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Social Trading: What It Is and How It Works

How the Forex Market Works

*OspreyFX would like to state that traders should research extensively before following any information given hereby. Any assumptions made in this article are provided solely for entertainment purposes and not for traders to guide or alter their positions. Please read our Terms & Conditions and Risk Disclosure for more information.

Key takeaways

  • A look at the social side of trading
  • How social trading works
  • An overview of the pros and cons

What is Social Trading?

The popularity of trading is increasing among the general public. This is common during difficult times when people want to generate a second income, make the most of their savings, or get into a new profession. And the latter has gained a lot of traction in 2020 as many looked for jobs that could be done from home during the lockdown.

However, traders’ professional communities began early in the century. More recently though, they have opened to retailers and beginners looking to learn to trade. And specifically, seeking experts to copy strategies from.

So you’ve certainly heard the term social trading among traders. A quick online search will tell you it is a trading strategy when you copy someone else’s trades. But what exactly does that entail?

A Time-Saving Approach to Trading

This type of strategy means you don’t need to spend too much time researching tactics, opportunities, and the latest news to set your trade. It is the right fit for people who don’t have enough trading knowledge, practice, or those who have a day job and can’t invest time and effort in their side forex trading activities.

The only thing you need is a reputable and reliable social trading platform offering the feature that allows you to copy other people’s trades.

Social trading

There are three types of trading that are often used interchangeably with social trading. While these are similar, they have key points that differentiate them:

Mirror trading: Using automation, it consists of replicating a strategy used by another trader on the same broker platform.

Copy trading:  Here, a professional trader decides to link his accounts to a platform and registers his transactions to show other investors who may copy them.

Social trading: Here, you are allowed to replicate strategies, as well as interact with other traders to ask for their input. Thus, the social aspect. Everyone has a profile, similar to those on social networks, and they can share their experience, opinions, and trade performances with others.

How Does it Work?

Social trading is starting to sound like a pretty simple and very practical strategy to use. The way it works is through the use of a platform offered by a broker. You can search for traders who share their strategy, historical performance, and tips. Once you find a trader with a similar mindset to yours and a plan that matches your expectations for a trade, all you need is to do is replicate the order. It is a community, akin to those on online social networks. Instead of sharing personal photos and stories, traders share performances, they discuss tactics and trading. This is not done for profit, but to seek profit through successful trades.

Pros and Cons of Social Trading

Here are some of the advantages of social trading:

  • The pressure is taken off as traders who get overwhelmed by emotions when trading can rely on the proven tracks and experience of others.
  • Networking allows traders to interact, ask questions, learn about techniques, and discuss the market. A great way for beginners to gain knowledge and grow their confidence.
  • Trading becomes easier for first-timers with little or no previous experience, as they copy transactions from other traders.

Some disadvantages:

  • Newcomers can be tempted to leave their transactions in the hands of professionals. This can lead to a detachment from the trades and a lower perception of risk. This means they may begin investing larger sums of capital without proper assessment.
  • Due diligence is important yet often skipped when selected the trader to follow and copy.
  • Attention needs to be given to the time that passes between a strategy applied by a trader and another trader replicating it. This difference means the market may have changed in the meantime and the strategy is no longer relevant.
  • Making sure that the trader being emulated has similar risk and capital approach. It’s important to be careful when copying high-risk tactics.

Round-up

Whether you are a professional trader or a beginner trying out social trading, it is recommended to keep in mind some key points:

  • Past performance of a trader is not a guarantee of success on future trades
  • Caution and due diligence is always required
  • Never forget to stay involved in your transactions even if you apply successful tactics

In conclusion, social trading is an efficient way to practice trading, learn various strategies and techniques, and understand the way the market works. It is worth trying out while remaining aware of how you invest.

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