Trading of any sort can be quite challenging, especially for new traders. Traders over the years have looked for more innovative ways to make a profit. Social trading is one such strategy that traders adopt. So, what is social trading, and how does it work?
Social trading is a strategy that involves associating with more experienced traders and sometimes copying trades. Social traders rely on the insights of other trading experts to gain an edge in the competitive trading circle. But this strategy has its risks and benefits.
Social trading and copy trading are easily mistaken. However, the distinction is that with social trading, the choice of how the trade will go rests on the trader. On the other hand, copy trading automatically takes the position of the target trading account.
Read on to find out if it fits into your style as a trader.
How Does Social Trading Work On Trading Platforms?
The principle of social trading relies on getting quick access to financial markets. A beginner can share strategies with other traders on an online trading platform. The trader can also copy the trades of experienced traders to become a successful social trader.
Social trading takes place on an online trading platform or among individuals. A trader can opt for competitive trading on a social platform using mirror trading and copy trading as strategies. Some others might choose a social networking platform.
Traders on these platforms might need to subscribe to other traders’ channels. Some experienced traders charge fees for this service. With the subscription, the trader can access other traders' live trades and copy them. This implies that if one trader goes long, the other takes the same position.
Social trading networks have a ranking system for successful traders. New traders often adopt the most successful traders with historical performance.
Also, traders can maintain their social network but control their trade decisions using signals and indicators for market analysis. The trader can use the trades of their peers to confirm their analysis and adjust market sentiment.
Most social trading platforms give members access to signals. These signals suggest when to buy and sell an asset based on past performance and research. However, no trading signal is a hundred percent accurate, and they can fail.
Social Trading Pros And Cons To Note
The social trading strategy is popular with many benefits. But there are some risks associated with social trading work, too.
Pros
Access to quality communication
Trading can be a challenge, especially for the inexperienced. A few bad trades can make a new trader give up entirely. However, with proper communication with an experienced trader, they can share ideas to avoid a high level of risk in the process.
This communication provides vital support and can help traders improve their technical and fundamental analysis.
Mentorship from professionals
Since social trading functions as a social circle, new traders are directly mentored by proven professionals. They can also mirror individuals with similar investment objectives that have recorded growth investing in the market.
While the argument abounds that it might make traders lazy, it also exposes them to complex trades.
Access to more trades and information
Social traders can easily access vital information on their platforms. The social circle unveils previously unknown markets to traders. Equipped with sound information, traders can make much profit quickly.
Also, traders can easily place multiple trades fast - since they have access to information. On the social platform, traders share experiences in different markets that serve as a guide for other investors.
Access to bots
A trading robot (Bot) is an automated mechanism that places trades whenever a particular market pattern occurs. This robot can help a novice trader make a profit without much technical analysis.
It is important to note that the robots are not 100% accurate. Traders must understand the risk involved in using them.
Cons
Absolute trust in a third party
One of the dangers of social trading is your trust in third-party judgment. There are no guarantees that more experienced traders can replicate the historical performance. Most investment providers include a disclaimer for traders to understand the risk involved.
If a trader you follow closely in a social circle suffers a trading loss, it will also affect your account. Also, there are no guarantees that the third party has done a proper analysis.
Can hinder trader development
As a social trader, you can decide to copy successful trader positions. While you might see their signals, you might not have access to a detailed breakdown of the technical analysis.
Successful traders mastered the art of trading by repeatedly trying different strategies. So, it could harm a trader’s development in the long run and leave them always dependent on other traders.
It takes considerable effort not to fall into this trap and derail your development.
Fake profiles
Not all platforms are regulated, and some social trading platforms can con users into paying for unreliable signals. Also, some traders who claim to be experts can manipulate their statistics to gain more followers.
It is one risk that traders face. A new trader might not identify such a trap and fall for it.
Losses are Inevitable
Just like any other trading strategy, losses will eventually occur. Social trading can be more devastating if the follower is not keeping an eye on the more experienced trader.
For instance, in the crypto world-volatility is high, and a successful position can suddenly turn into a losing one. So, traders must develop the best technical and fundamental skills for results.
Social Trading Vs. Copy Trading-Understanding Their Differences
Social trading involves users depending on the financial content of a social circle to make trades. Copy trading directly copies the positions of other traders. Copy trading can be carried out automatically or manually.
Social trading and copy trading have similarities. However, there are differences that must be noted.
Social trading gives users options to choose if they will follow an experienced trader or trade alone. They can also study the strategies and modify them for their purpose.
Copy trading mimics the activity on the chosen account. Positions are opened and closed simultaneously in sync with the copied trading account.
Although you can choose if this process should be automatic or manual, traders do not have full details of the trading process.
However, copy trading is better when it comes to making a profit. But it depends on if a trader joins a great platform and follows the right trader. By that, the chances of making a profit increase.
Copy trades placed on auto also help traders avoid missing out on sudden price corrections since the market is volatile. An experienced trader is set up to exploit a potentially profitable movement almost instantly.
Conclusion
If you have ever asked: What is social trading, the concept refers to a trading strategy. It involves joining a community of other traders to rub minds together and sharpen strategies. Social trading sometimes gives new traders an added advantage in the market.
Copy trading is under the umbrella of social trading. Here, a trader identifies a successful trader and copies the trades on the account. It can be manual or fully automated.
Although social trading gives a trader control over their trading decisions, copy trading helps a trader realize profit fast. Traders can automatically profit as long as the parent trader is profiting.
These two strategies carry a fair share of risk and should include further research. A trader will likely experiment with different methods to find out what works best. Overall, you must engage in proper risk management techniques.
FAQ: Common Questions And Answers On Social Trading
Find more details on what social trading is and if it’s legal.
What is social trading in crypto, and how does it work?
Social trading is a strategy in which traders make decisions by observing and learning from their peers. The traders can decide to adopt and modify these strategies or use copy trading to mirror the trades.
New entrants in the market rely on social trading to learn from more experienced traders. A trader must join an online platform that offers this service to interact with others and get results.
Is social trading legal as a strategy?
Social trading is legal in most countries around the world. As a trader, you need a regulated broker that will give you a great social platform for trading. The only restrictions are in countries with bans on trading.
Should a trader rely on social trading?
Social trading is a great idea, depending on the trader's sentiments. It provides traders with a platform to meet and achieve one goal -profit.
Unfortunately, it can also make some traders lazy and hinder their personal development. So, traders should balance information from the social trading platform with research.
