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Social Trading Terminology – Important Concepts

Franklin Carneiro da Silva| Updated May 16th, 2022

Here is a list of important concepts you should be aware of before venturing into social trading.

1. The 4 agents in social trading

  • The investor: also called “follower” or “copier”, is the person who has the capital and wants to replicate the signals. His function is to form and manage a portfolio of traders, to replicate their positions according to the bankroll.
  • The trader: also called “signal provider”, is the individual who actually studies and operates in the stock market, deciding which positions to open, hold and close. The trader shares his operations and strategies in the social trading platforms, interacts with his followers and other traders, and is paid according to his number of copiers, returns, assets under management, etc (this depends from platform to platform). 
  • The social trading platform: the intermediary, who brings together the traders and the copiers/followers/investors, allowing for them to share knowledge, communicate, as well as copy the trades. It is also responsible for showing the traders’ past data. It handles the replication of the trades for all of the copiers, according to their specific settings. The social trading platform pays the traders and earns money from the investors’ activity (either in trading fees, commissions from the broker, or other).
  • The Broker: who actually places the traders’ orders in the market. A good broker should offer a good range of products and markets, a fast execution, reasonable fees, support, etc. Choosing a good broker can “make or break” a traders’ activity. Many social trading platforms are also brokerage platforms (like eToro), while others are simply intermediaries and work with different brokers (like Tradency Mirror Trader).  

2. Slippage

Slippage is essentially a trade execution delay. This can result in different prices for the trader and his followers when opening a position. This can have good or bad implications for the investors’ returns, depending on the price movement during the delay. This trade execution delay is almost nonexistent nowadays, and thus shouldn’t be a huge concern for investors. 

For small time horizons (scalpers – traders operating in minutes, seconds, or even less horizon) , be aware that if the pip size of the gains is small, slippage can eat a big chunk of your profits and thus your returns be smaller than the ones from your signal provider.

3. Stop Loss (or Copy Stop Loss) and Take Profits

Even though about 90% of traders don’t use Stop Loss, Stop Loss is a crucial risk management concept. Stop loss closes your position once the losses reach a certain number you’ve set. This helps you prevent from “gambling” with your money, using a strategy and sticking with it, not being influenced by your emotions. It helps you think which amount of money you’re willing to lose. If you don’t use stop loss, you may be losing and think “well, maybe it will go up again, let’s hold the position”, and when you notice it you’ve lost a considerable amount of your capital. Stop loss helps you lose small amounts of capital. And when you make a profit, there is not limit! Remember to limit losses and maximize gains!

In copy trading, what you can do is limit the losses from a specific trader you choose to copy. Meaning, you can choose to stop following a trader and replicating his trades once he reaches a loss of, for instance, 300€, or 6% of the amount you’ve allocated to that trader. This is called the Copy Stop Loss, in eToro, but most social trading platforms offer similar functions.

Also, don’t use a Stop Loss too short. You want to leave some space for the traders to do their operations, it is normal if they experience a period of loss. If you don’t leave some space for losing positions to hold back, the stop loss will be activated and you’ll most probably lose money.

Take profit is similar to Stop loss, take profit lets you automatically close positions once you’ve reached a predefined profit amount. In copy trading, most platforms don’t have this function for the follower/investor, but you can still do it manually.