Information sharing, and copy trading is improving trading performance
Although retail trading is growing in popularity and the volume of trades and profits are increasing, institutional investors still have the upper hand when it comes to long term gains.
Why the gap? The biggest difference is access to information. Information in financial firms travels faster to the institutional trader, and in larger volumes. An average trader on Wall Street is hooked into Bloomberg and Reuters where each economic event is updated in 2 milliseconds. Goldman Sachs has hundreds of people analyzing the market daily and spreading the information internally. Hedge fund traders are also exposed to insider tips with friends close to the action.
Although huge volumes of data and analysis are also available online, it is a significant challenge for retail investors to know the best sources to trust, and how to sift through the sea of information to find what is really important. In addition there dozens of theoretical models that can be used to determine which influences currency values, and deciding which one to trust requires specialized knowledge.
One specific example of information used by institutional investors is monitoring of interest rates. This has the most immediate impact on currency values yet in most cases retail investors are not aware of its importance, or in some cases even its existence.
Wisdom of the Crowds
Social trading is the new dimension of trading. It allows retail investors to take a more active role by providing access to information and expertise. It removes the traditional barriers of “financial black boxes” and offers transparency on how their money is invested by providing real time data feeds of trades and access to experts to discuss trading strategies.
It provides a wealth of financial information shared by a large active investment network. At the heart of social trading is a large community of investors from all walks of life and from every region of the world. The rich diversity of people who invest their money creates the largest knowledge base of investment advice.
Traders recognize the value of tapping into a large and diversified knowledge base and as a result activity on social networks is increasing and the potential is already being realized.
Online communities are enormously popular and many believe that social networking leads to greater trading volumes. Datamonitor – the respected Internet research firm – says that over 50% of consumers are using online tools to make their financial decisions today.
Today, more than 60% of our registered users (eToro) consult with experts and follow their trading activity using the advantages of a fully transparent investment network, proving that social trading is transforming the way people trade by promoting online sharing and collaboration.
It’s this collective wisdom, often described of wisdom of the crowds that provides novices, trader and pros with valuable information to make more informed investment decisions.
How social trading works
Healthy social networks are self-regulating organisms, which instantly raise exceptionally successful traders to the surface. By engaging in active social networks, traders can quickly and easily identify the most successful traders with the highest percentage of profitable trades, highest overall gains, sorted by the currency pair or commodity that they trade. In addition there are detailed profit and loss statements with graphs and charts so traders can analyze individual trading performance the same way they evaluate the prospectus for any type of financial investment.
By sorting though a live database of top traders, users can choose the most appropriate trader to follow based on their profits, trading style, portfolio strategy and risk level. Social indicators can be used to determine which traders are advantageous to follow, including the number of followers and number of people actively copying their investment decisions. The rate of responsiveness and the level of a trader’s interaction with the circle of followers provide further information about a trader’s personality, performance and investment strategy.
In addition, traders can fully diversify their investment portfolio by dividing their invested capital across several selected traders, thereby creating a people-based investment portfolio driven by performance-based social trading, lowering their overall investment risk.
Social Trading is Closing the Gap
Analysis of online financial trades reveals that following experts and copying their trader can has a positive impact on trading performance. In order to quantify the success of social trading we made a comparison of performance between trades done as a result of social activity compared with overall trading success.
We compared the win ratio which is the percentage of profitable trades from the total amount of trades and average profit per trade. We can see that copied trades had both better success rates and better average profit.
In the first months since launching of the CopyTrade and CopyTrader™ function on eToro OpenBook we saw an improvement in the win ratio (profitable vs. unprofitable trades) of 8%-12% in all of the copy trading activities.
Furthermore we saw a strong improvement of tens and up to hundreds of percentage points in the P&L of traders and investors using the copy trading features on eToro OpenBook.
We suspect as social trading builds momentum and becomes a bigger precentage of the overall pie, the gap will contine to close. In the first few months since CopyTrader was launched, some experts have built a following of several thousand traders and the numbers keep growing. As experts gain more experience and a build a larger following, their expertise will be leveraged even further pushing overall retail performance closer to that of instutional investors.
The biggest advantage of social trading, is that success is not only measured in terms of finanical gain, but is also documented, tracked and shared so that others can learn and benefit from the specific trading strategies and techniques. The accelerated learning curve raises the bar on trading performance and makes forex trading a more trusted part of a retail investor’s portfolio.
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