According to a new study, there are expert traders on social trading platforms, but the vast majority of inexperienced investors mask them.
Since the financial crisis, social trading has emerged as one of the most current modernizations in the interface between information technology and financial applications. The trading methods of other investors can be manually or automatically mimicked by users of social trading platforms. On the platform, traders may see the trades that other investors have made and copy the ones that catch their attention. Because of this, companies that offer social trading platforms let investors use them in one of two ways:
They can decide to make their investments public so that other investors, known as signal followers, can imitate their investment approaches and serve as signal providers.
They can decide to adopt other investors’ investment techniques and behave like signal followers.
One of the biggest social trading platforms in Germany provided the data.
The study investigates whether copying the financial methods of signal providers is profitable for signal followers. In this way, it may be determined if social trading users are savvy investors in the sense that they can afford the expenses associated with their trades. An exclusive data collection from ayondo, one of the biggest German social trading sites, is looked at for this purpose. By taking long and short bets, investors can trade CFDs for a variety of instruments. A bootstrap analysis is used to distinguish between expert and unskilled investors in order to identify investor skills.
Signal provider investments should be made cautiously.
When the investment expenses of signal followers are taken into account, the data demonstrate that social trading investors perform much worse overall. All signal providers up to and including the 70th percentile cannot produce positive returns when these costs are taken into account. The program does, however, also identify some social trading investors with the necessary expertise to reliably cover their costs and even to generate positive profits. The study shows that while investment in signal providers should be done carefully, some signal followers may gain from it.
The entry restrictions for investors should be raised on social trading platforms.
The study raises questions for social trading platforms because it shows that, overall, picking the incorrect signal providers could lead to significant losses. The entry restrictions for social trading investors should be raised, according to social trading platforms. They would improve the signal providers’ degree of expertise on their platform by doing this. Additionally, this improvement in competence can serve as a strong inducement for other signal followers to join the platform. Signal followers, however, currently need to use extreme caution when selecting their signal providers, or even better, they shouldn’t deposit any money at all on social trading platforms if they are unable to recognize skill.
The study demonstrates that the majority of signal providers do not produce positive net returns for signal followers, in conclusion. As a result, those who follow signals should exercise extreme caution while using social trading platforms.