Social Trading - What It Is and How It Works

In the fast and furious world of currency trading, everyone is looking for an edge. New concepts and methods are developed all the time, from abstract trading philosophies through to detailed analysis and execution systems. Social trading is one of the latest tools taking hold around the world, as traders look for new and innovative ways to profit from the forex market.

social trading

Much like the wider world of social media, social trading has revolutionised the way people interact with each other through the Internet. Built on the concept that 'collective wisdom' is better than 'going it alone', social trading lets traders add social information to their already existing technical and fundamental arsenal. Just like you can 'follow' people on Facebook and Twitter, social trading allows you to view, analyse, and even copy other traders in real-time.

A number of social trading firms are operating around the world, integrating Web 2.0 applications with affiliated forex brokerage. This combination of social network and trading platform provides users with an entirely new and powerful information source when making financial decisions. With social trading, traders have the choice to either use information alone in a self-trade scenario or directly copy other traders through an automated trade process.

While it's still quite a new concept in the forex world, social trading can be seen as a modern implementation of traditional floor trading. In the 'good old days', floor traders would often make decisions based on those around them, weighing up their own analysis with information from newsletters and other people inside an exchange. Today, with most retail traders working alone at their computers, people crave the connection and support that social trading provides.

Social trading allows traders to conduct analysis and make decisions online with help from others, hopefully balancing out the steep learning curve normally associated with the forex market. By interacting with more experienced traders, asking questions, and copying trades in real-time, traders hope to learn faster without risking their entire portfolio. While this method of trading is not without its risks, social trading can be a powerful tool in the right hands.

In order to understand how social trading works, it's important to analyse the key features that keep users engaged. Information flow is the heart and sole of social forex trading, with platforms offering activity feeds, trade walls, and private messaging to enable the free exchange of information between traders. Co-operative trading is another key feature of many social platforms, with traders allowed to work together in teams by sharing information or pooling funds.

Monetization is also an important aspect of social trading, with different strategies used to attract 'leaders' and 'followers' alike. Generally speaking, experienced traders are offered financial incentives to post trade information, with incentives generally available through affiliated brokers. Social trading provides an additional revenue stream for 'leaders' who want to share information on a network, although it goes without saying, people are only interested in following already successful traders.

While social trading can be a great tool, it is notoriously difficult to profit in the forex market. While copying other traders' set-ups might seem like a tempting proposition, it can have its drawbacks. For example, many platforms will allow anyone to be a 'leader', which means new traders have to make tough judgement calls when deciding who to follow. For this reason, it's important to analyse past trade history carefully, and only follow people with a verifiable and long-standing track record.

Perhaps the biggest danger of social trading platforms, however, is how they encourage an attitude of copying and foster a lack of responsibility. If you want to be a successful trader, it is fundamental to find a system that works for your personality and your lifestyle. While social trading platforms can be a great tool and a fantastic way to learn from other traders, in the long run, it's always important to find your own style and develop a trading system you can trust from the inside-out.