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Two questions you must answer before you start social trading

The advent of the digital age has caused massive disruptions across practically all fields of human endeavors. One of the changes that the internet birthed is social networks, which changed the way we interact, forge, and maintain relationships with others. Now, a merger is going on between the world of social networks and the world of financial investments as a new vehicle for accessing the market emerges - social trading.
Social trading is simply a new way to access the markets by aggregating the wisdom of the investing crowd to make trading decisions based on user-generated content. Social trading provides an avenue to see the portfolio of other traders, understand the fundamental and technical analysis behind their trades, benchmark their performance, and follow their trading patterns.

Social trading is a smart way to get ahead on the learning curve to understanding and profiting from the markets. However, before you start social trading here are two basic questions you'll need to answer honestly.

Two questions you must answer before you start social trading

1. Will you trade socially, copy trade, or have others copy your trade?

Social trading as the name implies is social in nature and it requires some interaction with other traders and market participants. You can choose to social trade – a position in which you'll be in charge of your trading portfolio after actively absorbing market information from other traders. As a social trader, you'll base most of your trading decisions on the overall sentiment in your social trading platform on any specific asset.

If you don't want to be actively engaged in the market or you don't have the time to study market sentiments, copy trading might be the way to go. Copy trading allows you to automatically follow and copy the trades of expert traders in your trading network.

If you are an expert trader with a proven record of profitable trades, you may want to consider setting up shop as a top trader. You get to help others improve their trading game by sharing insights and trading signals. In turn, you'll make money from your trades and earn commissions based on the popularity of your reputation in the network.

2. Can you afford social trading?

Many people erroneously believe that social trading is the magic potion that will erase their previous trading losses and set them on a path to beating Wall Street at the game of numbers. Of course, social trading can be profitable if you are in the right social network and you place trades based on logic and not emotions.

However, trading in itself has its inherent risks and the past performance of today's top traders is not a guarantee of their future performance. Everybody (including Warren Buffet) loses money on Wall Street at different times but the key to success is having more winning trades than losing trades in the long run.

Hence, the top traders that you are following or copying will inevitably have some losing trades, if you are trading with money you can't afford to lose, you are likely to jump ship at the first sign of trouble and you won't be around to record the gains when the tide finally turns to start yielding profitable trades.

21 Jul 2017 15:14