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Disadvantages of Social Forex Trading
Written by: PaxForex analytics dept - Tuesday, 05 December 2017 0 comments
Social trading is the process through which online investors rely on user-generated financial content gathered from various applications as the major information source for making financial decisions. Social trading allows traders to trade online with the help of others and some have claimed 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.
Social trading is one of the fastest growing trends in forex trading. New social trading networks are entering the forex market and new platforms with social elements are being developed and pushed out with rapid speed. Essentially, social trading may be an ideal service for traders who are interested in the markets yet may be short of time or education, or just simply wish to have someone else trade on their behalf. It is also praised for being cost-effective due to it not involving any performance or admin fees being charged that can be common with fund managers in other asset classes.
Social trading provides a free exchange of information to individual and small-scale investors. And while this is certainly an advantage, it could prove to be a disadvantage. Since there are only a small number of traders who are consistently successful, by using social trading networks a trader can follow the wrong trader and end up with losses rather than the hoped-for profits. One of the major
disadvantages of social forex trading is that it remains relatively challenging for a trader to select the right social platform. There is no shortage of networking platforms and this makes it difficult for a trader to make a choice.
There are various different social trading networks and they offer different features many of which are not fully understood by a newbie forex trader. Some networks reward their traders not just for the profits they make, but also for their low-risk management approach. This makes leading traders more risk-conscious than those on other networks which reward traders for profits only and may attract more risk-taking in the process. With this type of network, newbie traders are encouraged to start trading with additional risk which is not always a good beginning.
There are advantages and disadvantages to all investments and this holds true for social forex trading as well. The key to success in any endeavor is knowledge; the more a trader understands how a financial instrument works, they less risk he/she will take and his chances for profit will increase substantially. Traders must be careful of which traders they choose to follow as here too, there are untrustworthy individuals. Setting down a solid set of criteria developed prior to opening a trading account helps traders to select the best social traders from what can be hundreds on a leaderboard.