When you are new to trading and you are reading different strategies for successful trading, you may often come across terms like social trading and copy trading. Often, you may see these two terms being used as interchangeable descriptions of the same form of trading. While it is true that the two terms share many similarities, they represent different types of trading that are preferred by traders with various preferences.
Before you start trading, it is important to learn about both social and copy trading and pick the method that you find most suitable for your needs. Simply put, copy trading may be considered a type of social trading but it has its own specifics. If you want to understand the difference between the two kinds of trading, we suggest you continue reading.
Understanding Social Trading
Inexperienced traders can resort to social trading to learn from their peers and more advanced traders. You can use different social platforms to communicate with other traders and share strategies and technical analysis. Social trading can help you develop a successful trading pattern, based on the opinions of more experienced traders.
We should mention that this type of trading requires more time, as one could not base their trading style on just one interaction with another trader. What is more, you should make sure that you can rely on the information and opinion shared by a certain trader. Learning and mastering strategies takes time, making social trading suitable only for traders who have the time to interact with their peers. Using technical analysis in social trading is very important but you need to make sure that you are following the advice of the right trader.
In addition to requiring more time to analyze all of the information provided by other traders, social trading has a few other downfalls. With social trading, often, there are many missed opportunities. Since you are making your decisions manually, rather than automatically copying others’ trading patterns, you may neglect some markets that are overlooked by other traders.
Specifics of Copy Trading
While social trading is a great option for inexperienced traders, many prefer copy trading. Even though you still follow the trading patterns of other traders, this method eliminates the social factor. Instead, it all comes down to straight facts and technical analysis that indicate successful trading.
With copy trading, you automatically trade your assets based on the trades made by another trader that you follow. Most brokers allow their users to copy the portfolios of multiple traders, distributing one’s balance proportionally. Depending on the broker you have chosen to trade with, you can either do copy trading via a dedicated copy trading software or you can use third-party platforms. Copy Trading is possible via platforms like MetaTrader 4, MetaTrader 5, cTrader, or DupliTrader.
The MT4 and MT5 platforms allow traders to choose to mirror the trading strategies of other traders who have been successful in their endeavors. You can see the ranks of different traders, with those with the best results being on top of the list. Thanks to the cTrader platform, traders are also allowed to mirror other traders, having the opportunity to copy numerous providers at the same time. Meanwhile, DupliTrade is a platform that allows automated copying of other traders, enabling its users to select the trades they would like to mirror.
A copy trader determines a specific amount to copy the portfolio of another trader. Whenever the top trader decides to spend 5% of their money to sell or buy stocks or assets, 5% of the copy trader’s funds will also be used to make the same trade.
The good thing about copy trading is that it does not require that much time as social trading. What is more, you are following trades based on straight facts and technical analysis. Since trades are made automatically, missed opportunities are fewer than cases of social trading. Unfortunately, the risk levels with copy trading are higher as top traders often opt for riskier moves. This means that if they are not successful, all traders copying them will also lose money.
Which One to Choose?
Depending on the type of trader you are, you might prefer one of the aforementioned methods over the other one. You need to compare the strong and weak points of both social and copy trading and determine which one will be more beneficial to you.
Inexperienced traders often prefer social trading as it allows them to learn more about successful strategies that top traders are often utilizing. If you have plenty of free time, you can resort to different social network platforms like Twitter, Twitch, and even trading brokers to follow successful traders and learn their opinions and trading strategies.
This being said, as time is a precious asset, most traders prefer copy trading. Not only is it time-efficient, but it is also stripped of any biases and emotions that can often affect one’s trading. Copy trading is pretty easy and is offered by numerous major trading platforms.
If you opt for copy trading, however, make sure that you are copying the portfolio of a trustworthy and successful trader. What is more, be careful with setting up your bankroll and allocating the amount you are willing to spend on trading. In many cases, top traders are willing to make riskier trades that are not often suitable for more inexperienced traders.