Forex is one of the world’s biggest trading opportunities. The foreign exchange market is expected to be worth more than $110 billion this year, making it a tremendous opportunity for retail investors, particularly those interested in social trading. eToro’s OpenBook social network is among those providing live updates on other traders’ trading activity (strategies, positions and profits) enabling investors to see, interact with and copy the best financial traders.
If you want to take advantage of the benefits social trading has to offer you’ll need to know how to spot which traders to follow and copy. These are our top 10 tips to help you do just that.
1. Find the right risk level
If you want to succeed as an online trader then you’ll need to develop a trading plan. This requires determining the right risk-reward ratio for you as well the length of time you want to trade over – short term or long term. Once you have this figured out you’ll need to decide on the amount of leverage to use in trades, which is the key decider of trade risk. If you are interested in long term trading at low risk then you’ll want to use a low leverage level in your trades, if you want first trading and fast returns then a higher leverage level will be more appropriate for you.
2. Organize traders by their risk level
If you’re looking for other traders whose trading style and behaviour matches your own then you should seek to identify traders through their approach to risk and the length of trades which they execute. The best short term traders, e.g. one week traders, tend to open high risk trades whereas the best long term traders, e.g. one year traders, tend to open high risk trades.
3. Focus on the assets you want to trade
In social trading it’s possible to restrict your choice of financial experts to traders who are trading the assets which you enjoy trading e.g. Gold or the Japanese Yen. If you’re searching for a pro trader to be your “guru” you can limit your search to traders trading these same assets. Alternatively, you can simply trust in the wisdom of your chosen guru trader and follow their trading decisions, regardless of which assets they choose to trade.
4. Investigate your guru’s following
Gurus who can boast a greater number of followers are more likely to offer consistently high performance than those with a smaller base of followers. Make sure you investigate your guru’s record extensively before committing to following and copying them. You can do this by examining the number of followers the guru has as well as their individual success rates.
5. Examine your guru’s trade portfolio
It’s important to keep a check on the trading strategy of your preferred guru(s). Just because a traders adopts a long term trading strategy it does not mean that they can be considered a low risk trader. You should check the type of assets a trader is trading and seek to ensure that their portfolio is sufficiently diversified, a trader invested in just one asset can ultimately prove to be high risk.
6. Compare and contrast market leaders to keep a check on your gurus
A great tip for keeping tabs on your guru’s trading choices s to keep comparing how they match up against other traders who made similar investments at around the same time. That way you make sure that they are actually outperforming the competition.
7. Investigate your guru’s P&L
Keep a close check on your chosen gurus’ profit and loss rates and their general trading performance. Make sure to check multiple time periods, up to one year so you can see how consistent their success really is. By researching in this way you can work out where their strengths as a trader lie, which will tell you a lot about when and how much of your funds you should trust to investing in them.
8. Pick a guru with local insight
“Go with what you know” is often good advice in life. By picking guru traders who speak your language and live close to you, you are more likely to understand the online trading decisions they’re making which can be a big help. Also, picking a guru who lives in your time zone should make it easier for you to keep tabs on their trading decisions. Another good strategy tip is to pick a guru who has particular insight into the assets you are most interested in trading e.g. a trader living in Japan is likely to have more knowledge of the Japanese yen than traders living in other parts of the world.
9. Find out how communicative your guru is
Before settling on a guru it’s good to see just how much effort they make to communicate with followers. A guru who is making more effort to interact with followers is likely to be a better choice than one who has limited interested in sharing their trading tips.
10. Spread your risk by investing in multiple gurus
Investing in a variety of different gurus rather than focusing on just one is a good way to diversify your investment portfolio and spread the risks in your trading. Choosing at least 5 different gurus to invest in is a good way for investors new to social trading to get started because it prevents catastrophic losses from one guru’s mistakes from obliterating your account balance.