Interactive Trader

Social Trading: The Pro’s and Con’s

Basics of Social Trading

Social trading is a fast growing fad that is sweeping the trading world. Many new traders find themselves faced with the decision whether or not they should go this route.

What is Social Trading?

Social trading is based on a network of both professional and those who follow them. In social trading, we have traders link their accounts with those they have decided to follow. This means that any trade entered by the professional is automatically copied by those who follow said trader.

The Pro’s

  • As a beginner, you can copy the trades of professionals.
  • You can trade, even when you don’t know a thing about trading or don’t have the time for it.
  • You have access to the trading history of successful traders
  • No stress about your open positions, someone else is managing your trades on your behalf.
  • The effect of trading psychology is minimised, you don’t get negative after losing trades and don’t get over excited after the wins either.

The Con’s

  • Some traders require huge account balances to allow you to copy their trades.
  • A trader’s past performance is not an indication of his future success.
  • No trader has a 100% success rate, losses will happen.
  • Just because a trader is successful, doesn’t mean his trading strategy or style agrees with your appetite for risk.

Other considerations

  • Not all traders use the same broker, not all traders have the same amount of leverage which will affect your margin. Ensure your margin is sufficient to copy the trader you want to copy.
  • Just because the trader has a 100% success rate, does not make him successful. I’ve come across traders with the most impressive stats, however, when looking at his trading history you will find he only closed the successful trades and left the losers open. Always check the open trades.
  • Your account may not be the same size as the professional whose traders you want to copy, decide how much you are willing to risk, and adjust your position size accordingly. The professional may afford a position size of 10 lots, can you?

Should you do it?

The most negative aspect of social trading that I have found, is that “Social Trading” cultivates the idea that personal research isn’t necessary. It’s easy to recognise trends and capitalise on them. When this happens many new traders either forget or do not bother to learn or to do research. This leads to a lack of understanding that both gains and losses occur. When this situation arises, most new traders don’t know how to deal with the emotional rollercoaster that trading can inspire. Doing adequate research on all aspects of trading is a must for all traders. No matter how they decide to trade with their hard earned money.

Social trading can be very profitable, but it can also lead to immense losses. All those who are considering social trading should never assume what other traders are telling them to be true. Avoid those who seem to give the impression that they can tell the future. Always do your own research and get your facts straight before you trust anybody with your money.

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The #1 Danger Sign that Investors are Doing Forex Trading Wrong

Forex Trading Mistakes

There are many, many ways to do the wrong thing when you are trading the Forex market (as more than a few traders have discovered).  Studies have shown that traders are right more than 50% of the time, but they still lose more money on their losing trades than they ever win on their winning trades.

So, what is the “Danger Sign” that investors are missing that makes their trading so wrong?

It comes down to “Risk/Reward”

Simply put, Forex traders should always use stops and limits to ensure a risk/reward ration of 1:1 or higher. Now, this seems very easy to follow when you aren’t in the middle of your trading, but you should close out your trades when your trades go against you before your loss gets too big. When you’re a Forex trader, you’re going to lose — the trick is to lose as little money as possible.  Similarly, when your trade is going well, it is often a great idea to let it continue going in the right direction for a few more profits.

Don’t Let Your Emotions Get the Best of You

Unfortunately, humans — with their emotions — can’t easily do this.  When things are going bad, we want to wait for things to turn around and get better, and when trades are going well, we want to cash out and start spending our money!  Emotion almost always favors the “risk” side of the “Risk/Reward” equation, and while we want to prove ourselves right with our trades (“If I just hang on, this 98% reduction in value is going to go the other way…”), we need to focus on what makes us profitable, whether we’re right or not.

The way to avoid the danger sign is to follow one rule:  make sure your reward is bigger than any possible loss. This is your “Risk/Reward ratio,” and it is the most important factor in your trades.  Let’s say you are in a trade where you could gain 50 pips, and you could lose 50 pips.  Your risk/reward ratio here would be 1-to-1 (or 1:1).  This is good, but you know what is better? A trade where you could gain 100 pips while leaving yourself at risk to lose 50 pips.  This would be a risk/reward ratio of 1 (the 50 pips you could lose) to 2 (the 2×50 pips you could win). 

A 1:2 risk/reward ratio is twice as good as 1:1, but you can do even better if you try.  When you’re using lower probability trades (like trend trading) you’ll want to aim for a risk/reward of at least 1:2, and 1:3 or 1:4 would be preferred.

No matter what Forex trading strategy you use, you should always use a minimum 1:1 ratio, because if you’re right only 50% of the time, you’ll still be able to at least break even with your trades.

How do you stay on track once you’ve set your risk/reward ratio? That part is a little easier. All you have to do is make your plan and stick to it.  Resist the temptation to take tiny profits or stretch out your losses. Instead, take your emotions out of the equation entirely by using stop-loss and limit orders from the very beginning of your trades.  These will help you set the correct risk/reward ratio of 1:1 from the very start — and after you’ve put your strategies into action, keep your hands off of them.

When you do resist the urge to play around with your trades while the market is still moving, you put yourself in the best position to make money no matter whether your predictions were right or not. Successful Forex traders profit even when they are wrong about the market’s direction (which no one can predict accurately all the time!), and they do this by setting the proper risk/reward ratio, let profits run when they happen and cut losses quickly using stop-loss and limit orders.

And here’s another tip: When you place your trades, use a stop-loss order and make sure your profit target is at least as far away from your entry as your stop-loss is.  Aim for a 1:2 risk/reward ratio or higher if you can, and then no matter which way the market goes you’ll be in a place where you can make money.

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3 Insider Forex Trading Facts Everyone Needs to Know

Despite the fact that the Forex market is the biggest investor market in the world — in which $5.3 trillion is traded every day — too many people don’t understand the huge opportunity it provides. It’s best to begin with a few basic facts about the Forex market before seeking the training and tools it takes to become a successful investor.

Here are 3 of the most important things every trader needs to know about the Forex market:

#1 – It all begins with a PIP. The smallest increment of trade in the Forex market is called a “pip,” which stands for “percentage in point.” Basically, the prices of currency pairs are quoted to the fourth decimal point in the Forex market. For another way to look at it, if you bought a cup of coffee at Starbucks for $4.30 (hey, it’s Starbucks!), in the Forex market that cup of coffee would be listed for 4.3000. Now, as prices go up or down, any change in that fourth decimal point (the ten-thousandths place) is called a pip, and is usually equivalent to 1/100th of 1% (note: the Japanese Yen does not follow this convention, and a quote including the Japanese Yen is taken out to just two places — that is, to 1/100th of the yen itself, instead of 1/1000th like other currencies).

#2 – Here’s what’s traded in the Forex market. The Forex market includes currencies from countries all over the world, but only twenty of the top currencies are used in about 93% of all trading. The more exotic currencies (such as the Czech koruna) have nowhere near the trading volume of the so-called “Majors,” which include these currency pairs: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, NZD/USD and USD/CAD.

The next most popular trading pairs are known as the commodity pairs, and they include AUD/USD, USD/CAD and NZD/USD. These seven pairs, along with other combinations such as GBP/JPY and EUR/CAD make up more than 95% of all Forex trading. Only 18 pairs and their crosses (pairs which do not include the USD) are actively traded by the majority of traders, which means the Forex market is much more compact for traders than the thousands of listings in the stock market.

Wondering about these abbreviations? Currency quotations like EUR/USD use the abbreviations for currencies that are prescribed by the International Organization for Standardization (ISO). Using this convention, the abbreviations for the major currencies include the US Dollar (USD), the Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Australian Dollar (AUD), Canadian Dollar (CAD), and the Swiss Franc (CHF).

#3 – Here’s what’s actually being sold in the Forex market. In a way, you could say that nothing is really being bought or sold in the Forex market, because currencies never actually change hands. The trades that Forex traders place are merely ones and zeroes in a computer, with the market price determining profits and losses.

The Forex market was needed by big companies with locations around the world to allow consistent exchange of currency to easily pay for goods and services from foreign vendors, pay workers in the currencies they use and make corporate mergers and acquisitions easier to transact. These days, there is much more speculative trading in the Forex market, with 80% of all Forex trades coming from investors looking to profit. These speculative investors include hedge funds, large banks and, of course, individual investors who appreciate the tremendous opportunity offered by Forex trading.

Despite the fact that in the Forex market one Euro is not packaged up and sent to the U.S. in exchange for one US physical dollar, the consequences for investors are the same. Whenever a trader sells one standard lot of EUR/USD (where a standard lot equals 100,000 units), that trader has basically given up euros for US dollars — making the investor short on euros and long on dollars.

Going back to our Starbucks example above, when you pay your $4.30 for your coffee, you are short the $4.30, and long one coffee. Starbucks is long $4.30, and short one coffee (probably a Grande…). This is exactly the same as what investors are doing in the Forex market with pairs of currencies.

There is a great deal to learn about trading the Forex market, and experts in the field are always ready to help you get started trading right. Take time to understand the Forex market before you dive in, and you’ll be in a much better position to profit as you gain experience.

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