What is Social Trading?
Social trading enables traders or investors to copy and follow the strategies of their peers or more experienced traders. While most traders perform their own fundamental and technical analysis, there is also a group of traders that prefer to observe and replicate the analysis of others. Social trading is often thought of as a type of social network, as the function enables traders to interact with others, watch each other’s trades and learn about decision making processes.
Social trading first started in the early 2000s, when it was used to mirror successful forex trading strategies. Since then, retail traders have begun to use it for an ever-growing number of trades across different asset classes, as anyone can participate with little-to-no previous experience of trading. So, social trading shares, commodities and indices has also become popular.
How does social trading work?
Social trading works by creating quick access to financial markets, enabling experienced traders to share strategies and allow other traders to copy their trades. With new technology and advanced platforms, it makes it easier than ever to become a social trader. A social trader can either use a comprehensive social trading platform or adopt some of the features in social trading.
Some traders might want to use a fully integrated social trading platform, which facilitates sharing of trading strategies using a ‘copy trading’ or ‘mirror trading’ feature. Just like in a social networking platform, a social trader could choose to ‘subscribe’ to another trader’s account, whose positions would be broadcast simultaneously with the option to copy their deals and execute it.
The incentive for experienced traders to share their strategies is that they are often rewarded with both money and status.Social trading networks usually have a leader board based on popularity and success rate.
Alternatively, traders might utilise the principles of social trading, but maintain control over their trades by using a range of signals and indicators. By looking at the market sentiment and activity of other traders, social trading can act as confirmation of other forms of analysis.
Is social trading suitable for everyone?
Social trading has been praised for knocking down some of the barriers to financial inclusion but has also been criticised for downplaying a lot of the knowledge needed to properly negotiate financial markets.
One of the biggest mistake a social trader can make is thinking that the method eradicates risk completely. All trading involves risk, and traders are likely to make a loss at one point or another. The idea of trusting a third party’s judgement, while retaining the risk of loss, is seen as a large drawback of social trading.
Financial markets require knowledge and patience, while social trading can potentially help new traders skip a few steps, it does so at the expense of experience. It is important to make sure new traders understand exactly what they are doing and have a risk management in place. Everyone has different risk appetites and capital available, so trading the way someone else would is not always necessarily a good idea.
Social Trading platforms offer beginners avenues where they can easily and efficiently trade in the market. Although they do not completely eradicate failure, they can minimize chances of failure. Since social trading platforms are cater for both beginners and professionals, they create a reliable trading community that enables people to trade and learn at the same time.