Introduction

Private investors trading the financial markets via binary options or other another instrument such as CFDs has exploded over the couple of decades. Once the sole preserve of professional and institutional investors, the internet has democratised online trading and there are now millions of individuals trading globally.

However, the financial markets are not a simple beast and the fact of the matter is that not all traders are successful in their pursuit of realising consistent profits. Those who do so have put the time and effort into gaining the skills needed to be able to analyse the direction momentum of an instrument such as a forex pair, commodity or equities index like the Nasdaq. Financial markets analysis is divided between what is referred to as ‘fundamental analysis’ and ‘technical analysis’. The former is concerned with big picture factors such as supply and demand trends. Technical analysis, on the other hand, is the science of picking out price movement patterns that result from the shorter-term influence of market sentiment and psychology.

 

While both fundamental and technical analysis have their intricacies, the ‘technical’, mathematical nature of technical analysis often proves most daunting for new traders. However, those who show dedication and commitment will almost always get to grips with technical analysis and learn how to apply it when taking trading positions.

 

The comparative challenge of learning how to use fundamental and technical analysis, necessary to be able to achieve consistent profits, has given rise to the most recent major development in online trading – ‘social trading’. In social trading, traders simply copycat the positions taken by successful traders, rather than analysing the markets and picking out opportunities themselves.

While the concept of social trading might sound like it negates the need to learn technical analysis as a prerequisite to being able to make consistent profits trading, this is not necessarily the case. We’ll explain here what social trading and technical analysis are, how they work and why social traders should also not neglect the importance of learning technical analysis.

 

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Social Trading

Taking inspiration from another major development brought about by the internet age, social trading combines trading and a social network. Like any social network, social trading platform allow people to share their thoughts and knowledge with a community and to take advantage of the opposite flow of information.

 

Broadly speaking, social trading is a digital environment, usually an online trading platform, with additional functionality to facilitate common access to user-generated content. This is then used to inform the trades of individual members. The ‘user generated content’ might be thoughts, analysis, discussion, visualised patterns of the wider group’s trading behavior and trends or, most crucially, individual trading positions taken by members.

 

How exactly social trading works varies between different social trading platforms. However, as well as discussion boards and sections where users can post articles or analysis, most social trading platforms allow members to see and, if they choose, copy what other traders are doing. This might mean replicating their preparation, such as copying their newsfeed structure, seeing their portfolio and trade history and results or choosing to copycat individual trades or all of a particular trader or traders positions over a trading session.

 

What is Technical Analysis

Fundamental drivers such as supply and demand show the ‘intrinsic value’ of securities underpin different markets and must be understood to predict their likely direction in the mid to longer term. However, shorter term price movements are more influenced by technical analysis.

Technical analysis is a methodology used to forecast the price movement of securities by analysing statistical patterns in price direction and trade volume at a given moment. Charts which visualise this data is the primary tool used in technical analysis.

The underlying principle of technical analysis is that, at least in the short term, historical patterns of trading activity and price movements are a better guide of future trends than intrinsic value. It is based on Dow Theory, which is based upon three main tenants:

  • The price movement of traded securities forms identifiable patterns that repeat over time.
  • The market price of a security takes into account all of the information available to market participants that is relevant to that price. This will include information such as supply and demand data, news, geopolitical events and sentiment around future opportunities and potential risks.
  • The price of a given security evolves simultaneously in three forms: primary, secondary and minor price movement.

The common assumption of these three tenants is that price movements are not random and can therefore be, theoretically, accurately predicted, allowing traders to profit by taking positions that align with future trends.

Technical analysts have developed a variety of indicators to predict price movements. Some of these focus on identifying market trends and probable support of resistance points to price rises and falls. The role of others is to assess the comparative momentum strength of a trend and the probability of its continuation. Some of the most common technical indicators employed by traders are trendlines, moving averages and momentum indicators. These technical indicators are applied to charts visualising price movements and trade volumes. Charts cover different time frames and range from a minute to months. Longer time frames will be used to attempt to pick out primary trends and shorter time frame charts for secondary and minor price movement trends.

Do I Need to Learn Technical Analysis if I am Copy Trading?

Beginner traders who have decided to take the social trading approach and are simply copying the positions taken by the most consistently profitable traders on a platform might well wonder why they would make the effort to learn technical analysis. After all, isn’t the premise of social trading to allow traders who lack the skills to trade successfully as stand-alone traders the opportunity to benefit from others who do have those skills?

Well, yes and no. If we leave aside the ‘trading’ element to ‘social trading’ for a moment and use the analogy of a pure social network that will help put things into context. Those who are active on social networks will appreciate that they can learn a lot on a particular theme by consuming the ‘content’ provided by other members. Some members will understand a topic much more deeply than you and can provide real insight through imparting their knowledge and opinions.

However, there probably isn’t anyone who believes it would be a good idea to rely solely on a social network to form opinion on different topics. Other authoritative sources and some personal general knowledge on a topic are also necessary to be able to put the opinions and positions shared on a social network into context. If two third parties argue convincingly in conflicting directions, how would you evaluate who you agree with if you have absolutely no general knowledge of the topic yourself?

 

The same can be said when it comes to social trading. Having a reasonable foundation in technical analysis will mean that while other traders may be far more knowledgeable, experienced and successful than you, you will be in a position to better assess the merits of their position. A more informed decision can then be made on which trades and/or traders to copy.

 

A trader who has had a good run of profitability is not guaranteed to maintain that indefinitely. Gaining a good personal grounding in technical analysis will likely help prevent expensive mistakes that are a likely result of blindly following other traders on a social trading platform.

Maximising the benefits of social trading means using it as a support tool to give ideas and to learn from, not simply blindly copycatting other traders. A trader learning technical analysis can learn much faster by seeing how more experienced traders are implementing the techniques and methodologies being studied in the same way an interest group on a social network will be of benefit to someone learning about the subject the group focuses on.

 

Conclusion

Social trading is a great environment for both beginner traders learning the ropes and also more experienced traders to share knowledge, bounce ideas off each other and trigger new ideas and directions of thought. It is possible to trade by simply copying what successful traders are doing on a social trading platform.

However, without the foundation of any personal technical analysis basis to give context to why the trader being copied is doing what they are doing this would be a risky approach in the long term. Social trading should be best considered as a great environment to help accelerate the process of mastering technical analysis and then subsequently developing that skill. Treating it as a way to potentially trade with consistent profits without having to put in the effort to learn how trade is unlikely to lead to a positive long-term outcome. Trade socially smartly and use it as an additional educational resource and not as an easy way out!