Traders of all types of commodities, stocks, and goods have kept insights gained through experience and observation, centralized. However, information sharing, guidance, and the spread of the trading business have made it possible for many people to see results from trading. How? Through Social Trading.
What is Social Trading?
Social Trading is a type of trading where investors can observe the trading strategies of their other traders and interact with them. The idea is to be able to use their strategies via copy trading or mirror trading. The investors can copy the trades of veteran traders and implement the same trades in their accounts. One may ask, why experienced traders would give out their secrets?
Well, since they are trading against each other rather than trading against the market, they are motivated to share as much information and potential opportunities as they can. Therefore, social trading is a way for a lot of people to explore the market compared to individual trading.
A Social Trading Platform
It is a platform that allows you to copy other people’s trades and actively carry out social trading. For example, Tixee is now a fresh and loaded social trading platform!
How Social Trading Works?
It’s quite simple. Among other traders on the platform, you search for their trading ideas, past performance, and strategies. When you find the most suitable trader that fits your investment capital, desired assets, risk tolerance, and goals, you can replicate their strategy in your account. The catch is that you have to find a really good trader to mimic.
Read Also: What is Forex Trading and How Does it Work?
Advantages of Social Trading
1. Limits Emotional Interference
As the trade opens, closes, and amends according to the strategy you choose to follow, it doesn’t require you to make daily trading decisions. Since the market can be overwhelming to new traders, and taking informed decisions can be tricky, this method is very convenient where a quick-witted trader’s experience lets you free ride towards potential profit.
2. Allows Investment with Little Market Knowledge
One of the most inviting benefits of copy trading is that you can trade with limited knowledge. Since the trader doesn’t have to devise a strategy of their own and mimic that of an experienced trader, they don’t need to know forex inside out. You still need to use your own criteria to find a good investor and use your better judgment to understand their performance.
3. One step ahead
Social trading usually examines, investigates, verifies the strategies and they are tested. Therefore, losing trades are often filtered out. Usually, the strategy needs to have a 12-month track record of results with a certain maximum drawdown limit. Therefore, the strategies you are following have passed very tough criteria.
4. Assists New Traders
The above-mentioned advantages of filtering risky strategies, providing reliable trades to mimic and no in-depth financial knowledge makes social trading potentially ideal for beginners. You can observe how veteran traders perform, trade, and learn from them while exploring the market.
5. A Passive Investment Strategy
It doesn’t require a lot of homework. You can start trading today! If your trader does well, you do well and if he/she doesn’t, you can move on to a new trader. The best part is that you can trade at your own convenience and don’t have to keep checking back again and again.
Limitations of Social Trading
1. Inflexible Strategies
Some trading strategies seem very promising but they can only yield good results under certain market conditions. If a strategy performs well in a trending market, it may not perform at the same pace in range-bound markets.
2. Complex Risk Assessment
The process of social trading can be very simple and it’s easy to see if profit is being made or not. However, it is usually difficult to depict what risks were taken to make that result. So, even if it seems a strategy-made profit, you won’t be able to easily figure out the underlying mandatory conditions for that result to be possible.
Using social media in different forms has grown to all financial service providers. The gains are promising but losses are not insignificant either. It is a sophisticated and beginner-friendly trading method but still isn’t magic.