What is Social Trading?

Social trading has become a big deal in finance recently. Collective2 was one of the first platforms to offer social trading to regular traders back in 2003, even before ZuluTrade. In 2010, social trading got more popular with eToro, and Wikifolio joined in 2012. The market for social trading platforms is expected to grow from $2,229.56 million in 2021 to $3,774.17 million by 2028, with an annual growth rate of 7.8% between 2021 and 2028. In this article, we’ll explain what social trading is, how it works, things to know before starting, and its pros and cons.

Understanding Social Trading

Social trading is online trading where traders connect and share information, strategies, and insights on investments. The main goal is to help traders improve their performance and make more profitable trades by interacting with other traders.

Traders share ideas about which stocks or other assets to trade, discuss market trends and conditions, and follow the trading practices of others. This practice builds a community and encourages collaboration among traders, helping both new and experienced traders. This community and collaboration can help traders improve their performance and make more profitable trades.

How does it Work?

Social trading is about people sharing their trading tricks and following each other’s moves in the financial markets. It’s made easier nowadays because of better technology and trading platforms.

You can join in through a special platform made for social trading or just pick up some ideas from it.

On these platforms, there’s a feature called “copy trading” or “mirror trading.” It lets you copy what another trader is doing. It’s like following someone on a social media site.

If trader A makes a trade, trader B can automatically do the same thing.

Social trading platforms often have a leaderboard showing who’s popular and successful. This encourages experienced traders to share their strategies since they can get money and respect for it.

What should you know if considering social trading?

If you’re thinking about social trading, there are some important things to understand. Some people find social trading helpful, but it has its critics. They say it doesn’t give you all the information you need to do well in the financial markets. But others praise it because it makes financial services more accessible.

One big mistake social traders might make is thinking they can’t lose money. But trading always involves risks. Even the best investors sometimes lose money.

Trading in financial markets needs knowledge and patience. Social trading might seem like a shortcut, but it means missing out on experience. It’s important to understand what you’re doing and have a good plan for managing risks.

When you do social trading, you’re copying someone else’s trading strategy. But you need your own strategy that fits your goals and needs. Even if you use other people’s ideas, remember everyone’s situation is different. So, copying someone else’s strategy might not work well for you, especially if you have different comfort levels with risk or different amounts of money to invest.

Pros and Cons

Pros

1. Instant Communication: Most traders join social trading sites to get good info about the market. They can also talk to experienced traders from different places around the world. This means they can chat directly with these experts instead of just copying their strategies. Many platforms have chat rooms where users can ask questions and get answers right away.
2. Learning by Doing: Social trading platforms let users learn from pros by actually trading, which can save time and money. Instead of spending hours trying to understand theories, users can gain experience by practicing.
3. Community Focus: Social trading creates a community of investors who share ideas and goals. This means traders can get market info no matter where they are. As long as they have a good internet connection, they can access information quickly and easily.

Cons

1. No interest: When new traders start with social trading, they might become too confident and relaxed. This happens because they let professionals handle their trades, so they don’t learn much and might need more motivation. This makes them think the risks are low, which is risky when deciding how much to invest.
2. High-risk methods: For instance, copying high-risk methods like scalping requires caution because the trader’s own risk and money might be different from those they’re copying. Scalping is one such risky method.
3. Uncertainty: Also, just because a trader was successful before doesn’t mean they’ll always be. Things in the economy and elsewhere change, which can make it hard for traders to adapt quickly.

Conclusion

Social trading can be easy because the process is quite simple. You just need to sign up for an account on a trusted trading platform, find experienced traders whose strategies match yours, and start copying their trades to learn. But keep in mind, there are risks involved, like losing money if the traders you follow make bad decisions. So, deciding whether to try social trading depends on your financial situation and goals.

FAQs

What is meant by social trading?

Social trading is when traders or investors copy and do the same strategies as other traders. Instead of doing their personal analysis, some traders like to follow and copy what others are doing.

What is an example of social trading?

Sure. Let’s say there’s a new trader named Topforx who wants to learn about trading stocks. They join a social trading platform where they see experienced traders who have been successful for a long time.

What is the difference between social trading and copy trading?

Social trading is about traders interacting, learning, and making their own decisions. Copy trading is when trades from successful traders are automatically copied without any need for interaction or decision-making.

Is social trading profitable?

Yes, you can make money from copy trading. You can follow experienced traders or become a provider yourself, where your skills can attract followers and earn you money.

Is social trading free?

Social trading means traders share and use information for free. This information helps with new trading ideas, managing risk, and understanding client sentiment.

Related read: Basics of Forex Trading