Social Trading vs Copy Trading
Copy trading and social trading are two ways in which the trader can get help to trade forex or binary options assets. Even though these two terms are used interchangeably, they are actually different. It is important to understand the similarities and differences between the two in order to understand which of them will prove to be the better option for you. Let us delve further into this topic by looking first at the similarities between social trading and copy trading.
Social Trading vs Copy Trading: The Similarities
Social trading and copy trading share a few similarities, and these are highlighted below.
1. Range of Markets
Social trading and copy trading models are actively used in the same markets. You will see both models of trading used in forex trading as well as binary options trading. There are some brokers that adopt both models of trading on their platforms.
2. Risk Management
Effective copy trading as well as social trading both involve the application of risk management. In social trading, this is easier to implement as active guidance is provided by the traders being followed. Some people feel that copy trading eliminates the need for active use of risk management in the financial markets, but this is a wrong notion. In fact, copy trading involves use of risk management in copy selection, as well as in allocation of trading capital for copy trading.
3. Selection Process
The process of selecting traders to follow on a social trading platform and a copy trading platform are basically the same. The same metrics are what are looked for: trader performance, profitability, risk management, etc. This is why many traders usually classify social trading and copy trading as one and the same activity, even when they are not.
4. Free or Paid?
Some forex trading platforms offer social trading on a free or paid basis. In copy trading, the service is almost always paid for according to a compensation plan arranged by the company. So if you want to learn about the forex or binary options market without having to pay for it initially, it may be best that you join a social trading platform.
Now that we know where the similarities of copy trading and social trading start and end, let us look at the differences between copy trading and social trading.
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Social Trading vs Copy Trading: The Differences
What are the key differences between social trading and copy trading? These are summed up below.
1. Level of Interaction
What is the level of interaction between traders in a social trading setup and a copy trading setup? In social trading, there is a high level of interaction between traders. This is what makes the entire activity “social” in nature. Think of social trading as a way of socializing with other traders in the social network for the purpose of progressing in forex trading or binary options trading. In copy trading, you may hardly interact with the trader whose system is being copied. It is a purely mechanical venture in copy trading as there is hardly any interaction between the Copied Trader and the Copier.
2. Learning Experience
As a follow-up from the point discussed above on trader interaction, the lack of interaction in the copy trading setup makes this less desirable for those who want to really learn the Forex ropes. Social trading will provide a far better learning experience. New traders will have the opportunity to learn from the experienced ones, ask questions and improve. Social trading suits new traders better as they get to understand why certain trades are made and the technical/fundamental basis for such trades. Copy trading is more suited to traders with some experience but who simply do not have the time to study the charts and scour the market for trade opportunities. This category of traders would rather have someone do it for them. Copy trading is not suitable for those who want to learn the ropes in Forex trading. Traders who copy trades do not know how and why certain trades are made. This is not good for learning outcomes.
3. Manual vs Automated
Copy trading sets up the trader’s account for automated trade executions. This is the true “set and forget” system where traders simply do the setup for the trade copy, and the trades are automatically implemented on the trade copier’s account until he or she decides to stop. Social trading is not an automated way of trading the markets. It is more manually oriented and leaves the control of trade executions in the hands of the trader. So when it comes to trade processing and execution, social trading is manually oriented while copy trading is more automated in nature.
4. Trading vs Investing
Trading involves more active participation in the market by being involved in the steps and processes it takes from trade analysis to trade execution. This is the hallmark of social trading, as it involves a process of learning from other more experienced traders in the social network and actively implementing what is being learned. When it comes to investing, it connotes a more passive participation in the Forex market. This is what copy trading is all about as it involves virtually no active participation in the trade execution process. So think of social trading as the trading activity, and copy trading as the investing activity. Active= social trading, and passive = copy trading.
5. Signal Delivery: Humans vs Machines
An analysis of copy trading shows that many of the trades being copied are in fact generated by robots or automated trading software. This is unlike social trading where majority of trades generated in the social network are done by humans. This difference brings us to the next point.
6. News Trading: Which is Better Suited for It?
When it comes to forex trading or binary options trading, the news is what moves the markets. When the news hits the platforms, it becomes irrelevant whether the chart of the asset being observed is displaying a falling wedge or a double top. The market traders will follow the news instead of such technical patterns. Therefore, when it comes to trading the market during news events, which is more suitable: copy trading or social trading? Due to the fact that social trading is dominated by human activity and human interaction, it is easier and safer to trade the news with social trading. In copy trading, there is no such interaction and nearly every aspect of the process is controlled by automated processes and software. This makes it difficult to trade the Forex market or perform binary options trading during news events, thus increasing the fail rate of copy trades at these times.
Copy trading and social trading have their advantages. They can serve a trader’s purpose, depending on what the ultimate goal is. Those who want to start from the ground floor up and learn the basics of trading within an interactive environment are better suited for social trading. Those who want to hit the floor running and are not interested in learning but earning can go for the copy trading model. Pick whichever one is suitable for your purposes.