A new social network based approach shows improvements in trading performance. Although retail trading is more popular than ever and the numbers of both trades and profits are on the rise, institutional investors still rule the field when it comes to long term gains.
Why the gap?
Access to information seems to make the biggest difference. The institutional trader is privy to faster incoming information that is shared in larger volumes across financial firms. Your average Wall Street trader is constantly connected to Reuters and Bloomberg where economic events are updated every 2 milliseconds. Firms like Goldman Sachs employ hundreds of staff members to analyze the market on a daily basis and spread the information within the company.
Unlike the corporate investor, the retail investor faces a lot more challenges on his quest for information. Despite the huge volumes of data and analysis that are available online, retail investors find it difficult to select trustworthy sources, and sift through the ocean of available information to find what is relevant to them.Moreover, when it comes to choosing a theoretical model on which to base fundamental analysis, it takes specialized knowledge to determine which one to use out of the dozens of models out there.
For example, institutional investors monitor interest rates very closely because they have the most immediate impact on currency prices, and yet most retail investors are unaware of its importance, or even its existence in some cases.
Wisdom in Numbers
Social trading adds a new dimension to currency trading. By allowing retail investors to share their information and expertise, it bridges the traditional informational gap between retail and institutional traders. It also offers unprecedented transparency regarding how their money is invested by providing real time data feeds of trading activity and access to experts with whom to discuss investment strategies.
A large active investment network contains a wealth of financial information that is shared by its members who come from all over the globe and from all walks of life. This rich diversity of investors creates an enormous data base of investment advice that is automatically sifted through the various social ties between the members.
Traders have been quick to recognize the benefits of such a large and diverse knowledge base and as a result social networks are growing quickly and teeming with ever increasing activity.
Many believe that the recent popularity of social networking has already lead to bigger trading volumes. The online research firm Data monitor reports that over 50% of consumers today are making their financial decisions using online financial tools.
Since the launch of our social trading network, over 60% of our customers(eToro) take the opportunity to consult with expert traders and follow their trading activity, proving that social trading networks are changing the way people trade by enabling communal sharing and collaboration online.
It’s this collective wisdom that provides traders of all levels of expertise with valuable information that in turn allows them to trade smarter together.
How does it work?
The great thing about healthy and active social networks is that they are self-regulating, which means that exceptional traders will automatically rise to the surface. Social networks make it easy to identify traders with high success rates and overall gains, and sort them according to various factors such as the instruments they trade, or the risk they take. Once a potential expert has been identified, traders have access to detailed trading statistics with charts and graphs that enable them to analyze individual performance in much the same way that one analyzes the prospectus for any kind of potential business investment.
In addition, the social network adds a dimension of social indicators which can be used to determine if a trade is advantageous to follow according to their number of followers and the number of people actively copying their trades. Factors such as a trader’s degree of interaction and responsiveness within their circle of followers give a further glimpse into a trader’s personality, performance and trading style.
Social trading has the power to transform financial investment into the creation of people-based portfolios by enabling traders to copy each other and to divide their investment capital among several traders. This portfolio lowers the trader’s overall risk and is very easily manageable according to performance.
Bridging the Gap
Recent analysis of financial investments online shows irrefutable evidence that following copying expert traders has a positive effect on trading performance. This evidence arises from a comparison study of the success rates of trades that were executed in the framework of social trading activity as compared with overall trading performance.
In this study we compared two factors: the win ratio, which is the percentage of profitable trades from the total amount of trades, and the average profit per trade. This comparison revealed that copied trades had higher success rates and higher average profit or lower loss per trade.
In the first months following the launch of the Copy Trade and Copy Trader™features on eToro Open Book, we saw an improvement of 8%-12% in the win ratio of all copied trades.
Along with this figure, we also saw a huge improvement that reached hundreds of percentage points in the profits of traders using Open Book's copy trading functions.
Based on these findings, we predict that as the momentum of social trading grows and appropriates a bigger percentage of the financial investment pie, the gap between retail and institutional trading will continue to close. Some our guru traders have built a following of several thousand traders within only a few months since the launch of our social network, and the numbers keep growing. As gurus gain more experience and a amass a larger following, their trading activity will have an even bigger impact on the retail market,lifting overall retail performance to the level of institutional investors.
Social trading’s biggest advantage is that any successful investment is not only reflected in the investor’s balance, but is also documented and shared among others, enabling them to reap educational and fiscal benefits from the original investor’s trading strategies and techniques. The accelerated learning curve raises the overall trading performance in the social network as the effects of one trader’s improvements quickly trickle down to its weakest members. Thus, as an entity, the social trading network has the potential to raise the bar indefinitely and to add stability to any retail investor’s portfolio.
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