Social trading is a relatively new concept in retail Forex trading and its popularity has grown substantially over the last few years. The concept that drives social trading—especially in Forex—is that the process offers an opportunity for Forex traders who trade online to retrieve information assembled from other retail traders and use their combined experience and knowledge to trade in their own accounts.
Social trading works along the same lines as other popular social networks, such as Facebook and Twitter, where individuals communicate directly with others on an ongoing basis from wherever they are. And as with these other social networks, there are advantages and disadvantages to their use.
Advantages of Forex Social Trading
The most obvious advantage of social trading is that it is easy. By monitoring and following other traders and basing their trades on the professional decisions of more seasoned traders, there is no need for individual Forex traders to do their own technical or fundamental analysis. It’s like having the answers to an exam before the teacher even gives out the test questions!
With social trading, Forex traders have an immediate association with thousands of other traders in an environment where they can interact with each other, discuss viewpoints and then duplicate the trades that sound right for them. At the same time, both novice and experienced traders can learn how top performers come to the decisions they make and which strategies they use that work better than others in their efforts to make a profit while at the same time limiting the risks to their entire portfolio.
Another important benefit of social trading is that when trading as part of a group or community rather than as an individual, it is easier to avoid the personal biases that often result in losing positions. As part of the pack, trading becomes much easier to view changing activity in the market from a more unbiased perspective. For example, a trade that starts to show a loss can trigger emotional reactions in a trader which often lead to bad trading decisions later. When traders work together as a unit, it is easier to discuss and analyze market activity as it transpires and to make decisions that are more sensible.
Finally, by opening up trading to the public, social trading acts to remove Forex trading from being an instrument that is normally restricted to top league brokers and multinational banks. And since all trades placed on a social trading platform are copied directly, no one can intervene in a trader’s trades so there should be more transparency.
Disadvantages of Forex Social Trading
Social trading provides a free exchange of information to individual and small scale investors. And while this is certainly an advantage, it could prove to be a disadvantage. Since there are only a small number of traders who are consistently successful, by using social trading networks a trader can follow the wrong trader and end up with losses rather than the hoped-for profits.
One of the major disadvantages of social Forex trading is that it remains relatively challenging for a trader to select the right social platform. There is no shortage of networking platforms and this makes it difficult for a trader to make a choice. And although social Forex trading is not a scam, there are some social trading scammers that don’t play by the rules and an unsuspecting trader can be easily swindled. Choosing the right trading platform is the key to social trading but it is tricky and traders are not always savvy enough to decipher the good from the bad.
It isn’t only the devious broker or business that can use a good platform for scheming purposes. Traders must also be careful of which traders they choose to follow as here too, there are untrustworthy individuals. Setting down a solid set of criteria developed prior to opening a trading account helps traders to select the best social traders from what can be hundreds on a leader board.
There are various different social trading networks and they offer different features many of which are not fully understood by a newbie Forex trader. Some networks reward their traders not just for the profits they make, but also for their low risk management approach. This makes leading traders more risk conscious than those on other networks which reward traders for profits only and may attract more risk taking in the process. With this type of network, newbie traders are encouraged to start trading with additional risk which is not always a good beginning.
In addition, traders just starting out in Forex trading may not understand the ramifications of the different social trading networks. For example, there are some social trading networks that limit the amount that a trader can allocate to 20-or 30% which is certainly beneficial as this forces the trader to spread his risk. On the other hand, a trader may be allowed to risk up to 100% on a single trade and can technically lose a full allocation in one trade.
There are advantages and disadvantages to all investments and this holds true for social Forex trading as well. The key to success in any endeavor is knowledge; the more a trader understands about how a financial instrument works, they less risk he/she will take and his chances for profit will increase substantially.