Social Trading: Focusing on Education, Not Simply Copying
As investors continue to move from the trading floor to the home trading station, the size of the networking communities available has grown exponentially. But the unfortunate outcome of these trends can be seen in the fact that many new traders have started to rely too heavily on strategies that are not their own. At this stage, it is undeniable that the phenomenon of “copy trading” has taken over large sections of the market (especially in areas like forex and binary options). Copy trading essentially allows you to see the exact trade entries and exits that have been initiated by other traders. For example, a trader might elect to buy the S&P 500 if prices drop to 1,800, and then take profits if prices reach 1,850. You can see exactly when the trade is placed, and the trade can be replicated in your own trading account.
To be sure, these practices have added advantages for those that are new to financial trading: It is easy to find a mentor, monitor the trades, and avoid some of the losses that are often encountered by newbies. But these practices have some negative consequences as well, as they prevent traders from learning some significant lessons and limit the ability to craft a personalized strategy that meets your investment goals.
The Dangers of Copy Trading
On the face of it, copy trading might seem like a “holy grail” for investors. All you need to do is find a trading website, locate a successful trader that matches your criteria for risk tolerance and positioning, copy the trades and make money. But anything that sounds too good to be true, probably is — and there are some significant risks involved when we allow our trading decisions to be dictated by other people.
The first risk is that many of these systems will automatically place trades in your account. This can be done using Expert Advisors (EAs) in popular binary options platforms like MetaTrader, and it can be difficult to monitor every trade that is made. But you are still liable for any losses accrued in these positions, even if it is a trade that you might not have placed on your own. Of course, it is always dangerous to have open trades that you do not know about — especially if market conditions start to post increased volatility (big price changes in short periods of time).
Other dangers come from the fact that it is very difficult to verify the identity or reputation of the people making the trading decisions. Anybody can have a few successful trades in a row but whether or not these people can continue to do this on a consistent basis is an entirely different question.
Learning Communities vs. Trade Copying
But this does not mean that social trading communities have no value — quite the contrary. Some of the best choices will place the focus on learning and market debate as a means for educating traders and in helping the community as a hole to be successful in trading. One of the best choices that I have come across in my own trading is the CommuniTraders forum to learn and trade binary options. It is important to rely only on trading platforms where learning the fundamentals of markets like forex and binary options is most important. Unfortunately, trading can never be as easy as simply copying the person next to you.
Does this type of approach work well in a student’s math class or in your place of employment. It might work once or twice but will leave you largely unprepared for the real trading environment. And, when dealing with investments, there is simply too much risk to proceed blindly. The online trading world as a lot to offer — in wealth, education, and social interconnectivity. Social trading can help to educate both new and old traders, but it much be done the right way. Networks like CommuniTraders offer a new spin on these types of outlets and help you to protect yourself against the potential dangers in copy trading.