Social trading is what happens when you want to outsource financial trading decisions to professionals. Since financial trading can be profitable but also very difficult to achieve, outsourcing your trading using social trading and copy trading might be the best idea. However, without knowing how you can properly copy other traders’ strategies and methods, it will be difficult to succeed. Copying real trades of other investors via online platforms has become super popular among traders who do not have enough time to allocate to financial trading.
In this compact guide, we will explain what social trading is and the pros and cons to better evaluate your chances of success.
What social trading really is
Social trading is like Instagram for investing, but instead of vacation pics, you see trades. Copy trading is also similar to social trading, but it is fully automated, and traders do not have to manually open and close trading positions. Both of these methods have their pros and cons, and knowing the social trading vs copy trading nuances can greatly help to achieve profits.
The basic idea behind social trading is pretty simple: traders can replicate other traders’ performance, and if you choose the right one, you can make lots of money. And you don’t even need to develop a profitable strategy yourself. This is a powerful idea, and many retail investors try to find the best strategies to copy.
How to properly leverage social trading
To properly leverage the power of social trading, it is necessary to follow several strict steps. You need to find reliable traders, then diversify your capital and strictly control risks. Let’s outline these crucial steps below.
Do your homework
When copy trading, you need to select profitable strategies with low drawdown. Similar is true for social trading. However, traders need to look through trader profiles, not just chase high returns. You need to know their history, how they have been trading, how big their worst losses (drawdowns) were, and what their trading strategy is. By analyzing these aspects, traders can understand how risky the strategy is and whether a few losing streaks can wipe out entire profits. This is especially true for martingale and other high-risk strategies that show great profits in a short period but are destined to blow the entire account in the medium to long term.
Diversify across strategies
Diversification is a powerful technique where traders and investors build portfolios of different assets. In other words, they invest in different assets like gold, bitcoin, and the EUR/USD pair to spread their risk. While many traders tend to pick only one trading system, it is best to select several strategies to copy. This way, you diversify across different profitable strategies and protect your account from the risk of ruin. If one social trading strategy fails, there are other strategies to account for those losses.
Start low and protect yourself using stop-loss
Once set up, the platform usually does the work for you. When the trader you selected buys or sells, your account does too. However, it is based on your allocation and risk appetite. Many advanced platforms enable you to control your risk, and it is mandatory to use strict risk management strategies like stop-loss or a certain percentage risk for each trade.
Pros and cons of social trading
Despite its advantages, social trading comes with its unique set of downsides, which is absolutely necessary to know before employing this powerful trading method.
Social trading pros
- Watch and learn – You can watch real trades happen live and understand different strategies passively.
- Outsource trading expertise – You tap into the knowledge and experience of seasoned traders.
- Save time – Much less time is needed than to develop and test your own trading strategies, which can take weeks or even months. You don’t need to stare at charts; social trading platforms take care of trading itself.
- Diversification – Easily spread your money on several different traders, preferably in different assets like one in crypto, another in FX, and so on.
- Community – You can share and talk with other traders, which is always good to learn something new alongside making money.
Social trading cons
- You inherit their risk – By copying other traders’ strategies, you also copy their risk, and if the system is a martingale, then you are going to lose it all.
- Over-reliance – Over-reliance on other traders’ systems leads to less understanding and knowledge of markets, which is never a good thing.
- Fees stack up – Platform fees and fees paid to the strategy provider can seriously damage your earnings.
Scams and fake gurus – This is a serious issue, as there are lots of scam traders advertising themselves as the best traders. You can easily spot them when they offer wild account flips and near 100% win rates.
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