Forex Social Trading: What Are the Pros and Cons?

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There’s a lot to think about when you start trading, and many of the terms (trading discipline, fundamental analysis, technical analysis, risk management) may seem to be in a foreign language because you have so much yet to learn. This could be the reason why so many new traders like the idea of forex social trading, or copy trading as it’s sometimes called.

For those with little experience who are a little nervous about entering the world of trading, social trading feels like a safe place to start. They can learn what trading is all about from those who have been doing it much longer, and without as much risk as if they just plowed ahead themselves. However, social trading has both pros and cons associated with it. Read on to find out what some of these are.

Pros

A Collective Knowledge

Forex social trading allows new traders to learn from the strategies and knowledge of more experienced traders. It’s not the same as learning the ropes yourself – something that, ideally, should be done in conjunction with social trading – but it is a good way to get started if you’re keen to try something out.

You can see the same sort of thing happening in many different sectors. Business mentors, for example, work on the same principle, giving advice, and allowing newcomers to benefit from their wisdom.

Information from Many Sources

In the past, before social trading platforms emerged, you would have had to go to a number of different sources to gather all the information you needed to understand just how to make a trade and what to do in specific situations.

With forex social trading, you no longer have to do this. In fact, the whole point of these platforms, or at least a big part of them, is to condense a lot of information from many sources into one place. This is so new traders don’t have to spend their entire time finding new sources. They can simply use their social trading platform and not go anywhere else.

Confidence Building

Lack of confidence is a big problem for new traders. They want to trade, they’ve researched what to do, they’ve understood the risks, and yet when the time comes they can’t do it. They’re too nervous.

With social trading, these nerves can be reduced and confidence built. Seeing what other, more experienced traders are doing and copying their strategies will give you a confidence boost like no other. You’ll be much happier to make a start. Once you do, you’ll start gaining experience in your own abilities as well as other people’s.

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Cons

A False Sense of Security

Following successful traders through forex social trading is, as we’ve said, great for building confidence. However, it’s important to be careful because that confidence can come with a false sense of security. You may feel as though you cannot lose. The truth is, no one ever wins all the time when trading, or anything else. You need to be prepared for a loss as well as a profit. Otherwise you might invest more than you can comfortably lose, and then find yourself in trouble.

Becoming Overconfident

Similar to the above, it’s possible that you can become over confident when using forex social trading platforms. When this happens (because you feel as though you have a good safety net under you), you may not pay as much attention to the markets as you should. Not only does this mean you aren’t learning anything for yourself, but it could mean you don’t notice when an issue starts to occur. This means you lose a lot more money than you had to.

Of course, it’s great to be able to “set and forget” when it comes to trading. But, when you’re copy trading it doesn’t quite work like this. You need to monitor the trades regularly, just in case.

Different Trade Conditions

Although you might be able to copy a trade exactly, you won’t necessarily be able to copy the trading conditions. You just don’t know what conditions the trader you’re copying through forex social trading platforms is working in the same way you are, and because of this, there can always be some discrepancies.

The other trader might have a more diversified investment portfolio, for example, and that could mean they are willing to risk more on some trades knowing they have safe capital elsewhere. If you’re copying one of the riskier trades without that safe capital, you could find yourself with problems should something go wrong.

Should You Try Social Trading?

For those just starting out on their forex trading journey, social trading represents a great way to find out more and to make some trades yourself, feeling safe that you are following someone else’s lead. However, that doesn’t mean you won’t lose, and it certainly doesn’t mean you will be protected from any losses. In other words, by copying other traders you’re not guaranteeing that you’ll make money.

However, as a way to hone your own skills and learn more about the process, many find forex social trading to be priceless.

Allan Smith is a professional finance writer specializing in personal finance. He has worked in the finance sector for a long time. He believes that everyone’s economic and life situation is isolated, and he keeps this fact in mind while providing personal finance advice in his blog Day to Day Finance. All the people seeking financial guidance are in different stages of life. Allan loves to explore every possible angle of personal finance so that anybody can get help.