One of the trendiest developments that’s appeared in the trading industry recently is ‘social trading’.
Many traders use social trading and copy trading strategies when they want to get involved in the markets without having a thorough knowledge of how trading works, or if they don’t want to spend hours analyzing charts and financial data.
Both novice and experienced traders believe that using the knowledge and experience of active members of online trading communities to improve their results is one of the greatest advantages of social trading. Giving traders new ways to profit from the power and wisdom of the crowd is disrupting the world of traditional finance and trading – and will continue to change the way people trade in the coming years.
So, what is social trading, and how is it different from copy trading? What are the advantages and disadvantages of these trading techniques? Most importantly, how do you integrate social trading into your strategy to improve your overall trading performance?
Social Trading vs. Copy Trading
The terms social trading and copy trading are too often used interchangeably. Simply put, copy-trading is just a form of social trading. Not every type of social platform allows copy trading.
Social trading allows traders to instantly access market information and trading ideas shared online by other traders with whom they can interact. Therefore, using social trading in your investment strategy implies that you work with data and analysis performed by other traders – or at least, you consider it.
There are several ways you can get involved with social trading. You can visit forums and other information-sharing platforms to interact with other members. You can also ask questions and follow other trader track records. And finally, you can mirror some trader positions to take advantage of their experience and success.
Using copy trading in your investment strategy consists of automatically copying another trader’s activity in your account. With this technique, you will automate your trading strategy, effectively outsourcing it to someone else.
Pros and Cons of Copy trading
When it comes to copy trading, there are different advantages you can use to enhance your trading results.
For example, relying on a copy trading strategy allows you to invest in markets you wouldn’t have thought about, because you don’t have a deep understanding of how they work and what impacts them. Therefore, using copy trading can broaden the underlying markets you’re investing in, which allows for better diversification of your investment portfolio.
Another advantage of copy trading is that you can make money without having to spend any time in front of your screen, because everything is done for you. Not to mention that it will generally allow for you to take advantage of strategies that can be used 24 hours a day.
Finally, using copy trading means that you don’t have to deal with the stress of trading. Being in the right mindset when trading can be quite difficult, as emotions can easily take control and wreak havoc on your trading decision process, especially if it’s hard for you to control your emotions, or if you’re a novice trader.
As copy trading is a form of social trading, binding your trading account with the account of another trader, you have to understand that there is no room for your own trading decisions, which can sometimes be an issue for people who like to control every aspect of their trading. It also means that your performance depends 100% on the success of the trader that you’re following.
How is social trading useful for your investing?
Social trading helps you understand what the financial community thinks about specific market configuration or assets. Consider what other traders are doing may give you an overview of what is happening in the markets.
You will, therefore, be able to take into account sentiment analysis in your strategy (in addition to fundamental and technical analysis you might already be using), which will improve your decision-making process.
Social trading provides an insight into market psychology at any given time, giving you an idea of what most traders think about the current market environment and what they’ll do (buy, sell, wait). This will make it easier to adjust your trading parameters and determine the direction and strength of a movement you might want to take advantage of, like a bullish trend, a reversal point, or a breakout.
Social Trading vs Copy Trading – How to choose?
Social trading allows you to obtain market information and trading insights from other interested parties, but you are free to use them (or not). If you decide to use copy trading, on the other, hand you are bound to replicate the positions of whoever you decide to follow.
As an automated process, copy trading is great as you won’t have to do anything other than click on the “copy” button once you’ve found the perfect trader to benefit from a proven investment strategy. But because your performance depends entirely on the trader you copy, it’s important to choose carefully who to follow. Always check the track record of the trader you want to copy, so you can see their performance, trading method, and the level of risk engaged.
