The Forex market is full of complex terms and definitions that look like a total mess for a novice. There is no surprise that some traders do not see the difference between copy trading and social trading. This article explains the difference, discusses pros and contras, and the best platforms for these types of trading.
Social vs. Copy Trading: What’s the Difference?
As every market, the Forex market constantly develops and tests new global trends. Now the global markets are crazy about social education. While the classic educational system faces a severe crisis, people try to find new forms of knowledge sharing, including professional education.
As a result, new terms have appeared on the market. Social and copy trading are new words that many people do not completely understand and can use. Let us explain this to you.
What Is Social Trading?
People love using social networks to demonstrate their professional success. This is true for the Forex market: successful traders tell their success stories on YouTube, forums, and special sites. Their fans and followers analyze their actions and trading strategy to find the key to success. Many of them copy the successful strategies, partly or completely. This is social trading.
The behavior of a copier can vary. Some traders copy just the general principles to catch the logic and understand the deep layers of the trading strategy. Other copiers just repeat the activity deal by deal. The last principle is called copy trading. So, social trading is a broad trend on the Forex market, and copy trading is a part of this general trend.
And What is Copy Trading?
Copy trading on the Forex market directly copies someone’s deal. The copier can reproduce the activity of another trader manually or use a special platform. The special platform is recommended because the Forex market is volatile, and the situation changes every second. While a trader reproduces the deal manually, the currency pair can jump up or down.
Pros and Cons: Compare Social Trading and Copy Trading
While copy trading is a part of social trading, some benefits and disadvantages are standard for both types of trading. Let us list them and compare them.
Social Trading: Pros
- Easy Access to Trading
The entry barrier is the main obstacle for many potential traders: they are afraid to start trading because of a high-risk level. Social trading on the specialized platform makes a start smoother, like in the sandbox.
- Knowledge Sharing
The communication among the Forex traders is not new: there are hundreds of specialized forums and boards. However, social trading moves the knowledge sharing level up: knowledge exchange is central.
- Practical Lessons
For a new trader, it is highly recommended to learn some Forex theory. However, any theoretical information is useless without the training. Before the skyrocketing growth of social trading, some brokerages offered a demo account - a virtual account to practice the trading skills. However, social trading systemized learning via practice.
- Portfolio Diversification
Social trading saves time because a trader does not waste much time on planning but relies on others’ skills and experience. So, the rest of the time can be used for other trading strategies or even other financial markets.
Social Trading: Contras
- High-Risk Level
This disadvantage is common for all types of financial trading, including social Forex trading. Forex trading is a hazardous business because of the volatile market. If we go back to the history of the financial markets, we can easily find numerous “black days,” the market collapses caused by external factors. The financial markets are vulnerable to economic and political trends and events, and even experienced traders lose their money during such a crisis.
- Relying on Others Skills
The warm bath of the supporting community helps start but prevents successful individual trading. The trader relies on the other’s skills and does not choose the individual strategy. So, the copier does not know what to do in a critical situation.
- Hard Choice
A social trader should choose the skilled trader to follow. However, the experts sometimes manipulate the ratings to be more attractive. They pretend to be more successful than they are, and following them is a greater risk.
- Disturbing Environment
Some experienced traders feel nervous when they are followed on each step of their professional life.
Copy Trading: Pros
- Lower Entry Threshold
The lower market entry threshold is valid for copy trading as well. Some money and basic knowledge about the Forex and you can start.
- Portfolio Diversification
While copy trading does not require much effort and can even be automated, it saves time and allows trading on other markets.
- Knowledge Sharing
Knowledge sharing is still important in copy trading, but the copiers can hardly share their understanding of the Forex trading strategies. Instead, they share their experience regarding the trader they follow.
- Practical Lessons
Copy trading does not include much education; only a trader can decide how much time to learn. Sometimes, a lazy trader can set the automated trading, so there is no practical lesson until they lose the money.
So, we can conclude that most pros and cons are like copy trading and social trading. The major difference is that blind copying can cause no analysis, no practice, and money loss. Copying saves time for portfolio diversification.
So, Which to Choose? Copy Trading or Social Trading?
For a young trader, the first steps to the field of social trading mean a choice. One of the most important choices is a social trading strategy. Probably, copy trading can be a good choice for a start. Following the experience of the best traders, it is possible to understand the deep flows of the Forex market, its rules, and trends. Also, copy trading leaves enough free time for other practices.
However, a young trader can also explore other types of social trading. For example, it is possible to find several successful traders and develop an individual trading strategy.
Bottom Line
Social trading is a fashionable trend on the Forex market nowadays, if we can say so. Social education can be extended to the trading field, and the best students can earn some money with the help of their experienced peers. Copy trading is a strategy within the social trading framework, and it can be profitable if a trader controls a trading account carefully.
FAQ
No, social trading and copy trading are close but different. Social trading is a broad term that includes several trading strategies. Each of these strategies is different, but they are based on following the peers. A young trader chooses an experienced peer trader and follows them, while trying to repeat a success. A follower can repeat a general strategy or blindly copy each deal. The second approach is called copy trading.
There is no ultimately profitable or unprofitable trading strategy on the Forex market. Copy trading can be beneficial when wisely used. The most frequent mistake of the young copy trader is the wise belief in the more experienced trader. However, to err is human, and even the best trader can make a mistake or lose money because of the market volatility. If a junior trader does not control the trading account, the risk of losing money is high. However, a wisely managed account can earn a good profit.
The benefits of copy trading are easy access to the market, learning-in-practice education, and knowledge sharing. As we know, many young traders start Forex trading with risky deals hoping to get a great profit at once. Many of them lose their money because of a lack of experience. In copy trading, it is possible to adapt the experience of the skilled trader to mitigate the risks. Knowledge sharing within the community also helps learn about the Forex market and get a profit instead of loss. So, copy trading is like a warm bath that helps a junior trader to adapt to the market with minimal loss.
