Since the trading migrated online, the traders have been communicating on the online forums and other special services. Some traders teach their less experienced peers how to earn on trading, mitigate related risks, and build their careers in trading. This trend is known as social trading.
What Is Social Trading?
Have you ever heard about influencers? In our era of social networks, people can ignore annoying advertising, but they believe in famous bloggers and other Internet authorities with all their hearts. Day by day, ordinary people follow their idols on social networks. The commercialization of this belief was only a matter of time. Influencers transformed into powerful marketing tools.
The world of trading has its influencers also. For example, Elon Musk causes an earthquake on the financial market with his every tweet. However, the impact of the influencers on the financial market is not limited to Musk’s followers’ reactions.
What Is Social Trading in Forex
Forex traders are also people who do not exist in a social vacuum. They communicate with their peers for experience exchange and lucky vibes. Some young traders follow their successful colleagues, use their trading strategies and methods to repeat their success. This type of trading is called social trading.
How Social Trading Works
Social trading does not mean that someone else will take responsibility for your trading and your money. Of course, other traders can manage your forex investments: we have known account management on the forex market for many years. One trader can operate many accounts to accumulate a hefty sum for better profits. However, delivering your money to someone else can end with money loss for unknown and unclear reasons.
In the social trading system, every forex trader has full control of all operations and every investment aspect. A social trader can decide whom to follow, copy the deal or strategy, and where to start and stop.
For a new trader, social trading in forex is a less complicated way to start a career in trading. The return on investment can also be much higher than for any traditional method. However, it requires some preparation and a non-stop learning process.
What Are the Benefits of Social Trading?
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Easy start
While other types of trading require solid theoretical knowledge before entering the market, copying the experts is the best education for a new trader. -
Support from Community
As with every social initiative, social trading is built on the traders’ community, ties, and relationships. A newcomer can ask for and get informational and emotional support. -
Wisdom of the Crowd
Every newbie sometimes faces the moments when wise peer advice can save the situation. In social trading, a new trader has access to many peers and their wisdom at the challenging moment.
What Are the Disadvantages of Social Trading?
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Careless relaxation
Copying the strategies and deals of the most successful peers can make traders lazy. They just piggyback on another trader without the analysis and understanding of the system and no idea why a more successful peer is doing well. When a lazy trader loses, it is always a shocking surprise. -
Search of a role model
Not all successful traders want to be followed by their peers. Many traders, who pretend to be successful, hide some of their activities, deals, and outcomes. Following such a trader can be risky for a junior trader. -
Personal discomfort
Let us look at the problem from the side of a successful trader. Many of them find it nerve-wracking the concentration of attention on their activities.
The Difference Between Social Trading and Copy/Mirror Trading
Within social trading, the trader can vary the behavior and strategy. It is reasonable because copying just one trader is perilous. Using various strategies and models mitigates the risks.
Copy Trading
Copy trading is a business model of direct copying the deals. The copier opens the same deals as the experienced trader. Sometimes the copiers even set their trading terminals to repeat the deals automatically. This strategy is risky when unmonitored; you can read about the related risks below.
Mirror Trading
This model is more complicated because the follower copies not the deals but strategy, for example, plays against thread on the low market. Mirror trading requires a better understanding of the trading and can hardly be automated.
Is Social Trading Profitable?
There is no single answer to this question. Social trading can be profitable, otherwise, it could not appear. In many businesses, following the best player in the class is the shortest way to success. The same principle works in forex trading. It is relatively easy to make a profit following the trend.
However, trading is still a high-risk business. Financial markets are volatile, the situation can drastically change in several minutes, and many traders lose their investments. Do some research and read about the great market collapses. You will see the thousands of people who lose their money at once. Does it mean you should avoid trading at all and social trading in particular? Of course, no.
Any business is risky, less or more, and a failure can happen in any industry. Ex-president Donald Trump bankrupted six times! Do not forget there is a direct correlation between the risk and potential profit. You will never earn big money without risk.
Social trading is profitable, but you should evaluate your risks correctly and never invest money you cannot afford to lose.
What Should Social Traders Be Aware of?
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Poor management
In trading, each trader manages his or her activities. In social trading, young traders often forget to put some effort into trade management, particularly to analyze the strategies. It is a trap: blind copying of the deals will give no personal experience and result in money loss. -
Lack of portfolio diversity
In classic trading, portfolio diversity means investing in various assets: stocks, currencies, etc. In social trading, it also means following the traders in just one area. When one market collapses, a trader with a diversified portfolio can recuperate losses with other assets. -
Know who to follow
As we mentioned above, some traders pretend to be more successful than they are for various reasons. The ratings on the platforms can also be irrelevant: some traders make risky deals to move up in the rating. Young trading should understand that experienced traders are also people with weak and strong sides. One of them can be strong in long-term strategy; another one makes brilliant short-term deals. The forex trade copier should analyze the system and follow the best practices. -
No understanding of risk
Young traders rarely understand their situation is not the same as for their successful peers. A successful peer can afford the risky deal because of a financial safety cushion. When the successful trader can open a dangerous deal, they can afford a loss. However, the new trader without some saves does not evaluate the risk correctly. -
Timing
In periods of high volatility, the market fluctuations are rapid. While the copier repeats after the more experienced trader, the market changes. The slippage in a few seconds can cause a price change and different results. -
Scams
The scam appears in any profitable business. Sad but true. So, before investing your money, do detailed research. Use Google and in-built search engines on forums and websites to find more information about the traders you want to follow and platforms you want to use.
Conclusion: So, does Social Trading Work Then?
Social trading is a relatively new term in trading. Some skeptics even reject its value for the trading community. At last, we know pair trading, mentoring, and other forms of knowledge transition between the experienced and young traders.
However, the Internet has changed our lives, including business communications. As a result, we have a new trend in the traders’ community – social trading. A mix of education and business, social trading will empower the market before it becomes irrelevant, which should not happen soon.
So, if you are interested in trading and good at communications, social trading can be your choice.
by , 2021.11.25