Social trading is a relatively new idea in Forex Trading and its popularity has become significantly over the past years. The idea that drives social trading—especially in Forex—is that the process offers an opportunity for traders who deal online to retrieve information assembled from other retail traders and use their combined knowledge to trade in their various accounts.
Social trading works similarly as other prevalent 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 social networks, there are advantages and disadvantages to their use. (Check also ways of getting passive income with partnership platforms)
Advantages of Forex Social Trading
The most obvious advantage of social trading is that it is easy to use. By monitoring and following different traders and basing their trades on the professional choices of more experienced traders, there is no need for individual Forex traders do their own fundamental analysis. It’s like having the answers to an exam before the examiner even gives out the questions!
With social platforms, Forex traders have a close relationship with different traders in an environment where they can associate with each other, discuss perspectives and then duplicate the trades that sound right for them. At the same time, both beginners and experienced traders can learn how top traders come to the decisions they make and the 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 whole portfolio.
Another important advantage 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 risks that often result in losing positions. As part of the pack, trading becomes easier to view changing activity in the market from a more unbiased perspective. For instance, a trade that starts to show a loss can generate emotional reactions in a trader which often lead to bad trading decisions. When traders work as a team, it becomes easier to discuss and analyze the 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 usually limited to top brokers and multinational banks. And since all trades placed on a social trading platform are directly copied, no one can intervene in a trader’s trades so there should be more transparency.
Disadvantages of Forex Social Trading
Social trading gives a free exchange of information to individual and small-scale investors. And while this is actually an advantage, it could turn out to be a disadvantage. Since the number of successful traders is low, by using social trading networks a trader can follow the wrong steps and end up with losses rather than the aim for profits.
One of the major disadvantages of Social Forex Trading is that it remains relatively challenging for a trader to choose the right social platform. There is no shortage of networking platforms and this makes it difficult for a trader to make a decision. 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 defrauded. Choosing the right platform is the key to a successful social trading, but it is tricky and traders are not always savvy enough to decode the good from the bad.
It isn’t just the devious broker or business that can use a good social platform for scheming purposes. Traders must also be careful of the trader they wish to choose, there are untrustworthy individuals. Setting down a solid set of criteria developed prior to opening a trading account helps traders to choose the best social traders from what can be thousands on a leaderboard.
There are different social trading platforms and they offer different features, many of which are not fully understood by a newbie. Some platforms reward their traders not just for the profits they make, but also for their low-risk management approach. This makes successful traders risk-conscious than those on other platforms. With this type of platform, newbie traders are encouraged to start trading with additional risk which is not always a good start.
In addition, startup Forex traders may not understand the implications of the different social trading platforms. For instance, there are some social trading platforms that limit the amount that a trader can allocate to 10%-20%, which is absolutely beneficial as this forces the trader to spread the risks. More also, 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 remains true for Social Forex Trading as well. The key to success in any business is knowledge; the more a trader understands how a financial instrument works, the lesser risk he/she will take and chances for profit will increase substantially. (Also read further on Social Forex Trading Tips and Tricks)