Social Trading: The Good, The Bad, And The Ugly

social trading

In this article, we will explain what Social Trading is, what are the advantages and disadvantages it presents and the most used platforms, which platforms exist and how you can find out more about it, and ultimately our opinion about Social Trading.

Introduction

Social Trading is a new generation investment discipline. It developed thanks to the use of the Forex market and MetaTrader platforms.

Nowadays, many people want to invest, but do not have the necessary experience and knowledge to succeed. To meet the needs of these people, Social Trading was born, which aims to democratize the investment world and make it more #social. 

What is Social Trading?

Social Trading was born thanks to Web 2.0 and allows the user to make financial transactions automatically, copying the movements made by professional investors. It is so-called because it works as a social network where investors can interact and share ideas and results.

It is a collaborative discipline, offering the possibility for novice investors to work with professionals in a mutually beneficial way.

People with little experience and knowledge can follow more experienced investors and copy their strategies. In that way, they learn and gain experience faster and more efficiently. In turn, professional investors earn a commission for allowing novice investors to have access to their information, movements, and results.

Social Trading takes place on many digital platforms which provide statistics with the results of investors. People who want to copy an investor can compare these statistics and choose the best option.

The discipline is characterized by the free flow of information between users and transparency, as the platforms display the statistics, results, and positions of each investor in a transparent way.

Social Trading is considered by many experts as the future of investment because it eliminates intermediaries and connects inexperienced investors directly with professionals.

 

What are the advantages of Social Trading?

Ease is one of the most outstanding advantages of this modality, although it is not the only one. Below, we will analyze the main benefits offered by Social Trading:

– You earn money while you learn: with this technique, you don’t need to wait until you have the experience to start earning money. You will be able to learn by following the steps of professional investors and, at the same time, you will earn money by replicating their strategies and movements.

– You learn quickly and efficiently: Social Trading reduces the time it takes to learn how to invest. By copying professional investors, you learn quickly. In addition, you can automate the process, so you save time.

– Diversification: through Social Trading platforms, you can trade in many assets, depending on the investors you copy and the markets they trade in.

– You build a community of investors: you can interact, share information, and collaborate with other investors. Moreover, as it is an online community, you can access it from anywhere in the world if you have an internet connection.

What are the disadvantages of Social Trading?

On the other hand, this discipline has some disadvantages.

– The risks are high: even if you choose an investor who has many benefits, there is no guarantee that this will always be the case. This investor may perform a bad action, which will have repercussions on your results. Also, if you do not start investing at the same time as the professional you follow, your profitability may be different from his.

– The wrong investor: it is necessary to do a lot of research before deciding on an investor to replicate. If you make a mistake, you will end up losing money instead of earning it.

– Dependency: by following the strategies of another investor, in many cases, a situation of dependency is created. If the novice investor does not try to learn and gain experience, he may never become capable of making decisions on his own. Thus, he will always end up having to wait for the professional to perform an action and then replicate it. There is no guarantee that this dependency relationship will work in the long term because at any time the professional investor can stop offering his services.

To choose a broker, it is recommended that you consider some aspects, such as security, transparency, quality of service, and customer service.

Our opinion on Social Trading

In short, although it is a simple discipline, that does not guarantee that it is easy to succeed and make money. To achieve good results, it takes a lot of caution and analysis, because you have to choose a good investor to copy. In addition, it is good to remember that there are always risks: if the investor makes a wrong decision, it will affect you too.

In our opinion, Social Trading is not a practice we recommend. We believe that everyone should learn to identify stocks on their own than to copy a person you don’t know and who, at any moment, can stop offering you, their services.

Studies raise concerns for Social Trading platforms, as it demonstrates that in the aggregate, selecting the wrong signal providers could result in severe losses. Unfortunately, the evidence demonstrates that naïve retail investors can be easily convinced that they have an edge — they know something the market hasn’t yet incorporated into prices. Sadly, the evidence also shows that while these less sophisticated investors can be convinced, they “know” something by finding an “expert” on a social media platform, the results of trading activities based on following “experts” show negative outcomes.

As of now, however, signal followers need to be very careful when choosing signal providers or even further, they should not invest their money on Social Trading platforms at all when they are not able to detect skill.

In summary, the study shows that the majority of signal providers do not generate positive net returns for signal followers. Therefore, signal followers should be very cautious when investing their money in a Social Trading platform.

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