What is Social Trading?
Social Trading has taken off in a big way in the last couple of years and promises to revolutionise how individuals trade the financial markets. Just like how people share information and news on traditional social networks, users of social trading networks share information with the other users of the network. But rather than sharing news and info about their life they share their trades and opinions about various financial markets. This allows the other users of the network to take in this information and either use to inform their own trading or alternatively automatically copy other traders.
In theory this should make it much easier for those interested in the financial markets to make money from trading. Rather than spend time and money learning about trading and perfecting a trading strategy, newbie’s can simply copy already successful traders and make money by simply copying the best traders. It should be clear why social trading has become so popular, as it gives individuals the chance to make money without being a trading expert. But is social trading is as good as it sounds? We take a serious look at the pros and the cons.
Social Trading: The Positives
Clearly, the biggest positive is that with social trading one can make money from the financial markets without themselves being an expert. In the past if someone wanted to make money from trading they would have to spend a significant amount of time learning how to trade and even then they might not be successful. Social trading revolutionises this and allows any with the money to potentially make money from copy the actions of others.
In addition to allowing those without prior experience make money from trading the markets, social trading networks provide useful information for those already trading the markets. The rise of social trading has allowed traders to see what positions other traders are taking, this can be very valuable and can help you gauge market sentiment.
Finally, those who are already successful traders can share their positions and knowledge with others. You may ask why someone would do such a thing? Well to ensure that there are lots of highly skilled traders sharing their positions and trading knowledge, social trading networks tend to reward those who share this information with others on a commission basis. This means some traders can make a significant second income sharing their trading positions with their followers. For instance social trading network eToro allows for its users to make up to $10,000 a month in commission, to find out more check out this article.
Social Trading: The Negatives
Placing your hard earned cash in the hands of someone who you don’t know involves taking a big leap of faith. While you will be able to set your own risk profile, all the trading activity will be in the hands of someone you don’t know. To make matters worse it can be very difficult to find out the credentials of the person you are entrusting your money too. This makes social trading something which is not for the faint hearted.
There are significant risks involved in social trading and past performance is no indicator of future success. Some individuals have gone into social trading without truly understanding this and have ended up losing significant sums they could ill afford to lose. Social trading is risky and it is not uncommon for the top traders on networks to go through periods were they make significant loses. This is why you should only ever trade with money that you can afford to lose.
Overall social trading presents individuals with an opportunity to make money from the financial markets without themselves having an in-depth knowledge of the subject. Of course any sort of trading involves significant risk and many people who have got involved with social trading haven’t truly grasped this. Make sure you understand the risks before you get involved.
Social trading presents some great opportunities to individuals who are already competent traders, as they can use social trading networks to get a grasp of sentiment as well as potentially making some impressive commissions which are paid out by most networks.
Katty Sanders writes for Foreign exchange trading blog The FX View. As well as writting about Forex, she also trades the financial markets and you may find her trading on social networks.