Social trading is a popular system through which Forex traders can share trading strategies while trading currencies. By linking traders from all over the world into one big network, social trading empowers traders to use the skills of other investors from around the globe in order to trade smarter and more profitably.
One of the major challenges you will face with social trading is the screening of signal providers. Most platforms have no way of controlling who becomes a signal provider and who does not and this can be a problem because the quality of the signals provided may vary wildly within the same social trading platform.
Beware of Too Much Profit
While most traders tend to follow the names that appear at the top of the list without viewing their past histories in the belief that the best performing signal providers are those who accumulate a huge number of followers, this is not always the case. Oftentimes, the ones who profit the most pips over a two-month period are those who are extremely aggressive and as quickly as they rose to the top, they can shoulder significant losses. Beware of following those with these outrageous profit numbers as you can end up joining them in wiping out your account. Sometimes looking past the leaderboard for a trader that logs a good solid performance over a period of time may be the smarter thing to do.
Similarly, it's important to remember that even though you're using autotrading technology to place your trades, you should monitor the action to ensure that you agree with the decisions that are made. It is highly likely that after a few trades or an extended period of time you won't want to automatically follow a specific trader, or that you'll want to adjust your trading strategy accordingly. Social Forex trading is not something that should be 'set and forget', even if many brokers try to convince you otherwise.
Keeping an eye out for unusual activity is important when selecting your social trading platform. There are some social trading platforms that allow trade leaders to trade on demos only, rather than with their own money. This can lead to careless decisions and lackluster results. And there are plenty of untrustworthy individuals out there, such as those who receive commissions for each trade they post and rogue traders that place trades in hopes of effecting market conditions. So it is worthwhile to formulate a set of solid criteria for any potential trade leader before you set up an account or follow any specific trader.
Knowledge is always important. And as much as social trading places your trust in others and removes the necessity of understanding the ins and outs of Forex trading, without at least the minimum of understanding of the markets you may find yourself in a position where you are incapable of overriding or taking charge of the situation when a particular trade or strategy starts to go downhill.
Like any system, there are downsides to social trading – but there are also significant advantages. The biggest concern is that since anyone can become a signal provider so there is no guarantee that the advice you receive will always be sound. You may end up following a signal provider who has no more knowledge or experience than you have. Forex trading is never a sure thing and social trading may take the stakes to another level of risk; the only way to protect yourself from this risk is to really understand the system and the markets before putting trust in someone other than yourself.