Social trading networks are weaving techniques for analyzing investor sentiment into their platforms, which connect investors and traders via Twitter and other social media, as well as private networks.

By linking traders from all over the world into one giant network, social trading empowers traders to use each others skills to trade smarter together, and that collective wisdom can in theory take trading to a new level.

eToro, which operates a community powered network that enables investor to follow and automatically copy the actions of other investors in real time, passed the milestone of 50 million trades by its users, and the network grown to more than 2.75 million users.

Individual users benefit from the collective knowledge and experience of the crowd. Indeed, 32 million (64%) of the trades were copied trades, in which one user copies the trade of another.

“Our users share a common financial goal and help each other to achieve it,” said Yoni Assia, CEO and founder of eToro. “This is best reflected by the readiness to copy the trades of any other user in the network.”

Traders with a large number of users copying their trading activity are adapting their trading strategy from high risk to medium risk and lower. “This is what we describe as the responsible social trading phenomena,” Assia said. Evidence to this conclusion can be also found in the fact that 80% of all traded positions have been executed with medium risk, and held for an unexpected average of 13 days.

While many online brokers allow investors to share a trade with the trading community, several social community tools that are conducive to the trading experience have yet to be integrated into a trader’s workflow or trading screen, according to a report by research firm Celent.

For example, although investors often have tools within the trading screen to analyze investor sentiment, they must toggle to private trader community screens in order to view the private community’s sentiment. Celent expects online brokers to begin exposing trader network sentiment directly within the trader platform.

Further, while investors can choose to follow certain users and view their recommended stocks or trades, this information is contained within the investor community pages. Deeper integration also means that when an investor searches or finds a symbol, he can see those symbols recommended by the investor he is following within the trader platform, according to Celent.

MIT Media Lab researcher Yaniv Altshuler, an expert in collective intelligence methods, has developed a tool for social financial trading that helps guide users to make better decisions by improving the information flow within the networks.
This is accomplished by diverting the traders’ attention away from certain links, and drawing their attention to others, changing the dynamics of the network.

Working with the eToro investment network, Altshuler distributed $20 trading coupons to 500 active financial traders out of the more than two million eToro members. Matches between traders and recommendations were based on an innovative algorithm designed to optimize information flow within the network.

Even this small number of coupons was enough to move the entire network away from dangerously high levels of “groupthink,” and as a consequence, the entire trading community–not just the 500 coupon users–saw a significant increase to their rate of return.