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Social trading is one of the buzz words floating around the FX industry at the moment, with almost every brokerage clamoring to attract new traders by promoting the social side of trading. Many however question whether social trading is not just a gimmick aimed at attracting people to deposit money with brokerages. This view seems somewhat understandable as it appears that Social trading products are much more attractive to individuals who have less technical knowledge of Forex trading. A number of social trading networks have popped up over the last couple of years and currently the three biggest social trading networks are ZuluTrade, eToro and Tradeo. A couple of months ago, I decided to investigate the world’s biggest social trading network ZuluTrade in a bid to determine whether one could in fact make good returns from engaging in social trading.

The Experiment 

To determine whether social trading is a viable trading option, I began an experiment using a ZuluTrade demo account. ZuluTrade demo accounts use the feed of AAAFx the official brokerage owned by ZuluTrade’s parent company. So in theory an experiment using a ZuluTrade demo account should accurately model performance provided a trader chooses to deposit with AAAFx and not one of the numerous other brokerages supported by ZuluTrade.  I opted for a demo account balance of £5,000 as this seems to be the upper limit most retail investors will have available to them.

The next step was to pick the signal providers, ZuluTrade provides its users with ample statistics and information regarding the various signal providers active on the site. The only gripe with ZuluTrade in this regards is that the ZuluTrade ranking system doesn’t do a particularly great job of placing the very best traders at the top of the rankings. However, if one is willing to trawl through the ample information offered regarding the various signal providers it appears possible to pick out a number of good signal providers. This makes operating a ZuluTrade account more akin to being a fund manager than a trader as practically all the tough decision making regarding opening and closing positions is taken out of your hands.

ZuluTrade back test performance

I proceeded to pick the four traders who appeared the most promisng according to my analysis. After having done this I ran a back test and according to ZuluTrade if I had placed £5,000 with these four traders back in 2010 by now in 2013 my account would have grown to a very impressive £10,000. Such a return far exceeds what you would expect to get from many alternative investments.

I set my self the following rules for the experiment:

  • After picking the Signal Providers, I would not change my choices. 
  • After setting up the initial risk settings, I would not alter the settings throughout the experiment.
  • I would not manually close any of the signal providers positions, even if the positions were heavily in the red.

I implemented these rules to determine whether one could make a good return with minimal management of their account. It is often claimed that ZuluTrade allows inexperienced individuals to make significant returns provided they pick the right signal providers, and I wanted to put this claim fully to the test.

The Results 

Performance chart
  • After 14 days, the £5,000 account was up by £250. A very impressive 5% return.
  • After 21 days, the £5,000 account was up  by £458. A very impressive 9.16% return.
  • At the end of the month, the account was up by £480. For a total return of 9.6%.

Analysis of the results

On the face of it, these results appear exceedingly impressive, achieving a near 10% in a month is not something to scoff at. So it does appear at least possible to make some pretty good returns from simply following the correct signal providers on ZuluTrade. However, it is not really quite as simply as it would appear and I have a number of concerns regarding whether such results could be repeated.

My Concerns 

  • In the particular month I run my experiment. Two of the signal providers chosen by me put in astonishing performances and were among the best performing signal provided that month. It appears that I may have been very lucky in my experiment. 
  • The other two signal providers performed significantly worth. One contributed a mere £18 of profit by the months end, while the other signal provider had made a small but significant loss. This shows that while you can make money from ZuluTrade there is certainly a high degree of risk involved.
  • I spent a rather long time picking my Signal providers and despite this fact. I only managed to pick two Signal Providers who provided me with strong performances. It seems likely that unless someone is willing to considerable research in deciding which Signal Providers to pick, ZuluTrade might not be for you.

Conclusion

It is certainly possible to make decent returns from ZuluTrade. However, using the ZuluTrade platform also involves significant risks and could lead to some incurring significant losses. As with all forms of trading, social trading involves significant risk. I would suggest that those who are interested in trying out social trading at ZuluTrade first open a demo account. If users are significantly impressed by the platform and it’s signal providers during the demo period, they should cautiously consider opening a real money account. While remembering not to risk money they can’t afford to lose.

2 thoughts on “Does Social Trading Work? : An Experiment With ZuluTrade

  1. Do you think perhaps a ‘demo’ account is not a true test? I’m assuming with a demo account they just apply the same trades exactly as the trader being followed has done them. But under a live account, your trades will probably not match the traders account exactly due to the delay in receiving the data and executing the trade?

    1. Correct, Brandan – our resources only permitted us to test it in the demo account for the moment, but you are absolutely correct.

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