Social trading is the process of replicating the trading actions of an experienced trader, either automatically or manually, so that you benefit from their knowledge and strategies.
Your account will follow theirs exactly, whether buying, holding or selling.
In social trading, a trader may well replicate the trading actions of another more experienced trader, but the main focus of social trading is on communicating with and learning from other traders and sources of trading information.
If you choose to automatically copy trade, you will generally use a trading platform that offers copy-trading functionality.
Choose the trader or traders you are interested in and copy their portfolio. Your account will continue to copy that trader until you tell it to stop.
Alternatively, they may charge a share of your profits to allow you to copy the portfolios of their experienced traders. Other platforms will instead charge a withdrawal fee.
Let’s say you are a complete beginner at trading. You have no real idea what you want to trade in (for instance, forex, shares, cryptocurrencies or commodities), but you like the idea of investing in the renewable energy trend.
You join a trading platform that offers copy trading, and you investigate who the most successful traders are.
You then look into which of these individuals trade specifically or predominantly in renewable energy.
You research the trading assets in their portfolio. These might include shares, commodities, etc.
Using the mechanism of the trading platform, you copy the trader of your choice.
Each trading action that they make, your account will also make. Your profit, or loss, will reflect their own but at a percentage relative to how much capital you invest.
For instance, if the trader has invested $10,000 and you invest $1,000, your profit or loss will be a tenth of theirs.
Your account will continue to copy that trader until you tell it not to.
You can learn about markets that you are unfamiliar with. For instance, if you are interested in trading forex but you have no idea what pairs to invest in, copying a trader who is experienced in the forex market can be an excellent way to learn.
You can diversify your portfolio, by copying an experienced trader alongside making your own informed investments.
If you start copy trading as a complete beginner to trading, you can use it as a way to learn about trading strategy, the markets and a general trading how-to. Trading is an ongoing learning curve; there is always more to learn at any stage in your trading journey. Copy trading is an excellent tool to further that education.
Unless you feel the need to constantly monitor your progress, automatic copy trading through a trading platform can be a real time-saver. In comparison, manual copy trading may still take up as much time as other forms of trading.
Copying the actions of another trader, especially one who does not live in the same country as you, may enable you to trade in other time zones.
Social trading removes the emotional responses and knee-jerk reactions that may hinder your trading decisions because the choice of what to trade and when is up to someone else.