The Advantage and Disadvantage of Social Trading in the Forex Market

December 30, 2020 | AtoZ Markets – Social trading is a nearly new concept in retail forex trading, and its reputation has substantially grown during the last few years. The idea that drives social trading is that the process offers a chance for forex traders who trade online to retrieve details assembled from other retail traders and use their combined experience and knowledge to trade in their accounts.

Social trading runs along the same lines as popular social networks - like Facebook and Twitter, where people connect directly with others on an ongoing basis from wherever they are. And for other social networks, there are advantages and disadvantages to their use.

The Advantages

The most common advantage of social trading is how easy it is. By simply monitoring and following other traders and basing their trades on more seasoned traders' professional decisions, there is no need for individual traders to make their technical or fundamental analysis. It's similar to having the answers to an exam before the teachers give the test questionnaires.

Through social trading, forex traders instantly associate with thousands of other traders in an environment where they can communicate with each other, talk about viewpoints, and duplicate the trades that seem right for them. Then, novice and experienced traders can learn how top performers come to their decisions and the strategies they use that work properly than others in their efforts to profit while limiting the risks to the whole portfolio.

One more important benefit of social trading brokers is that when trading as part of a group or community, instead of an individual, it is easier to prevent the personal biases that mostly lead to losing positions. As a member of the pack, trading becomes much easier to see changing activity in the market from a more unbiased perspective.

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Lastly, as traders open up trading to the public, social trading acts to remove forex trading from being an instrument typically restricted to top league brokers and multinational banks. Since all trades placed on a social trading platform are copied, no one can interrupt a trader's trades, giving more transparency.

The Disadvantages

Social trading gives a free exchange of information to individual and small scale investors. Though it is undoubtedly an advantage, it might also become a disadvantage. Since only a small number of traders become consistently successful, using social trading networks may lead to the wrong trader and end up with losses instead of the hope-for profits.

Then, one of the major disadvantages of social forex trading is that it stays relatively difficult for a trader to choose the right social platform. There is no shortage of networking platforms, making it challenging for traders to make a decision. Even though social forex trading is not a scam, several scammers don't play by the rules, and an unsuspecting trader becomes easily swindled. Picking the right trading platform is the key to social trading. However, it is complicated, and traders are not always savvy enough to see through the good from the bad.

Moreover, different social trading networks offer various features that are not entirely understood by a newbie forex trader. Then, some networks reward their traders not just for the profits they get but also for the low risk management approach. As a result, it makes leading traders more risk conscious compared to those on other networks, rewarding traders for profits only and might attract more risk taking in the process. This kind of network pushes new traders to begin trading with the additional risk that is not always a good start.

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