Introduction to Social Trading
The internet has opened up a world of opportunities for traders and investors who are looking to make money from the markets or simply increase their profits, and social trading is one of the most exciting opportunities.
The whole concept of social trading is that successful traders and investors can shares their trades or their stock purchases online, as well as their strategies in some instances, and other people can then trade their signals or copy their trades automatically in their own accounts.
The traders can receive subscription fees or a small percentage of the profits, for example, and subscribers can generate some decent profits if the traders that they follow are profitable. So it is mutually beneficial to both parties.
The Main Drawback of Social Trading
The only real problem with social trading is that it can have a negative effect on your trading once you start to share your signals online.
That’s because there is an extra layer of responsibility that is almost guaranteed to play on your mind whenever you are entering and exiting positions.
When you are trading for yourself, you know that you are just risking your own capital, but when you know that tens, hundreds or even thousands of people are copying your trades, it can easily change the way you trade and influence your trading decisions.
I have seen this numerous times myself since I opened an account with eToro (here is my profile page).
There are some traders that will generate consistent profits over a long period of time, but once they become Popular Investors and start to attract a number of copiers, they will often become unprofitable and struggle to make the same kind of returns because of the added pressure.
Reasons for Poor Performance
It is fairly obvious why this tends to happen quite a lot. As I already mentioned, there is an extra pressure to do well when you have so many people copying and scrutinizing your trading decisions.
When you are in profit, for example, there is always the temptation to bank some profits early to satisfy your copiers, and when you are in a losing trade, there is the temptation to keep it open for as long as possible to avoid closing it out for a loss, even when it is continually moving against you.
Some people will also make changes to their trading system if they feel that they are experiencing too many losing trades (even if they are profitable in the long run), whilst others will often be tempted to change from a longer-term strategy to a shorter-term strategy if they earn commissions from their copiers for every trade that is opened, and this will often end in disaster.
Closing Comments
There is no doubt that social trading can be beneficial to both experienced traders and investors, and people who are still learning how to trade (or people who are unable to generate consistent profits themselves).
However the point I wanted to get across in this article is that the added pressure can make it very hard for people to continue producing good results for their copiers.
So it is always worth bearing this in mind, regardless of whether you are providing signals or subscribing to other people’s signals.
If you are sharing your trades, the only way to produce consistent profits for both yourself and your copiers is to try to imagine that you are trading for yourself and forget about the number of people who are copying your trades.
Don’t worry if you receive criticism about your trading strategy or receive some negative feedback about some of your trades.
If you stick to your strategy and your trading plan, and apply your usual money management rules, you should do well in the long run and will be able to generate additional commissions as a result, whilst also helping many other people make money from the markets as well.
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