Last Updated on January 21, 2023 by Tabraiz
Social trading refers to an investment strategy where one copies or mirrors the trades of another more seasoned investor. Social trading platforms facilitate this, thus making it much simpler for investors to assess other traders’ activities and then replicate the same for their trades.
While it is similar to copy trading, it is not exactly the same. In copy trading also one can copy the trades and investments of other traders but what makes social trading different is the platform. Social trading platforms have been particularly created for such trading. Hence, rather than simply copying the trades by observing, there is scope to interact with the trader you look up to or whose trades you want to follow. Learning directly from a fellow trader also does wonders for your knowledge.
How does social trading work?
Social trading operates by giving investors an opportunity to come together on a shared platform and discuss trading strategies as well as ideas. Upon joining a social trading platform, you will be able to look for other investors and assess their trading activity. You can also use the platform to get answers to your questions from the experts. Once you weigh your options in, you are in a better position to understand whether or not you should be using those strategies for your own trades.
To put together a social trading strategy could be as easy as clicking on a button and mirroring a fellow investor’s portfolio completely. Your portfolio too would then have the same trading activities. It’s a very basic strategy that someone who is just starting out can use but it may also be beneficial for traders who wish to earn more from what other investors do. They can even do so to share their wealth of knowledge with those who’re new in the field.
Such type of trading also helps in building a community of like-minded investors. It helps to interact with other traders and talk about or compare various strategies. Here comes in the social factor where one gets to speak to the other person instead of just copying trading tricks and moves.
Before you start social trading
Let us make it very clear at the beginning that social trading is not everyone’s cup of tea. Though many will sing praises about this kind of trading since it helps in bridging the gaps in financial inclusion, critics have been vocal about how the knowledge necessary to trade well gets underplayed.
A major mistake that social traders end up making is believing that this kind of trading eliminates risk entirely. Remember that trading is never devoid of risk, the probability of loss always exists. Do not get carried away by another party’s judgment when social trading.
Financial markets demand knowledge and patience but with social trading, you might end up moving a few steps ahead. But skipping steps comes at the cost of experience. You should ensure that you thoroughly comprehend the steps you take and work with a solid risk management strategy in place.
Essentially in social trading, you implement another trader’s trading plan on your own but a good strategy is one that is unique to the trader. It is one that caters to your goals and resources. Thus, replicating someone else’s strategy may not always work for you as your means and requirements will be unique to you.
How to start social trading
You can carry out social trading in many ways, reaping all the benefits and retaining control of your strategy. One of the key benefits of social trading is that you are part of a community that interacts and shares advice, and market tips, sets up buy and sell signals as well as creates awareness about the market’s mood. It also allows automatic trade execution.
Trading community
Social trading allows you to access a trading community where ideas are exchanged and trading advice is shared. The tool could come in handy when you want to gain information on events that may take place soon and how the market could potentially react to the moves. You basically have your way inside an online trading forum that brings together traders from various backgrounds as well as experience levels. You can leverage this interactive space and connect with fellow traders.
Trading signals
Social trading allows you to copy the purchase and sell strategies of other investors. This can cut down your preparation time but the downside is that you will never be able to go into the depths of the trades. Additionally, you cannot be sure that the trader whose moves you’re replicating has done their share of research and analysis or not.
With the help of technical analysis, you can recognize the appropriate trading times for a variety of financial markets like indices, and commodities. The signals option on your online trading platform lets you choose from the trades of two third-party traders. Though signal service can cut down research time, you still are the one in-charge of the trades.
Market sentiment indicators
Taking the help of market sentiment is one of the most popular ways to identify trends and see what’s the mood of other traders in the market. It is basically an indicator of how other participants feel in the market. Sensing market sentiment can be hard since there are several factors that lead to a positive or a negative overall market mood.
Is Social Trading Safe?
Social trading can be hard as investors depend on the expertise and experience of other investors for their trades. For amateur investors with little to no knowledge of financial instruments, it’s natural to seek an experienced trader as a helping hand. But do remember that in this you’ve assumed that the third party is sure of their moves. It is risky in itself since it is likely that you end up picking an asset that is not in sync with your risk tolerance, requirements, goals, and investment timelines. It is also not clear as to what kind of outcome you can anticipate and how much fees you actually end up paying.
