand, never neglect the downside which is not limited to fewer assets to trade and differentiation in certain events like switching days or expires. In addition, these applications let traders backtest or forward test their strategies to see how they would have performed in the past/future.

When Is It Time to Change Strategies?

FX strategies for example work when you are not in one of the abovementioned exemptions.

But we cannot generalize on it :

There is never a one-size-fits-all approach, so what works today may not necessarily work tomorrow. If a strategy does not bring the calculated revenue, traders are asked to check the following before changing a game plan: 

  1. Matching risk management with trading style: If the risk vs. reward ratio isn’t suitable, it may be caused to change strategies. 
  2. Market conditions evolve: A trading strategy may depend on specific market trends, so if those change, a particular strategy may become obsolete. That could signal the need to make tweaks or modifications.
  3. Comprehension: If a trader doesn’t quite understand the strategy, there’s a good chance it won’t work. If a problem comes up or a trader doesn’t know the rules, the effectiveness of the strategy is lost.  

Although change can be good, changing a forex trading strategy too often can be costly. If you modify your strategy too often, you could lose out. 

Example of a Basic Forex Trading Strategy

Chris is a novice trader. To get started, he calculates exponential moving averages for USD/JPY, a currency pair his research indicates will be profitable, to spot trends in the pair. Subsequently, he trades the pair at opportune times during the next few days to profit off its price changes.

Trading Stocks with CFDs

What Is a Contract for Differences (CFD)?

A contract for differences (CFD) is an arrangement made in financial derivatives trading where the differences in the settlement between the open and closing trade prices are cash-settled. There is no delivery of physical goods or securities with CFDs.

Contracts for differences is an advanced trading strategy that is used by experienced traders and is not allowed in the United States.

Understanding Contract for Differences

Contract for Differences (CFDs) allows traders to trade the difference between the entry price of an asset and the exit price of an asset without being the owner of the underlying.

This is the nature of derivatives (lat.: derivare = deriving from)

Essentially, a Contract for Differences is used by investors to make price bets as to whether the price of the underlying asset or security will rise or fall.

Contract for Difference traders may be invested with a secure payment (margin) on the price moving up or downward. Traders who expect an upward movement in price will buy the Contract/Asset, while those who see the opposite downward movement will sell an opening position.

Should the buyer of a Contract for Difference see the asset’s price rise, they will offer their holding for sale or increase their investment.

Now taking not overnight costs, premiums, and spread into consideration the net difference between the purchase price and the sale price are netted together. The net difference representing the gain or loss from the trades is settled through the investor’s brokerage account.

Conversely, of course, if a trader believes a security’s price will decline then an opening sell position can be placed. To close the position they must purchase an offsetting trade. Again, there is the net difference of the gain or loss is cash-settled through their account.

Real-World Example of a CFD

An investor wants to buy a CFD on the SPDR S&P 500 (SPY), which is an exchange-traded fund that tracks the S&P 500 Index. The broker requires 5% down for the trade.

The investor buys 100 shares of the SPY for $250 per share for a $25,000 position from which only 5% or $1,250 is paid initially to the broker.

Two months later the SPY is trading at $300 per share, and the trader exits the position with a profit of $50 per share or $5,000 in total.

The CFD is cash-settled; the initial position of $25,000 and the closing position of $30,000 ($300 * 100 shares) are netted out, and the gain of $5,000 is credited to the investor’s account.

Pros

  • CFDs allow investors to trade the price movement of assets including ETFs, stock indices, and commodity futures.
  • CFDs provide investors with all of the benefits and risks of owning a security without actually owning it.
  • CFDs use leverage allowing investors to put up a small percentage of the trade amount with a broker.
  • CFDs allow investors to easily take a long or short position or a buy and sell position.

Cons

  • Although leverage can amplify gains with CFDs, leverage can also magnify losses.
  • Extreme price volatility or fluctuations can lead to wide spreads between the bid (buy) and ask (sell) prices from a broker.
  • The CFD industry is not highly regulated, not allowed in the U.S., and traders are reliant on a broker’s credibility and reputation.
  • Investors holding a losing position can get a margin call from their broker requiring the deposit of additional funds.

What are Stocks and How do they differ from a CFD

In simple terms, a stock is a stake (or participation) in a company that allows a person to purchase a portion of the company. As the company’s value increases so does its stock. A person with stock in the company can resell it to someone else for a profit, or a loss depending on the future of the company.

Trading stocks has become increasingly popular among newer generations, in part thanks to the availability of digital platforms that facilitate the possibility to do so. Robinhood and TD Ameritrade are among the most popular of these platforms.

When you purchase a stock you buy it nearly immediately, you hold it for however long you see fit (turn a profit) then you sell. After selling you usually have to wait a couple days before the order completes and you get your money available in your account.

As we mentioned above, a CFD is a speculation based on what the company’s stock price is headed without ever even holding shares in the company. If you’re looking for short-term trades CFDs are more likely to be what you’re looking for – but that’s not to say you can’t hold stocks short-term. Nonetheless, if you are looking for a long term investment holding a stock is your choice.

There are some pros and cons of trading both, so before you decide to dab into trading stocks or CFDs make sure you do your research and make sure that your actions align with your goals. 

KEY TAKEAWAYS

  • A contract for differences (CFD) is a financial contract that pays the differences in the settlement price between the open and closing trades.
  • CFDs essentially allow investors to trade the direction of securities over the very short term and are especially popular in FX and commodities products.
  • CFDs are cash-settled but usually allow ample margin trading so that investors need only put up a small amount of the contract’s notional payoff.

Social Trading on Trading Platforms

Just try with TradeViewMarkets which approach is best for you.

We provide more than 12 different platforms!

Sibusiso Khumalo

Senior Market Analyst
skhumalo@tvmarkets.com