What is Social Trading?

What is Social Trading?

 

 Looking to dive into the markets, but not sure where to begin?

Social Trading makes it simpler, as Investors can copy trades made by experienced traders while both earn from profitable trades. With an impressive suite of tools, control over your investments are firmly in the palm of your hand.

Here’s more:

 

The Investor 

An Investor uses the Social Trading service to browse and choose experienced traders (known as a Strategy Provider) to copy trades. The Investor will join a strategy, set up by the Strategy Provider to track their trading performance. 

 The Strategy Provider (Trader) 

A Strategy Provider is an experienced trader aiming to execute profitable trades that investors replicate. The strategy is the presentation of the Strategy Provider’s performance, measuring return and risk. When a Strategy Provider’s strategy makes a profit, they earn money on their trade as well as receive commission (between 0%-50%) paid by Investors at the end of a trading period. 

How does copying work?

How does copying work?

 

 Copying is a process through which strategy provider’s trades are copied to the investor’s account, after factoring in a copying coefficient.

Let us look at two scenarios an investor may encounter:

An investor can start copying a strategy even when the market is closed (up to 3 hours before the market reopens). In such cases, the orders will be copied at the last available market price. Read this article for more details.

1. Start copying without open trades:

Investor chooses to invest in a strategy which doesn’t have any open trades at the moment. Once he clicks on ‘Open a new investment’, the system calculates a copying coefficient. When the strategy provider opens a trade, the trade is immediately copied to investor’s account at the same opening price.

If the strategy provider opens a trade of 1 lot, and the calculated copying coefficient is 2, the trade will be copied as 2 lots on the investment account.

2. Start copying with open trades:

Investor chooses to invest in a strategy which currently has some open trades. Once he clicks on ‘Open a new investment’, the system calculates a copying coefficient. In this case the copying coefficient is calculated differently because it also involves the strategy provider’s open trades’ spread cost.

Trades already open are copied onto the investor’s account using the current market price which may be different from the opening price of the trades on the strategy provider’s side.

If the strategy provider opens a trade of 1 lot, and the calculated copying coefficient is 2, the trade will be copied as 2 lots on the investment account at current market price.

3. Subsequent copying:

When the strategy provider opens new trades, they will be immediately copied onto the investor’s account using the same opening price as that of the strategy provider. The copying coefficient used for calculation is the actual copying coefficient which is calculated and updated according to these rules.

If the strategy provider opens a trade of 1 lot, and the calculated copying coefficient is 2, the trade will be copied as 2 lots on the investment account at the same price as that on the strategy provider’s side.

How is the copy ratio for a strategy calculated?

How is the copy ratio for a strategy calculated?

 

When Investors copy the trades made by a Strategy Provider (SP), they typically trade at different volumes; so how does Social Trading know how to proportionally calculate the result? That’s what the copy ratio is designed to do.

The copy ratio or copy coefficient is the ratio of the investment equity (provided by the Investor) to the strategy’s equity (provided by the SP). This is used to calculate how many lots are to be accurately assigned to Investors based on their investment.

Copy ratio or copy coefficient never increases after the start of investment regardless of any deposits/withdrawals on the strategy account, and is not affected by the end of the trading period.

Calculation formula

Copy ratio (K) = equityinvestment / (equitystrategy + sum (open_orders_spread_cost))

• equitystrategy - strategy account equity
• equityinvestment - investment account equity
• open_orders_spread_cost - strategy orders spread cost at the moment of the copy action. Current market prices are logged immediately upon initiation of the copy action.

When the strategy has no open orders open_orders_spread_cost will be set as 0.

In scenarios when a copy ratio has to be recalculated, the maximum copy ratio is set at 14.

The copy ratio has been formulated to be as clean and accurate as possible. Investors can trade with ease of mind knowing that how much they put into their investments is proportionally paid out when they profit.

Read more about how copying works to see the copy ratio in action during the copying process.

What is a trading period?

What is a trading period?

 

 The trading period is a timing cycle used to measure performance of a strategy within a specified period of time in order to accurately record commission. The trading period covers a calendar month, and ends on the last Friday of the month (23:50 UTC+0 to 23:59:59 UTC +0) with a new trading period opening immediately after.

What happens at the end of a trading period?

1. Investor orders are closed.
2. If these orders were profitable, a commission fee is deducted and copy ratio is recalculated. If these orders were not profitable, no commission fee is deducted but the copy ratio may still be recalculated.
3. All orders closed in step 1 are reopened with zero spread and the recalculated copy ratio.

Orders are closed and reopened during this process to record commission and calculate the copy ratio. Reopened orders can be found in the Copying orders area of the Social Trading app with a note providing context for the order’s reopening.

For more information, we recommend that you read about how commission is calculated, as it is paid out only at the end of a trading period.

What is social trading commission?

What is social trading commission?

 

Social Trading commission is a fee that an investor pays to a strategy provider for profitable investments. With Social Trading, strategy providers pre-define a commission rate at which investors are to share their profits for the copied strategies.

For example:

If an investor makes a profit of USD 1 000 on an investment and the commission rate is 10%, he will be charged USD 100 to be paid as commission to the strategy provider.

Social Trading commission is credited to a Standard trading account automatically created in the strategy provider’s Personal Area for this purpose. It is called the Social Trading Commission account and these funds once credited can be used for trading, withdrawals, or for transferring to other accounts.

The commission rate set by a strategy provider can be adjusted later. However, the new commission rate will only be applied to newly opened investments; existing investments will remain unaffected.

How is drawdown calculated?

How is drawdown calculated?

 

 Drawdown measures a single consecutive loss from the highest point of equity to its lowest point, ending as soon as profit is earned. Maximum drawdown is defined as the largest measure of drawdown during a time period and/or since the creation of the strategy.

Larger maximum drawdowns likely signal a higher risk for losing capital.

Drawdown is calculated based on cumulative return changes; as cumulative returns are based on equity, drawdown calculations include closed and open orders.

Drawdown is displayed in the strategy overview and clicking on the information icon will show you a small description of the parameter.

Note: Drawdown data is updated every hour.

The maximum drawdown formula

Max drawdown metric is generally calculated as such:

Drawdown 1 = (equity at the end of the drawdown 1 - equity before the drawdown 1)/equity before the drawdown 1

Drawdown 2 = (equity at the end of the drawdown 2 - equity before the drawdown 2)/equity before the drawdown 2

Get maximum from drawdown 1 and drawdown 2

An example of maximum drawdown

Let’s take a look at this formula in action:

The vertical metric shows strategy equity, while the horizontal metric shows the steps outlined below.

1. A strategy had a starting equity of USD 1 000.
2. The strategy provider earned USD 200 in profits, so the equity became USD 1200.
3. The strategy provider withdraws USD 200, setting equity to USD 1 000. Deposits, transfers, and withdrawals do affect equity, but are never included in drawdown calculations.
4. The strategy provider incurs loss of USD 300, so equity drops to USD 700. This begins a drawdown movement.
5. The strategy provider incurs further loss of USD 500; equity is now USD 200 while the drawdown continues.
6. The strategy provider earns USD 900 profit, bringing equity to USD 1 100.

The drawdown movement ended with equity at USD 200, as strategy experienced profit from this amount. The first drawdown is calculated USD 200 - USD 1 000) / USD 1 000 = -80%.

7. The strategy provider incurs a loss of USD 200, bringing equity to USD 900 beginning another drawdown movement.
8. The strategy provider incurs further loss of USD 300, making equity USD 600 and continuing the drawdown.
9. The strategy provider earns USD 600 profit, bringing equity to USD 1 200.

Again, profit ends the drawdown movement. The second drawdown is calculated USD 600 - USD 1 100) / USD 1 100 = -45.45%.

The first drawdown was -80%, bigger than the 2nd drawdown of -45.45%. Therefore the maximum drawdown for this strategy is -80% during this time period.

Please note: as maximum drawdown is a percentage, it is limited at a maximum of -100%.