Home Investment Copy Trading versus Social Trading – Explained for Dummies

Copy Trading versus Social Trading – Explained for Dummies

by wrich
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Overview

The world of trading, whether it is forex trading, cryptocurrency trading, stock trading, or trading in any other financial market, offers retail traders a plethora of trading opportunities and different ways in which to trade.

While social trading, as well as copy trading, may have the same basis, they differ in several ways. To understand how each works and how they are different, they must be examined in relation to one another.

What is Social Trading?

Social trading is one of the best ways for beginner traders to learn and invest by interacting with other traders, especially more advanced traders, through different social trading platforms.

When traders trade socially, they communicate back and forth with certain retail traders or peers. Traders can share different trading strategies, technical analysis results, or fundamental analysis components with one another, with the expectation that traders can learn more about forex trading.

This ultimately allows beginner traders to create a suited investment strategy that fulfils their financial goals and trading objectives. However, it must be noted that social trading can be biased and filled with human error, regardless of the financial markets, market conditions, or the trading strategy that the trader uses.

While many retail traders consider it as a way to learn and develop, it can also open unsuspecting new traders to potential pitfalls that they may encounter later during their trading career. Traders need to evaluate their unique trading style and decide whether social trading will help them achieve their trading goals.

There are many forex brokers that have a reputable social trading network that consists of many professional traders that are more than willing to share their advice and expertise. 

What is Copy Trading?

Copy-trading removes the social element from the equation and focuses on the technical analysis that is associated with successful trading. Where copy trading is concerned, traders can automatically enter and follow selected positions of experienced traders.

These traders have gone through extensive testing and they are typically hand-picked by third parties or by established, well-regulated companies.

Successful traders are typically vetted and they have many performance-based reviews that include their success rates, and all other components, making it easier for traders to choose the traders that they want to follow and whose trading signals they want to copy. 

Other fundamental considerations

Social trading may be a broader term while copy trading can form a part of social trading because there is interaction with other seasoned traders, whether on a private social network or through online brokers.

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Copy trading can be considered a type of social trading, but not every type of social trading can be considered copy trading because traders do not let others manage their trades automatically.

Traders can use the information that they gain from other traders and base their trading decisions on that information. Copy trading binds the traders trading account to that of another trader, with their trades reflected in the trader’s account.

When that trader enters a trade, the process is automated, and it can typically only be stopped when the trader stops copying the professional trader whose trading signals they are following.

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