Creating a Passive Income Through Social Trading
Platforms allow newcomer investors to follow up on the trades of expert traders and copy their activity. Although it is extremely simple to sign up with social trading programs and brokerages and participate in the lucrative FX market, it is always advisable to perform a preliminary research before pulling the trigger.If you’re looking to diversify your investment profile, you can consider investing some of it into forex and CFD’s. If you don’t have the prior knowledge or experience to make trades on your own, you can use social trading platforms
The first thing potential traders need to realize is that the forex market can be extremely volatile, that trading is often leveraged, and how unexpected losses may occur. The type of people who should be involved with it are people of two types – either financially established individuals who can utilize CFD trading as part of a diversified investment profile, or investors who are willing to put their money at tremendous risk with the hope of yielding a very high return.
The second thing potential investors should know is that both social trading platforms and FX trading brokers offer demo accounts. These accounts allow investors to check out the platform without actually depositing any money into it. It’s always a good practice to sign up for demo at the beginning, and proceed to a real money account only at a later stage.
The third thing potential investors need to thoroughly check is the regulatory body approving the activity of the firm he wishes to sign up with. It is expected clients will uphold the same type of scrutinization they use to inspect other financial service providers like their banks or their insurance company.
Retail forex trading is an extremely tricky industry – there’s a lot of scam and dishonesty with many of the brokers; Regulatory supervisory help maintain a certain criteria and can be used to issue complaints against the firm. Not all regulatory bodies are alike though, it’s always good to stick to brokerages approved by one of the main regulators: The Financials Conduct Authority (UK), CySEC (Cyprus), National Futures Association (USA), ASIC (Australia) or Central Bank of Ireland.
The safest platforms for social trading would definitely be the market leaders. Well-backed world-renowned firms with a long trading history of millions of trades by hundreds of thousands of traders. There are only two large niche dominators – eToro and Zulutrade whose comparison you can view here.
The fourth thing relates to the actual trading process. For investors who are interested in generating steady passive income rather than quick wagers on the market, it is advisable to focus on long-term trades with low leverage, spread across a variety of instruments (or spread over a multitude of traders, with social trading). Diversifying the investment over a large number of positions which with minimal leverage will help reduce volatility. The downside is that commissions are usually taken on a daily basis, and will eat off some of the profit that can be made with such long-term positions.
The last thing to know about social trading is that there are many antagonists who claim social trading is a sham. They claim that following a successful trader doesn’t really promise anything, because of the inevitable lags between the trade execution. Over a large number of trades copied, a significant deviation should occur. That means a someone could be following a successful trader and making less money than him (or even losing). It’s extremely difficult to scientifically approve or disapprove the claim.
In conclusion, forex trading and social copy trading can be used a high-risk form of investment, but there’s no reason to jump the gun before an appropriate research that could very well make the difference between a winning and a losing investor.