1. Start with a demo account
There is no need to deposit real money before understanding the way social trading works, and if you feel like it fits your investment style.
Although a demo account doesn’t offer the real experience in terms of the emotional and psychological impact that we know trading has, it’s still valuable for several reasons.
Firstly, you should use a demo account to familiarize yourself with the social trading platform. Learn how everything works, and especially how you place trades or correctly copy someone, while choosing the copy amount, copy stop-loss level, and so on.
Secondly, the demo account is also a great tool for evaluating the traders you are considering to copy with your real money. Try them out on the demo for a month or two first. Are their returns living up to their past returns? If yes, that’s great, but if no, try to find out why their trading performances have gone down.
Don’t put all eggs in the same basket. Diversification is a key principle of risk-management, so make sure that you follow several traders. Look at their risk profiles too – if some traders you choose are very risky traders, you may want to diminish the capital allocated to them.
3. Understand what you are investing in
Just arbitrarily selecting a bunch of traders, and allocating equal parts of capital to each one of them, is not the road to a successful investment. As Warren Buffet once said “wide diversification is only required when investors do not understand what they are doing.”. Just diversifying might help you not lose much, but you won’t gain much either.
4. Use the advanced search to find good traders
Some of the criteria you can use to search are low drawdown, low risk, returns, time of activity, among others.
5. Pay attention to fees
Pay special attention to the fees charged to avoid unnecessary costs – these can eat a huge chunk of your profits!
Unfortunately for many European traders, most social trading brokers denominate their clients’ accounts in USD only, and automatically convert any other currencies into USD upon deposit. This means that you will pay significant currency conversion fees.
One way to avoid these fees is to convert your currency through free currency conversion services like Revolut or Wise, and then go on to transfer your trading capital in US dollars directly to the broker.
6. Start small and adapt over time
Once you decide to start investing real money, it is better to start with a lower risk strategy and adapt it along the journey. Also, understand Take Profit and Stop Loss, these are key principles of risk management.
7. Manage your team of traders
Managing your team of traders is as important as choosing the right ones to copy. As a copy trader, there are 4 things you can do:
- Keep the current portfolio: if the traders are fitting your strategy and expectations.
- Change the capital allocation of your portfolio. This means reducing or increasing the investment amount for your traders.
- Manually delete/close certain trades. This can be a good option, for example if you notice that a certain trader is holding losing positions for a long time (gambling losses).
- Delete/replace one or more of the traders.
Remember to be patient! Every trader has periods of losses, this is unavoidable. Social trading is a long term investment. However, there are some times where you should act. Here are some risk signs that you should investigate:
- If the drawdown overcomes usual values.
- If the risk level has increased in the last days.
- If the trading strategy has changed. Ex: started operating in new markets and products, or started short selling;
- If the percentage of profitable weeks or trades have changed a lot;
Try to understand why it happened. Read the recent posts or ask the trader if you can. Among others, the reason for that change in the indicators and returns might just be down to temporary market conditions – example, if your signal provider trades long in the S&P 500, and the market is temporarily down, then it is harder to consistently do profitable trades. Try to investigate and analyze the important details, before making any decision.