All you need to know about ‘shadow trading’

I have noticed a number of brokers popping up all over the internet promoting “copy trade” or “shadow trading”.

Robby P.

Some of you may have heard of or seen what I am talking about. But what is it exactly?

The general industry accepted term is “social trading”, which describes exactly what it is.

Shadow trading, or copy trading, is a method of trading in short-term financial markets where you, the client, selects a master trader or traders to follow.

These trades are then fully automated.

So when the pro hits the button, your account will trade in the same relative size.

What this means is that even if the master trader has an account of R500 000 and you only have an account of R50 000, if he risks 5 per cent of his cash on a trade, you will automatically only risk 5 per cent of your capital.

It’s a rather clever system.

The “master trader” or lead trader does not have access to your account; it is simply an automated trading instruction to “do exactly what he does”.

I quite like the concept. In fact, many of my clients are jumping on the bandwagon because they either do not have the knowledge or the time to trade on their own.

The most important thing to note here is that you need to understand the risk.

If the so-called professional loses money, so do you.

He cannot be held responsible because, technically, you chose to follow him.

For someone who wants to take some risk with very little trading knowledge, it’s probably a good option because you can automatically follow a winning trader. In fact, you can follow multiple professional traders.

What I see as a benefit is the fact that you don’t need in-depth knowledge of shares, CFDs, forex, indices, or commodities.

You don’t even need knowledge of online trading platforms, systems or even know how to trade at all.

Interestingly, a recent research study conducted by Dr Yaniv Altshuler of the Massachusetts Institute of Technology, an expert in collective intelligence methods, found that copying a suggested master trader fared 10 per cent better than those trading individually and without guidance.

Now that might not sound like a lot but let me assure you, when it comes to short-term trading, any odds that are tilted in your favour are good odds.

Social trading is fully automated, which means your account will automatically copy each trade executed by the master trader without any effort from your side.

This type of trading does not guarantee that you will make money but it assists in avoiding the mistakes that beginner traders make.

You are copying a professional, after all.

Bear in mind, though, that even professionals lose money. But what I like about the concept is that if the “master trader” you are copying does not perform, you simply hop to the next guy.

Now, as I mentioned in a previous piece, you need to be cautious when selecting a broker, and social trading is very different from investing. This is not an investment solution, but if you are someone who likes to “have a punt” but don’t have the necessary skills, this is a pretty cool way to get involved.

Just make sure you choose a good service provider.