How social is social trading?

In the last decade, the forex market has gained popularity with both traders and investors. Together with the increase of participants in this multitrillion world, new forex businesses popped up like daisies. Not only brokers, but also traders (like myself) started their own adventure to get a piece of the pie. There is nothing wrong with that. However, for both traders and investors there are some huge pitfalls that may lose you a lot of your hard earned bucks. In this article, I will elaborate on that and try to tell you how you can prevent being on the losing side and increase your capital, year after year.

 

One of the recent phenomenons is the upcoming of social trading, pamm/mamm, fund management,… firms. There are some differences between all these businesses, but their core idea is the same: one trader, or a group of traders, has the knowledge to trade the forex market with a profitable strategy. They ‘sell’ this strategy to investors, in return for a fee on the profit (and/or management fee, commission on volume,…). Of course this a great idea. But unfortunately, most of these busines models are a pure scam. Mostly they convince investors with fake statements or beautiful websites. Simply search facebook for 5 minutes and you’ll discover they are all over the place…

 

To avoid being ‘scammed’ and be absolutely sure you allocate your capital to a real professional, I have come up with a checklist. If one of the points below is not checked, it’s possible you are dealing with a scammer. This is also the list I used to prove to investors my statements and my skills are real. Here it comes:

 

The most important checklist for everyone who wants to invest in other forex traders!

 

1) The track record has to be verified (!) by an independend 3rd party (!).  This is absolutely the most important rule. People/firms posting print screens of (metatrader) statements on their website or social media without verification of a 3rd party are absolutely not to be trusted. Anyone can manipulate print screens easily. The most reliable and common verification firms used are businesses like myfxbook or the broker I use. I decided to use both. Also, it’s important that both trading priviliges and track record are verified! (So print screens of MyFxbook are not enough!)

 

2) Your capital has to be kept with a regulated (!) firm with a reliable regulator, preferably in a seperated account. If a firm is regulated, it means it has to apply certain rules to keep your capital safe. Of course not all regulators are the same. For example, the FCA (regulator in Great Britain) is considered to be more strict then the Cysec (regulator in Cyprus), which means allocating your capital to an FCA regulated broker is probably safer. If your capital is kept in a seperated account, it means that it’s safe, even if the business goes bankrupt.

 

3) Stay away from websites like eToro, Zulutrade, IB’s or other commission based businesses. Traders are incentivized to trade more and riskier because they are rewarded for the volume they generate. Go for traders or businesses who ask you to pay a fee on the profit (with high watermark).

 

4) Make sure the trader or the fund trades with real means of their own. Otherwise they can just gamble away your capital. Preferably part of their fees have to be reinvested in the fund.

 

5) The track record has to be significantly long. The longer the track record, the bigger the possibility luck was not involved in the process.

 

Of course this checklist isn’t only meant for people who want to invest in forex traders. Every trader who wants to attract investors, should use this. Especially big investors will use these criteria to tell wether you are a true professional or not. If you want more information, simply take a look at my website and see how I managed to pitch investors’ capital, using the criteria above.