According to a report by the Bank for International Settlements (BIS), about 75% of traders have lost money on their investments in cryptocurrencies. For most of them, this was due to inexperience and a lack of social trading tools since it takes a long time to really understand the intricacies that make any financial market work.
Crypto trading is even more complicated because there are just so many moving parts. Between the intra-day volatility to the market news, social media updates, financial regulation, and so much more, it’s difficult for most people to correctly predict which directions the market will take from one minute to the next.
Fortunately, several platforms exist that allow traders to share their knowledge and create a collective source of reliable information. These platforms have also developed social trading tools to improve the process so that you can enhance your performance with their use. Once you learn what these are and how to implement them, you should notice an uptick in your returns or at least a reduction in your losses.
Leaderboard and risk score
One of the most important social trading tools is the leaderboard because it’s where you get to pick which traders to imitate. Every copy trading platform has a dashboard listing all traders from whom you can copy and an additional leaderboard with the names of the top performers. It therefore provides a quick overview of what you can expect to gain from each trader along with more information about them.
From the above snapshot of eToro’s CopyTrader, you can already identify the top traders to copy and the rate of returns over a 1-year period. All these parameters can be altered and refined to your particular preferences and goals with more options under the Advanced filter such as a particular market you’re interested in trading.
Of particular interest, though, is that each trader is rated with a risk score ranging from 1 – 7. This indicates the risks associated with a trader’s strategy and how secure your capital would be. For instance, the above trader has a healthy risk score of 3 because they are trading multiple markets and have thus hedged against risk. These are the kinds of qualities to look for and can be aided to find thanks to the leaderboard and risk score.
As the saying goes, never put all your eggs in one basket. This is also true when trading the financial markets because you wouldn’t want to lose your entire capital when the markets go sideways. Even the most experienced and competent trader will sometimes go through a losing streak resulting in huge losses hence why you should only allocate a portion of the capital.
From the above example, you can see that you’re in full control of how much capital to allocate using social trading tools. It’s also possible to dictate how much you’re willing to lose with the general rule of thumb being a maximum of 5%. However, we have selected 10% in this case because the decision will ultimately come down to how much risk you can take.
In our case, the decision for taking a higher risk was based on the volatile nature of the crypto market. A very low risk ratio could have triggered a stop-out if prices fluctuated violently downward. When trying to make the decision yourself, always take all factors into consideration and remain flexible to adapt when the market changes.
Even after finding the right trader for you to copy from, you may have to create the trade orders yourself unless you can add automated trading to your list of social trading tools. The purpose of this feature is to automate social trading so that it can keep running even when you are away from your trading desk or mobile device.
NAGA is one of the top social trading platforms in the world with a global community of more than 1 million registered users who share their investments. Using ‘Autocopy’, you can now copy any of these traders’ orders in real time without any direct input. It should allow you to keep earning a profit even when you’re at work or otherwise busy.
Unfortunately NAGA is not available in all countries so you may need to find an alternative such as eToro especially if you live in the US. Other platforms may also offer various social trading tools as well but it’s always recommended to use one you can trust to avoid becoming a victim of scam brokers.
Backtesting social trading tools
How do you know that a particular trader’s strategies are effective? There are only two ways to do so and fortunately they are both available social trading tools among the best copy trading platforms. Backtesting simply means applying a trading strategy to previous market data to determine how effective it would have been if activated during that time.
Trading platforms like MetaTrader allow you to backtest a trading strategy easily like you can see above where a MACD trading strategy is being tested. With an account from an online trading platform like ZuluTrade which also offers social trading tools, you can use MetaTrader to confirm its effectiveness.
Here, we have selected a 1-year period for the EUR/USD currency pair and a deposit of $10,000. The results were dismal with a gross loss of nearly $240 meaning that the strategy is not profitable. Of course it’s possible to perform a more in-depth backtest of the strategy with more data but this was just a quick demonstration.
An alternative to backtesting is trying out available social trading tools in the current market conditions without taking the risk just yet. This is referred to as a demo account which basically provides the same trading experience as the actual markets except that you’re using virtual funds and not your real capital. You can switch to a demo account on eToro by clicking on ‘Switch to Virtual’ from your account dashboard.
The eToro virtual account gives you $10,000 in virtual funds to use for both manual and copy trading. And since there is no risk to your real capital, you can freely try out various social trading tools without fear. From there it’s a simple matter of setting your parameters and letting the system run.
As mentioned at the start of this article, a majority of traders lose money when trading financial markets in particular cryptos where only a few are familiar with it. Knowing this, the solution seems obvious, right? Just simply do the opposite of what most people are doing and become one of the few making money. This is what reverse trading is all about, and it can be an essential strategy you can use.
The trick, and the most difficult part, is to determine what a majority of traders are doing so that you can do the opposite… unless you have the right social trading tools. Using a platform such as MetaTrader can make this very easy and efficient. An easy tool involves an expert advisor (EA) or algorithm installed on the platform that simply initiates an opposite trade than the one received from the trading signal.
Such an EA can be found on MQL5 or another platform and copied directly into MetaTrader. For example, when a buy signal is received, the EA will create a sell order essentially performing the reverse. Just remember that you will still have to pay trading fees either as commissions or spreads and take this into account.
However, you can also do this manually by checking ‘Depth of Market’ data on the trading platform. On MetaTrader, this is found by right-clicking the ‘Market Watch’ window and selecting the option. This will reveal other traders’ sentiment that you can use for reverse trading. In the above image, you can see that the market is bearish and that you should consider a buy order.
Yet another trick is to simply read other traders’ opinions on online blogs and forums. But because not all of them can be fully trusted for their opinions, you should only trust reliable sources such as the ‘Discussions’ tab on eToro where anyone can voice their opinions. Using these, take the opposite direction and trade the reverse.
One of the golden rules of investment is to diversify your investments to avoid huge losses when one aspect of the market fails. For example, while the S&P 500 lost 19.4% over the course of 2022, crypto markets were down over 60% during the year!
Therefore, any trader who had all their investments in crypto saw their capital dwindle, but the one with investments in both markets had a slightly better experience. This is referred to as hedging, and given its importance you will need social trading tools that take this into account too.
When you use a platform such as eToro, you will find the most innovative social trading tools in Smart Portfolios. Although most of these portfolios are generated automatically based on your interests, you can also find many that have been created by other traders. This kind of social trading can not only protect your capital but also teach you how to manually diversify your portfolio later.