Social trading is a new concept in retail Forex trading. It allows online financial investors to access data gathered from other retail traders in an effort to use the collective experience and knowledge of thousands of other traders around the globe. It works on the same principle as other popular social networks, such as Facebook and Twitter, where individuals can communicate directly with friends and family no matter where they are.
Social trading eliminates the need for Forex traders to do their own technical or fundamental analysis and gives them the opportunity to trade based on the professional decisions taken by others.
Traders can interact with each other, view the trades already placed by them and then duplicate their trades. In this way, traders can learn why top performers choose to place the trades the way they do and which strategies work better than others without risking their entire portfolio.
Unfettered access to information is very important in financial trading and social trading provides a free exchange of information to individual and small scale investors. Since there are only a small number of traders who are consistently successful, by using social trading networks a trader can locate them and place trades like they do in hopes that they will be as successful in the long run.
Different Social Trading Networks
There are various different social trading networks and they offer different features. Some networks reward their traders not just for the profits they make, but also for their low risk management approach. This makes leading traders more risk conscious than those on other networks which reward traders for profits only and may attract more risk taking in the process.
There are other social trading networks that limit the amount that a trader can allocate to 20-or 30% thus forcing the trader to spread the risk. However, a trader may risk up to 100% on a single trade and can technically lose a full allocation in one trade.
Another type of network offers traders a limited number of selected traders who have used a pre-tested money management approach and any trades they do in their accounts will be done proportionally in the trader’s account according to the amount allocated to them. I.e. if they risk 3% of their account balance on a trade, only 3% of the allocation will be at risk.
One way to experiment with social trading networks while avoiding the risk involved is by opening a demo account. Many Forex brokers offer demo accounts to their clients so they can practice their trades before moving on to a real account. Demo accounts can be used for only a few weeks but some brokers extend their use indefinitely. And since the funds are virtually provided by the broker, the trader’s money is never at risk. Traders can open as many demo accounts are they wish and can practice social trading with various approaches and different techniques.
Cina Coren is a contributing editor at DailyForex. She writes freelance for many publications and tries to find the humor in life’s challenges.