If you’re new to trading, there’s quite a lot to take on board. Trading discipline, technical analysis, fundamental analysis, and risk management can all add up to a lot of time-consuming self-education. It’s no wonder, then, that so many new traders are keen to try forex social trading. Sometimes called copy trading, it’s something that gives those who are inexperienced a form of safety net as they start to learn the tricks of the trade. However, like any trading strategy, forex social trading has pros and cons. In this expert guide, we’ll take a look at some of those advantages and disadvantages.
A Collective Knowledge
Forex social trading enables new traders to benefit from the wisdom, strategy, and knowledge of other, more experienced traders in order to make a successful trade. While it isn’t a substitute for learning independently how to trade, it’s a useful tool to support beginners to embark on the learning curve. It’s only natural for new traders to try to learn strategies and techniques from established traders and thanks to the latest technology, this is now possible using software instead of just observation.
Information Can Be Accessed From Numerous Sources
Social trading platforms have been able to condense a plethora of information into user-friendly tools and apps. A huge amount of data is stored on these platforms from many traders and this allows new traders to access lots of talented mentors simultaneously.
One of the best ways to build up your confidence as a new trader is to try social trading. While the system isn’t infallible and it’s still possible that trades will fail and money will be lost, the chance of a successful trade is higher when copy trading. It can also serve as a useful reminder that everyone loses money sometimes, and this gives a new trader greater confidence in knowing losses are normal and aren’t a sign of failure. It can give beginners the boost they need to try independent forex trading for the first time.
The False Sense of Security
Understandably, social trading plays of the possible gains traders could make when they try out copy trading. This can lead new traders to forget that everyone will lose sometimes. They may begin copying a successful trader at the start of their losing or winning streak with highly unrealistic expectations of the amount of money that could be made and could end up investing more money than they could afford to lose.
When a trader develops a false sense of security, they can then become overconfident. As a result, they may not pay as much attention to the market as they should. You can’t just “set and forget” with copy trading, yet many beginners fall into that trap. Forex trading will always take effort, even if you’re copying trades. You must monitor the traders that you’re copying and monitor and analyze their strategies at all times. This helps new traders to refine their own strategies.
Different Trade Conditions
A new trader could be operating under different conditions to the traders that they are copying. Copying trading patterns means that you have absolutely no idea of that trader’s circumstances. Their investment portfolio may be more diversified or they may have safe capital in other lower-risk investments and may, therefore, be using high-return, high-risk strategies. It’s important to have a risk-management strategy and to stick to it whether you’re copying trading or not, otherwise, you could end up with major losses.
Should I Try Social Trading?
Social trading represents an interesting way to start forex trading if you’re a newcomer to the markets. However, it’s important to recognize that the system isn’t perfect and that you won’t be protected from losses. Simply copying successful traders is no guarantee of making money, but it can be a useful tool to leverage when it comes to honing your own skills and learning how to manage risk, develop strategies and make trades independently.