Social and Copy-trading: Risks and Opportunities
Social and Copy-trading: Risks and Opportunities
08-22-2024, 04:18 PM
Social trading allows investors to trade online based on market analysis and the strategies of other traders. It is based on automated platforms that integrate social networks. It also provides an opportunity to share experiences, which is especially useful for beginners.
Social trading is based on:
- Analyses published on platforms or social media to recommend positions in the markets;
- Trading signals, which are recommendations to take positions in the financial market sent via email. It is up to the recipient to decide whether to follow it or not and place the corresponding order in their account.
In its basic variant, involving the use and analysis of trading signals, social trading can be one of the elements of training for a non-professional novice trader. It allows to study the market and develop decision-making skills, but requires a conscious approach to each signal and strategy. Despite this, even experienced traders can sometimes face unexpected risks associated with using signals and following other traders.
The most original version of social trading is copy-trading, which consists of automatically copying positions taken by a trader in real time. This allows users to duplicate the trades of successful traders without having to make their own decisions. However, copy-trading does not guarantee success and can lead to significant losses if the selected trader makes erroneous trades.
Mirror trading, another variation of social trading, involves copying the trading strategy (rather than the trader). It is a more structured approach that allows investors to follow a particular strategy regardless of who is using it. Mirror trading can be useful for those who want to use time-tested strategies, but also requires an understanding of how that strategy performs in different market conditions.
Practical aspects of copy-trading
To use copy trading, first choose a platform such as AvaTrade, XTB or eToro and make sure it is legitimate. Check reviews and trading conditions to find the best platform for you. Give preference to platforms with reliable jurisdictions and good support. It is better to choose platforms with more reliable regulation.
You choose the traders you want to copy based on information such as:
- 1-year performance;
- Risk rating;
- The number of people copying them and their popularity over the last 7 days;
- The markets they are targeting;
- Its trading strategies.
Next, you specify a number of parameters including:
[*]
- Amount to invest;
- Take Profit - the level you set to close the position with a profit;
- Stop Loss - the level at which you close the position to stop a loss;
- Your desired leverage and margin.
Some platforms offer to open a demo account so you can practice before opening a real account. This is the most preferred option. A demo account allows you to familiarise yourself with the functionality of the platform and test strategies without the risk of loss. Using a demo account can significantly reduce the likelihood of making mistakes when moving to a live account.
Commissions
The commissions (for order execution, custody, etc.) charged by these social trading platforms are quite modest and comparable to those of online brokers, but they still need to be compared. Keep in mind that even small commissions can significantly reduce your profits with frequent trades.
In addition, there may be additional fees such as exchange fees, if applicable, or withdrawal fees. And, above all, inactivity fees. Familiarise yourself with the commission terms on your chosen platform to avoid unexpected charges.
Risks
Although copy-trading is very popular among young people, it is not recommended for beginners because of its inherent risks. Among the risks are:
- Lack of guarantee of results;
- Unprofessional traders offered for monitoring;
- High losses over very short periods of time;
- Difficulties in stopping losses due to automatic duplication.
Conclusion
Social trading and copy-trading can be useful tools for beginners and experienced traders, but require a cautious approach and informed choice of platform and strategy. Despite the potential for quick profits, these methods carry significant risks, especially for inexperienced investors. Before using these tools, it is important to carefully consider all aspects and possible risks in order to minimise the likelihood of losses.
Ольга Ларина
08-22-2024, 04:18 PM #1Social trading and copy-trading are heavily promoted as new ways to make money fast, but they hide serious risks. These methods are popular due to their accessibility and automation, but without an understanding of the market, success is not guaranteed. Beginners often mistakenly believe that copying successful traders always leads to profit.
Social trading allows investors to trade online based on market analysis and the strategies of other traders. It is based on automated platforms that integrate social networks. It also provides an opportunity to share experiences, which is especially useful for beginners.
Social trading is based on:
- Analyses published on platforms or social media to recommend positions in the markets;
- Trading signals, which are recommendations to take positions in the financial market sent via email. It is up to the recipient to decide whether to follow it or not and place the corresponding order in their account.
In its basic variant, involving the use and analysis of trading signals, social trading can be one of the elements of training for a non-professional novice trader. It allows to study the market and develop decision-making skills, but requires a conscious approach to each signal and strategy. Despite this, even experienced traders can sometimes face unexpected risks associated with using signals and following other traders.
The most original version of social trading is copy-trading, which consists of automatically copying positions taken by a trader in real time. This allows users to duplicate the trades of successful traders without having to make their own decisions. However, copy-trading does not guarantee success and can lead to significant losses if the selected trader makes erroneous trades.
Mirror trading, another variation of social trading, involves copying the trading strategy (rather than the trader). It is a more structured approach that allows investors to follow a particular strategy regardless of who is using it. Mirror trading can be useful for those who want to use time-tested strategies, but also requires an understanding of how that strategy performs in different market conditions.
Practical aspects of copy-trading
To use copy trading, first choose a platform such as AvaTrade, XTB or eToro and make sure it is legitimate. Check reviews and trading conditions to find the best platform for you. Give preference to platforms with reliable jurisdictions and good support. It is better to choose platforms with more reliable regulation.
You choose the traders you want to copy based on information such as:
- 1-year performance;
- Risk rating;
- The number of people copying them and their popularity over the last 7 days;
- The markets they are targeting;
- Its trading strategies.
Next, you specify a number of parameters including:
[*]
- Amount to invest;
- Take Profit - the level you set to close the position with a profit;
- Stop Loss - the level at which you close the position to stop a loss;
- Your desired leverage and margin.
Some platforms offer to open a demo account so you can practice before opening a real account. This is the most preferred option. A demo account allows you to familiarise yourself with the functionality of the platform and test strategies without the risk of loss. Using a demo account can significantly reduce the likelihood of making mistakes when moving to a live account.
Commissions
The commissions (for order execution, custody, etc.) charged by these social trading platforms are quite modest and comparable to those of online brokers, but they still need to be compared. Keep in mind that even small commissions can significantly reduce your profits with frequent trades.
In addition, there may be additional fees such as exchange fees, if applicable, or withdrawal fees. And, above all, inactivity fees. Familiarise yourself with the commission terms on your chosen platform to avoid unexpected charges.
Risks
Although copy-trading is very popular among young people, it is not recommended for beginners because of its inherent risks. Among the risks are:
- Lack of guarantee of results;
- Unprofessional traders offered for monitoring;
- High losses over very short periods of time;
- Difficulties in stopping losses due to automatic duplication.
Conclusion
Social trading and copy-trading can be useful tools for beginners and experienced traders, but require a cautious approach and informed choice of platform and strategy. Despite the potential for quick profits, these methods carry significant risks, especially for inexperienced investors. Before using these tools, it is important to carefully consider all aspects and possible risks in order to minimise the likelihood of losses.
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