Advantages And Disadvantages Of Social Trading

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Just getting started into the world of trading? Let’s take you for a ride. Trading discipline, technical analysis, fundamental analysis, and risk management are the leading aspects of trading that one needs to have thorough knowledge about. It’s then not very surprising that a number of new traders want to try forex social trading. Also referred to as copy trading, it allows new or inexperienced traders a type of safety net they may require when they’re starting out. Remember that similar to any trading strategy, forex social trading also has its own plus minuses and we’ll take you through some of them today. Visit multibank group

What is social trading?

Social Trading refers to a form of investment that lets investors observe the trading patterns of fellow traders and expert traders with the intention of copying them. This allows community members to earn together. It essentially operates along the lines of social media that includes communication, information exchange, mutual help, and partnership. Traders can choose to mimic the trades of others or allocate their funds in a similar or the exact same portfolio. 

The basic concept here is that expert trader shares their thoughts, company news, charts, market analysis, suggestions, etc., and others subscribe or follow it. 

ADVANTAGES

Collective knowledge

Forex social trading allows amateur traders to make the most from the expertise, strategy, and knowledge of veteran traders to make a good trade. Though it is no match for independent learning, it’s certainly a great tool to get started in the world of trading. Learning strategies and techniques of experienced traders is only natural. With the latest technology, this can be done with the help of software rather than simple observation.

Numerous sources of information

Social trading platforms are well-equipped to hold a large amount of information into user-friendly tools and apps. This enormous amount of data on these platforms comes from various traders which gives new traders the opportunity to access and learn from many talented mentors at the same time.

Builds confidence

Social trading is hands down one of the most effective methods to boost up your morale as a new trader. Though it may not be a fool-proof system and your trades may go wrong, the probability of success is higher than failure. It may even give you a much-needed reality check that you may lose money at some point and thus you better get accustomed to losses. It keeps you from feeling overwhelmed because of losses. 

Autonomy to traders

Traders who use automated trading may find themselves limited by the set of rules and programs that govern how one enters and exits trades. However, when you’re social trading, you’re more in control of each trade which does away with a number of risks that came with automated trading. 

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Transparency

A number of self-proclaimed expert investors are running social media channels where they share their thoughts. Remember that most of these seemingly pro investors are not telling you the right thing as their own money is not invested in the trades they suggest. You can quit worrying about this in social trading platforms as you invest precisely what the other investor has invested. 

DISADVANTAGES

A false sense of security

It is not surprising that social trading focuses more on where you can gain when you practice  copy trading. This may be misleading as one tends to then forget that loss is part of the process. If you happen to follow a successful trader when they’re on a roll–either at the beginning of their bad trends or at the peak of their trades, the expectation may be unreal. As a result, you might be tempted to invest more than what you can afford to lose.

Being overconfident

A false sense of security among traders can lead to overconfidence. Consequently, they may not be as attentive to the market trends as is ideal. Copy trading is not just about setting it and not looking back. This is a common mistake that most beginners make. Forex trading demands effort and time even if you’re copy trading. Learn to keep an eye on the traders’ moves that you’re copying and also learn to scrutinize their strategies. It will help you develop and fine-tune your own strategies.

Different trade conditions

The conditions under which new traders are operating could vary from the ones the traders they are copying are functioning. Copying trading patterns also implies that you’re in the dark about the trader’s circumstances. Perhaps their investment portfolio is much more diverse or they have more capital set aside in other lower-risk investments. That could be one possible explanation for veteran traders opting for high-return, high-risk strategies. You must have a risk-management strategy that is unique to your portfolio. Irrespective of whether you’re copying trading or not, you must stand by it to prevent extreme losses. 

Time-consuming

Social trading can be time-consuming as one needs to go through plenty of stocks and assess a number of portfolios. 

Missed opportunities

In social trading, the process is not automated and you have to place all your trades manually. So even with the slightest laid-back attitude, you could end up losing out on some good opportunities.

Impulsive trading

Social trading is carried out in communities that often over-hype news or market sentiments leading to a false market indication. 

Parameters to consider while social trading

Let us assume that you have come across a trader with good percentage returns. But it may not be wise to be swayed away by good returns without putting in enough research and thought to a trade. 

Below are some yardsticks that you must bear in mind when you choose to begin social trading:

  • Trader’s Credentials – Career, membership, experience, popularity
  • Volume signals – Monthly trades, the total number of trades
  • Performance signals – Winning trades, winning months, current month’s performance, current year’s performance
  • Risk signals – Risk profile of the trader

Should you do it?

Social trading offers a very tempting method for those who’re just getting started in the forex market. But you need to realize that this is not a flawless system and you need to be prepared for losses. By just imitating successful traders, you may not always make money. You should look at it as a great tool at your disposal to further your own skills and function independently in the forex market. 

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