Our advice to avoid the pitfalls in social trading

Social trading is a process by which investors meet on an online platform and exchange essential information, or not, about trading opportunities. These investors usually connect to a website, forum or chat and debate on FOREX, the commodities market and any other financial instrument. These exchanges allow some traders to make decisions by giving them confidence in their ideas or giving them the opportunity to generate new trading ideas.

Social trading has introduced a new way of analyzing financial information and implementing trading strategies by copying those of other traders. In other words, social trading can be considered as a kind of social network for trading and investments in general. But beware there are pitfalls in social trading that are not recognizable when you start. Here are our tips.

Correctly evaluate traders’ profiles

Some social trading platforms operate on the same principle as the most popular social networks. These platforms have users who create their profiles and update their information such as their number of subscribers, their daily trading results, weekly, monthly, etc. However, this system can be risky if a novice trader relies on incorrect information about another trader’s profile.

etoro copy trader

Indeed, many apprentice traders tend to follow the strategies of traders whose names appear at the top of a list without necessarily going into more detail about their past history. In addition, many novice traders also refer to the profiles that have the most subscribers, considering that these investors are good advisors.

Still others are based on traders with high profits. However, these traders may have very aggressive trading strategies that in many cases may not be appropriate for their portfolio and over the long term.

In conclusion, don’t let yourself be trapped by the folklore of social trading. If you decide to follow a trader and his strategies, make sure you study their past as traders, their trades and their long-term returns on investment beforehand.

Beware of “Scammers”.

Being exposed to social trading, it is important to keep in mind that it is possible to meet any type of trader on these networks and in particular “Scammers”. The “Scammers” are in other words crooks. They know the pitfalls of social trading and will try to take advantage of it. Indeed, some “Scammers”, and this is very common for pennystocks, can encourage other traders to invest in a particular stock.

scam social tradingOf course, these “Scammers” will have invested in this action long before you. Their purpose is to provide you with false information regarding the analysis of an action in order to encourage you to invest in this action and thus inflate the prices to the greatest happiness of these crooks.

As you will have understood, the big winners of this transaction will be those people who will take advantage of the volatility to sell their large shares and thus make huge profits in a short period of time. This will obviously lead to the share falling and you will see your invested capital go into the pockets of these people.

In addition, some traders do not realize that the people they follow are also paid according to the trading volume generated by their advice. These novice traders are generally used for the benefit of those with significant influence. Beware of these scenarios.

Finally, trading requires a high level of knowledge. It will be essential for you to be as informed and educated as possible, and to do so consistently, about the financial markets and how they work. It is inconceivable to rely on others to invest your capital. Imagine that an unusual situation arises in the markets, how will you be able to manage this situation if you have always sought the advice of other investors?

In summary, the following is a summary

Social trading can be useful to generate trading ideas and confirm your position on an investment. It can also be interesting in terms of knowledge sharing and trading strategies. However, Forex, like many other financial instruments, carries risks. Trusting another unknown person and being dependent on them can increase the risk of losing your invested capital.

nessfx logoWe advise you to develop your own trading strategies, to learn as much as possible in terms of investments and financial investments in order to trust only yourself. Use social trading to get additional information about the feelings of other traders but never use social trading as an essential driver for your decision-making.

MassLib offers two social trading specialists in its selection of Forex and CFD brokers: eToro and NessFx. Other brokers also offer this service but these two are the best.