What is social trading?
While many people are familiar with the concept of forex trading and what it entails. This is the buying and selling of foreign currency, there is another concept that traders should inform themselves on – social trading. Simply put, social trading seeks to amplify the efforts of a network of traders and allows them to share real-time insights. This can be particularly beneficial for those looking to get started and learn from more experienced traders.
In a way, social trading is based on the belief that two heads are better than one. As it encourages a collective of traders to assess what is happening on the markets and share any consequential findings, projections and interpretations. Based on the information that is shared, some less experienced traders may opt to mimic the more experienced traders or use the information shared to reassess their approach to trading.
Copying another person’s trade, in this case, is not necessarily frowned upon because at the end of the day, you still bear the risks and potential losses that will come with the decision to do so. A term has even been coined to describe this, it is commonly referred to as mirror trading.
Social traders that share insights and are viewed as knowledgeable on the matter are generally actively followed by those in that particular network. Moreover, they have the opportunity to make additional income from those who copy their trades through earning commission.
Benefits of social trading
Social trading has become quite popular amongst retail forex traders and novices. Most of whom pursue it to get their start. The appeal is that instead of doing their own inexperienced analyses. They can make their investment decisions based on the information shared within the network.
Because of the manner in which social trading is conducted. Some people have drawn parallels between it and writing a test when you have already seen the answers. As your own trading decisions can be based on the successes or lack thereof, of traders that have gone before you.
However, the difference here is that market conditions are consistently changing. This is something you need to be cognizant of before copying another trader’s previous strategy to the T. This is similar to US forex trading and betting on a currency pair that involves the USD. Although these are often championed as they often lead to success, there is still a chance of loss.
That being said, there are some notable benefits of social trading. Such as the ease and convenience that comes with knowing that you do not operate in isolation. There is a collective of people that you can turn to for guidance. Another key benefit is that social trading avoids personal biases. It allows you to view the financial markets from a different perspective.
While novice traders may have certain preconceived ideas about forex trading. More experienced traders may suffer from past trading traumas and financial losses. So social trading indirectly addresses and seeks to eradicate. The emotional element of human trading is what may lead to poor decision-making. Before trading, which is why making informed decisions based on market data, industry insights and general consensus is often preferred.