There are many ways in which you can trade the financial markets in the digital age, but one of the most effective and intriguing is ‘social’ trading.
Make no mistake; the social trading platform market is projected to reach $3.77 billion in 2028, as the sector expands at a CAGR of 7.8% over the course of the next five years.
But what is social trading, and how does it work? We’ll answer these questions below while appraising the advantages of this practice.
What is Social Trading and How Does it Work?
Social trading is a relatively passive income stream and one that requires you to observe targeted and successful investors before largely replicating their strategies.
This negates the need to undertake extensive technical or fundamental analysis, as this work will have already been done by your selected trader.
However, there’s some scope for manual work and execution when deploying social trading strategies, this methodology works differently from copy trading (despite the two terms often being used interchangeably).
Copy trading is actually a subset of social trading, which enables you to automatically mimic the trades of other investors. Conversely, social trading lets you observe existing strategies and deploy these as you wish while allowing for your own insight, actions, and decision-making.
For example, you may follow an experienced trader and choose to borrow one of their highly profitable strategies. You can adopt this approach manually using dedicated social trading platforms, while many will allow you to make changes as and when required.
This strategy will also let you control and manage order execution in real-time, rather than relying solely on trading algorithms and software.
What are the Advantages of Social Trading?
OK, we hear you ask, but what are the main advantages of social trading? We’ve broken down some of the biggest benefits below!
- #1. Learn From Seasoned Traders: Social trading offers access to a first-hand learning experience in your choice of market, rather than simply copying trades through automation. This can provide practical learning and fill any gaps in knowledge that you may have, while it also offers an insight into how the best traders respond to specific economic events. For example, while what causes inflation can vary from one crisis to another, the effects are often the same, so learning how to trade such events positively is key.
- #2. Build Market Confidence: Social trading enables you to build confidence as well as knowledge, and while platforms don’t provide an infallible system, they offer access to optimized returns when compared with standard trading as a beginner. Social trading can also serve as a reminder that even the best and most seasoned investors can lose money from time to time, so you don’t need to be cowed in instances where you fail. In fact, social trading can teach you how to best deploy risk management measures like stop losses and profit-taking orders.
- #3. Access a Collective Wealth of Knowledge: Social trading also enables beginner and novice traders to effectively crowdsource an existing wealth of collective knowledge through dedicated platforms. Social trading platforms are also home to an incredible source of insight and strategy, which are crucial when looking to achieve success consistently over time. Remember, you can also combine social trading with manual execution and learning, allowing you to optimize the learning experience and make collective knowledge resources work for you.
The Bottom Line
As we can see, social trading is a fascinating and potentially rewarding trading strategy, especially in markets such as forex that are complex, volatile, and where 70% of traders actively lose money.
While it’s not infallible, the correct selection of experienced master traders can minimize the risk of loss and optimize returns, in line with your own risk outlook, capital holding, and underlying profit expectations.