>>> Expected norm
“Above and beyond that, though, we have to also consider the general social pattern,” continues Forman. “People today readily connect via social networks, as we can see from the growth of the likes of Facebook. T is is particularly true of the younger generations who are now moving into the markets. It’s natural that they would want to take the social network experience they have in their personal lives into the trading arena as well.”
Lior Nabat, CEO at Tradency, agrees that social networking is now the expected norm, for both work and play: “A reason that has made social investing so successful is related to the fact that people today are spending more and more time online in general, and specifi cally in social networks. People are used to sharing their experiences and ideas on their everyday lives, and it is only natural that this will have some eff ect on the way people trade as well.”
John Forman
Tradency runs one of the top social investment networks in the world and Nabat says the rapidly growing appeal and value proposition of social investment networks continues to grow amongst retail FX traders and investors because of human nature.
He explains: “People feel more confi dence when they have social proof of their actions. When we are making decisions, it always helps to know what others are doing in this situation. It is the same with trading; when we are thinking about entering a trade, it helps to know if other traders are entering a trade at the same time.”
Being careful
However, Javier Paz, senior analyst in the wealth management practice at Aite Group, states that while these services have been gaining more attention, social trading is a powerful value proposition but only provided that it is implemented with safeguards. He says there are some key elements that need to be present in an attractive copy trading solution, and not all proponents of social investment networks possess them.
Paz elaborates: “First and foremost, the screening of the trade expert to be followed has to be thorough. If a reported trade expert is compensated for trading volume, then his incentive is to generate volume and not necessarily to produce profi tability for those who follow his trades. T ere are also brokers who allow anyone in a social investment network to copy another member who, on the surface, appears talented; I call this
“I personally think that social platforms that are based
on real money activity among the members, as opposed to demo trading, have considerably more to off er. T ey create a much higher degree of focus and transparency between and among participants.”
social investing 1.0. T e social investing 2.0 concept is more along the lines of fi ltering those who can be followed and having a certain easy process for selecting a trade expert,” Paz continues. “But there are also pitfalls in the 2.0 model. T e lack of proper screening of the trade leader produces inconsistent results for diff erent trade followers, and exposes these investors to situations where the trade expert is having a bad day, or is risking too much, or simply does not have a proper risk management system that they strictly follow. T e solution is simple; screen would-be trade experts so they demonstrate consistent trading success over a period of months on a live account, while keeping sound risk management principles.”
Paz goes on: “Secondly, a trade copying service should try to foolproof the experience of trade followers, essentially assuming they know little or nothing about trading or investing,” Paz adds. “T e trade follower should not be asked to set lot sizes or leverage levels, as these terms require a fair amount of familiarity with trading. Copy-trading done the right way is a brand, a brand that tries to reproduce a successful trading experience for most investors in a consistent manner.”
april 2012 e-FOREX | 173
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