Social trade is a fairly new concept in Forex retail and its popularity has been growing considerably in recent years. Let’s see the pros and cons of this trading modality that is very similar to social networks.
The concept that drives social trading, especially in Forex, is that the process offers online traders the opportunity to obtain information about operations and strategies of other traders and thus use the knowledge and experience of other professionals in combination with their own experience.
Social trading works very much like the most popular social networks, such as Facebook and Twitter, where individuals communicate directly with each other continuously from wherever they are. And, as with other social networks, there are advantages and disadvantages in their use.
Advantages of Social Trading
One of the reasons for the success of social commerce is that it is easy. By monitoring the activity of other traders, novice or intermediate-level operators can base their movements on the professional decisions of more experienced traders; there is no need to conduct its own fundamental or technical analysis. It’s like when you have the answers to a test before the date and even taking a look at the test questions!
With social trading, Forex traders can have an immediate association with many other traders in an environment where it is possible to interact with each other, discuss points of view and then copy the most successful trades. At the same time, the beginner and the more experienced traders can learn how elite operators get to the decisions they make, what strategies they use, and which ones work better than others in their efforts to make profits, while at the same time limiting the risks to your entire portfolio.
Another important advantage of Social Forex Trading is that, when trading as a member of a community rather than as an individual, it is often easier to avoid personal biases that often result in loss of positions. As part of the package, it becomes much easier to observe the change in market activity from a more impartial perspective. For example, a transaction that starts showing losses can trigger emotional reactions in a trader that can often lead to wrong decisions. When operators work together as a unit, it is easier to discuss and analyze market activity as it develops and make more wise decisions.
Finally, the opening to the public of transactions through social trading has made Forex trading no longer an instrument that is normally restricted to the best brokers and multinational banks. And, since all transactions placed on a social trading platform are copied directly, no one can intervene in such transactions, generating more transparency.
Disadvantages of Social Trading
Social trading provides an exchange of information for individual and retail investors. And although this seems an advantage, it can also become a disadvantage. This is because there is only a small number of successful traders in this market, by using social trading networks an operator can follow the wrong trader and end up losing instead of increasing their profits.
Copy Trading represents a greater threat, as even novice traders, without the prior knowledge of Forex, are allowed to replicate the commercial behavior of successful traders. Therefore, they basically become helpless in case the “leader” fails.
The execution of trades, based on collective wisdom, remains an impressive proposition – in the beginning. However, some initial successes might even deny the danger that you will become totally dependent on others. You may be able to generate huge benefits by integrating other ideas into your own game plan. However, there is no guarantee that these strategies will work infallibly in the long term.
Choosing the Right Platform
One of the main disadvantages of social trading is that it is still relatively difficult for an operator to select the right social platform. Etoro, Zulutrade, and Signaltrader, (to name a few) are the main Social trading platforms of Forex. There is no shortage of social platforms and this makes it difficult to choose. And, even though social trading operations are not a scam, there are scam platforms that do not comply with the rules and there are some social trading scammers willing to cheat and an unsuspecting trader can be easily surprised. Some of them even end up claiming that they offer the best signals for you. Therefore, it is very important for you to choose your platform carefully. Choosing the right trading platform is key, but it is complicated, and you need to be informed and alert enough to tell the good from the bad.
Copy Trading represents a greater threat, as even novice traders, without the prior knowledge of Forex, are allowed to replicate the commercial behavior of successful traders. Therefore, they basically become helpless in case the “leader” fails.
We can’t just fall into the hands of dishonest racers. Traders should also be careful when choosing the individuals they want to follow, as there are people with little confidence. Defining several indispensable criteria before opening a trading account helps traders select the best operators to follow from a list that may include hundreds of them.
There are several social trading networks that offer different features, many of which are not fully understood by a novice Forex trader. Some networks reward their operators not only for the benefits they get but also for their low-risk management approach. This makes traders in these types of companies more aware of the risk than operators in other networks that reward only for profit and may encourage risk-taking in the process. This approach might not be a good start for novice operators.
In addition, traders who have just started trading may not fully understand the ramifications of various social trading networks. To take an example, there are social trade networks that place a limit on the amount that a trader can assign to 20 or 30%, which is certainly an advantage as this forces the trader to spread his risk. On the other hand, an operator can be allowed to run a risk of up to 100% in a single operation, and can technically lose everything in a single move.
Future of the Market
Last but not least, the presence of too many traders without prior knowledge is not advisable for the market itself. As in that case, (the market) runs the serious risk of running out of “leaders” in the long run. Only a continuous recycling of ideas will help to prevent a “substantive” future.
In Conclusion
There are advantages and disadvantages in all types of investment and this also applies to social trading. The key to success in any enterprise is knowledge; the more the trader knows about how a particular financial instrument works, the lower the risk you run and your chances of winning will increase substantially.
