What do you think about social media trading?

Social trading is the process through which online financial investors rely on user generated financial content gathered from various web applications as the major information source for making financial trading decisions.

Social trading introduces a new way of analyzing financial data. Until recently, investors and traders were relying on fundamental and technical analysis to form their investment decisions. Now investors and traders can integrate into their investment decision-process social indicators that are fuelled by a transparent real-time trading data-feed of all the users in the social trading network. This is now being introduced as social financial analysis. Social trading has also been associated with a variety of online social trading networks[2] These social trading networks can be considered a subcategory of online social networks.

Social trading allows traders to trade online with the help of others.[3] Social trading shortens the learning curve from novice to experienced Forex trader. Traders can interact with others, watch others take trades, then duplicate their trades and learn what prompted the top performer to take a trade in the first place. By copying trades, traders can learn which strategies work and which do not work, without risking their entire portfolio. Despite the influx of new social trading platforms, numbers still continue to increase showing a relevant and growing interest in the activity.

The number of social trading networks continues to increase as brokers see them as new growth engines for converting new and retaining old clients.[6] Social trading increases participation in the market and leads to a greater volume of trades going through.

I have seen several forex brokers add social media trading to their offerings. Social media refers to displaying trades from clients using its platform that can be followed or copy traded. The question is whether this is a ploy to get traders to increase their trading or an opportunity to ride the coattails of a hot trader.
It is hard for me to talk about this without firsthand experience so I will just point out the risks and you can decide for yourself.

1) There is a reason why regulated fund managers are required to have audited track records. These usually span several years, which gives the prospective investor a feel for how the fund manager performs over time and under varied conditions.

2) Following someone just because they appear to have a hot hand can be fool’s gold. Sometimes you will get lucky but it could easily turn the other way as you are betting on a very short-term performance rather than a long-term record.

3) You must be comfortable with the risk the trader is taking. If you copy a trader, what happens if he/she uses a stop you are not comfortable with? What happens if it pulls its stop and let’s a loss run? What happens if you are just following and the trader takes profit or closes a trade while you are not online?

4) I like trade calls that have a rationale with them. It could be a technical or fundamental reason for a trade or a combination. What I am not comfortable with is a trade call that is made without a stop or target or a rationale. From what I can see is that social media trades just tell what a trader is doing.

5) Bottom line is that following someone blindly, especially one who is not a professional trader suggests at least as much risk I(probably more) than the potential reward.

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