5 Essentials When it Comes to Social Trading

(STL.News) Have you heard about social trading and wondered what it’s all about?  If so, you’re like many others who prefer to join forces with like-minded traders in order to earn a profit in the securities markets.  The first step for anyone interested in operating this way is to learn the basic facts about what social trading is and what it isn’t.  For example, there are quite a few myths floating around about this hot topic, and it’s essential to dispel them right from the start.  If you think it could help your personal bottom line by joining forces with others in chat rooms and forums, review the key concepts below before getting started.

Social Trading and Copy Trading are Not the Same Things

The word social implies other people. Copy traders tend to follow a single person rather than a group.  They also favor the rote act of exactly copying that person’s buying and selling activity without discussion, question, or hesitation.  For some folks, copy trading is the ideal setup because there’s little thought involved, except for the decision about how much capital to put on the line.

Social traders take part in a much wider field of activity.  They discuss new theories and trends, make concerted buys in order to influence share prices, compare notes about which techniques are more profitable than others, and much more.  So, there’s a distinct difference between social trading and copy trading, and it’s an important one.

Anyone Can Join In

Whether you’re a social trading enthusiast or someone who gravitates to copying an expert’s day-to-day activity, you can take part in the markets in whatever way suits your style.  For instance, in less than 15 minutes, you can set up an account on a brokerage site and become a copy trader, choosing to follow any of the available professional investors on the site.

Social Trading is Wildly Popular with Those New to the Securities Markets

With the rise of social chat rooms and forums on the internet, beginning in force in the early 2000s, people got the notion that there was great power in numbers.  Formal and informal clubs sprang up for the sole purpose of comparing notes about securities trading theories and techniques.  From there, as sites like Facebook and Twitter grew exponentially, trading enthusiasts discovered that some of those media sites were ready-made for discussing the stock, forex, commodities, futures, options, precious metals, and other markets.  Within a few years, there were literally hundreds of large groups that met online to strategize about earning money by buying and selling securities of all kinds.

There are Unique Benefits

Social traders enjoy unique benefits, like the ability to cull fresh ideas from other, more experienced investors.  Additionally, you can join up with many others in an attempt to buy large positions in a particular security.  That’s one way of possibly affecting the price, based on mass buying.  Some brokerage platforms let you see the historical success rate of expert traders.  That way, you can judge their risk-taking behavior and past performance before you choose to follow their activity.  The primary benefit of using social trading to enhance your overall profitability is that you learn from the group.  This kind of decision-making is nearly always more effective than going it alone.

There are Some Drawbacks

Every type of money-making activity has pros and cons.  When it comes to social trading, there are a few downsides.  They include missing out on golden opportunities because you don’t pull the trigger quickly enough after hearing a great idea or tip.  Likewise, with all the give and take chatting and discussing, a social trading forum can turn into a time-eating activity.  The best way to avoid this pitfall is to set strict time limits for yourself when entering the room.  When the time is up, be disciplined enough to sign off and exit.

Emotions can get in the way, especially when a large group of people becomes excited about a relevant news story that could have an impact on the price of a particular security.  The most effective way of avoiding the emotional trap is to use a rules-based strategy that limits the amount of capital you place on any individual trade.  There’s also a challenge with truthfulness in such forums.  That’s because you never really know the people you’re speaking with, with few exceptions.  Someone might claim to have made a purchase of a specific stock, but in reality, they did not and are only trying to manipulate the discussion for purposes of their own.