Social or Copy Trading Explored
What is the appeal of social or copy trading?
If you are new to trading, then you will have realized already that there is a lot to learn, whether you are trading the actual real, underlying markets, Forex trading, Contract for Difference (CFD) trading or spread betting (see our article here on the similarities and differences between the trading options).
It is unsurprising then, that many novice traders are captivated by the idea of social trading, which is also well-known as copy trading. Copy trading enables fledgling traders the feeling of security when they take their early steps in the trading world.
How does copy trading work?
Copy trading – also known as social trading, mirror trading, or auto trading – has been on the rise for over a decade. This is due to the ascension of social media and the rapid development of more complex, fintech trading software.
The idea of copy trading is ingenious and relatively simple: copy trading software uses technology to enable less experienced investors/ traders to “copy” the trades in real-time of other, more successful traders, that they may follow. Every time the experienced trader trades, you automatically replicate (copy) their trades in your broker account. You enter the same positions in the same way, then exit the position in the same way, thereby and theoretically making the same percentage profit.
Best Copy Trading Platforms in UK
There are numerous popular copy trading platforms, and more are likely to emerge going forward. The best copy trading platform in UK is eToro. Please see our top three copy trading platforms in UK below.
What are the advantages and disadvantages of copy trading?
Copy Trading Pros
Learn and profit from the experienced
Copy trading or Social trading lets novice traders to “crowd source” the information, strategy and knowledge required to successfully profit from trading. Although it does not allow the beginner to directly learn to trade individually, it is a tool that can aid you along the trading learning curve. Newbie traders tend to look to acquire strategies and skills from experienced, successful traders and the social trading technology allows beginners to go some way towards this goal using software, rather than by observation.
A wealth of information
The brokers that have built social trading platforms have compressed a huge amount of data and information into various tools and applications that are very user friendly. The copy trading platforms display sizable levels of data from countless traders. A new trader can access many mentors all at once, although without the direct, personal contact.
Building self-reliance and confidence
Copy trading is a brilliant means to confidence building. The chances of placing winning, profitable trades will likely increase with copy trading compared to how a novice would initially fare. Copying successful traders often sees loss-taking occurring too, which highlights to new traders that this is normal and not a sign that they are failures. It is a reminder that everybody suffers trading losses on some trades. Some traders stay with copy trading in the long run, but many beginner traders use it to gain confidence to trade themselves, on their own.
Copy trading disadvantages
If copy trading is simple and lets you benefit from the experience and trades of successful traders, why are we all not doing it? There are many reasons why traders want to learn to trade for themselves, and there are reasons why social trading does not all reap the rewards you may anticipate. Social traders can and do lose money even when they are copying traders who are hypothetically successful. So, why?
The sales hype
Copy trading broking platforms often emphasise the possible profits that follower traders can achieve by copy trading. They highlight you will be taking the same trades as the most successful traders on their platform, implying that you too will profit. But this is not necessarily the case, you have to pick the right trader to follow and at the right time ….
Everybody loses sometimes.
New traders could start copying a trader at the start of a profitable run, with idealistic hopes of profits that could be made, possibly risking more than they should. If they lose, they may surrender a sizeable amount of their capital. The trader they copied, however, may have lost a much smaller percentage of their capital. Or, the followed trader may quickly go from a winning streak to a very bad losing streak. As many disclaimers note, past performance is no guarantee of future performance or success.
Because you are following an experienced trader with a solid track record, this can give you a false sense of security. In turn, this may lead to self-confidence and brashness, which may not occur if you were trading for yourself. Even with copy trading, it is necessary to carefully monitor the situation, positions and market exposure.
Copy trading in summary
Trading takes time and effort, even if you are copying a successful trade. You may not need to learn how to use fundamental and technical analysis or risk management, BUT you should be continuously examining the traders you are copying. By monitoring their performance over time, in different market conditions, you can concentrate on following traders who are successful in differing market conditions.
Copy trading is an interesting and captivating introduction to Forex trading, Contract for Difference (CFD) trading or spread betting. The new trader should keep in mind that it is not foolproof. There are never any guarantees that you will profit by copying traders who have been profitable in the past, even over a longer time frame. In the long-term, the most successful way to trade is to learn how to develop your own strategy and manage your own risk.
Good luck with the copy trading experience, choose one of the best platforms for copy trading above, and have a great trading day!