The Pros and Cons of Social Trading Vs Traditional Trading
By Louis H-P on
March 26, 2021
Reading Time: 4 minutes
In this article, we explore the pros and cons of social trading vs. traditional trading.
Whilst traditional trading relies on conducting your own market analysis and developing your own trading strategy, social trading allows you to quickly replicate someone else’s trading idea.
But is social trading any better than the traditional method of trading? Let’s find out…
Social trading gives quick access to reliable trading information and allows users to earn without learning how to trade.
However users are presented with a new challenge: learning how to successfully utilise social trading.
While social trading offers many advantages to new traders, perhaps it isn’t the best choice for everyone.
Social Trading – the pros:
- Quick access to reliable trading information
Traditional market analysis takes hours or even days to complete. But with social trading, you’re never more than a few clicks away from reliable trading information. In fact, you can view the latest information whenever you have a spare 5 minutes, whether you’re commuting to work, waiting for an appointment, or sitting in front of the TV.
- Earn while you learn
Typically, you will only earn money after mastering your trading skills. Research shows that people require 10,000 hours of practise to “master” a skill, which was famously discussed in Malcolm Gladwell’s book, Outliers: The Story of Success. But with social trading, you can simultaneously earn while you learn from the decisions of professional traders.
- Build a trading community of investors
Communities provide democratized knowledge and friendly support. The social trading community is full of like-minded investors that help each other to make more money. If you scratch my back, I’ll scratch yours…
- Learn from watching others
One of the best ways to learn is by watching the professionals at work. You can see what they do in specific situations, how they execute trading strategies, and what they do if a trading plan goes wrong.
Social trading also teaches that even the professionals experience losses and go into account drawdown. It allows new traders to know what they’re getting into and that losses can be normal.
Traditional Trading – the pros:
- Strong history of profitability
We’re all here to make more money, right?! There’s strong historic evidence that it’s possible to be profitable with traditional trading methods. If it’s not broken, don’t fix it…
- Cut down on costs
Social trading platforms typically charge additional fees to use their service. With traditional trading, you aren’t paying extra for copy services or any associated social trading fees.
An example of this includes the copy trader paying wider “spreads” per trade compared to the “master trader”, which can have an adverse impact on the copy trader’s equity curve – especially if they’re copying someone who is constantly in and out of the market (ie: scalping).
- Control the process / remove the middleman
Unlike when setting your account to mimic the trades of another trader, traditional trading sees you in control of the entire trading strategy. You aren’t depending and waiting on the actions of a middleman.
- Get real-time updates
Traders can take advantage of real-time data to make trading decisions. Conversely, social trading usually means waiting for the opinion of others before you make a trade, which can result in missing good trade set-ups.
Social Trading – the cons:
- False sense of security/becoming overconfident
After seeing the impressive trading records of the professional traders, it’s easy to believe that they never lose money. With this in mind, it’s easy to see why so many become overconfident with social trading. Many enter the game thinking their money is in safe hands and can’t be lost.
- Hard to determine which traders are actually successful
The success of social trading relies on following the correct signal providers. However, this isn’t always such smooth sailing. For example, you could be following a trader who is only driven by commission and has forgotten that you are copying them.
Another risk is following a trader who appears profitable, but secretly has kept their losing positions open and away from their trading record.
- Sharing your trades may not suit your disposition
Social trading is a new phenomenon, which means it can feel alien to share your trade ideas and strategies with others. You may even question the honesty of other traders, which could prove wise, especially as people have a tendency to shout about their successful trades instead of their trading failures.
- Near impossible to predict the outcome
In this sense, social trading is no different from traditional trading. Just because you’re following a trader who has been profitable for the past month, it doesn’t mean they will stay profitable after you’ve followed them.
Traditional Trading – the cons:
- Easier to invest too much, too fast
Without setting your account to follow a professional trader, you have free roam to place as many trades as you would like. This freedom can lead to you becoming rogue, as you deposit more and more to make “just one more trade”.
The pursuit of money is addictive, and this can be especially true for trading. Unlike with copy trading where you can simply take a back seat, traditional trading makes you responsible for every decision, which can result in addictive behaviour and bad trading ideas.
- Buying errors due to computer mishaps
With social trading, you can set your account to automatically copy the trades of signal providers. However, traditional trading requires you to manually execute the trades, which opens the door for trading errors and missed opportunities due to life getting in the way.
- High risk
Setting your own trading strategies means 100% of the risk is on your shoulders. Conversely, social trading allows you to diversify your risk between multiple professional traders.
- Never a guarantee you’ll make money
Although you may have a friend of a friend that “makes £10k a month trading the forex markets”, it’s a mistake to think trading is a guaranteed, or even wise, way to make money. In fact, research suggests that 80% of traders quit within two years of starting.
Social trading is changing the world of trading, and the benefits are clear for us to see. The new phenomenon gives quick access to reliable trading information and allows users to earn without learning how to trade. However, this is a paradoxical point, as users are presented with a new challenge: learning how to successfully utilise social trading.
While social trading offers many advantages to new traders, perhaps it isn’t the best choice for everyone. For example, users may not know which specific traders to follow, and even when they do, it can quickly lead to a false sense of security.
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Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.