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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