Although often used interchangeably even on our site as well, it would perhaps be instrumental to distinguish between social and copy trading because although similar the two are not identical. In fact, it could be argued that social trading is a more wide encompassing term and copy trading is one way that social trading is manifested.
The basic difference between the two notions lies in the automation of the copy trading process and the more control which one has when relying on social trading alone. In other words, in copy trading in essence you allow another trader or traders to manage your trades automatically, while in social trading in general the ultimate decision is up to you but you still use the information you get from other traders and the decisions they make and trades they place.
Understanding the difference between the two terms is important not just for argument’s sake but because newbies in the field of trading have to be able to distinguish that copy trading is binding and the things you can control after you tie your account to another trader are limited, depending on the platform you choose that is. Having this knowledge may save a rookie trader from hitting the copy trading button under the false impression they may be just getting information sharing and instead end up losing all their funds.
A total wipeout is not very likely of course, because most copy trading platforms will not allow you to risk all your funds on one trader/one trade and have in place several risk management methods to insulate you.
Choosing between social trading and copy trading is up to the mentality, needs and appetite of each individual new trader. If you go for social trading, i.e. without the automated mimicking part, then the final decision whether to place a particular trade or not rests with you. This will of course give you the control over your funds and trades, but may also lead you to make a wrong move due to your inexperience to correctly interpret the information you receive and turn it into the right trade at the right time. Thus, we could say that if your are totally inexperienced in the field of trading then if you go for social trading this could entail some higher risks.
Copy trading is much easier and simpler since the only thing you really need to do is to press the copy trader button and the rest is taken care of automatically. Besides the obvious benefits however, there is also a downside to all this automation, because things may go horribly wrong if you make the wrong choice of trader and they get trapped into a bad streak. Copy trading allows you much less control over your trades and it also entails the additional danger of a new trader getting too lazy and not bothering to learn anything about the basics of how to trade since copy trading enables one to be able to trade without knowledge and without effort.
Since social trading entails working with, helping and being helped by other traders then it can be argued to stem from the human need for collaboration. But although you get information through collaboration the ultimate trading decision is yours alone. On the other hand, in copy trading you don’t rely so much on information from other but rather on their actual trading actions, since those are the ones you will be copying. This automatic replication is in fact the main distinguishing element between social trading and copy trading.
Trading is in itself complicated and learning all the technical and other jargon and tools one needs to effectively trade could be very difficult and confusing and may well put new traders of. The beauty of copy trading is that it takes away the complexities and makes the world of trading accessible to everyone; even the totally ignorant.
Also building a close relationship with more experienced traders could prove mutually beneficial but it is surely good for the new traders since they gain insights, know-how, understanding of why the pros act as they do and get guidance and useful tips about the markets and trading effectively.
If one chooses the right social/copy trading platform and the right traders to follow/copy, then social and copy trading could be a dream start for every newcomer in the world of trading. Besides, it has the unique advantage of allowing a trader to learn from the mistakes of others, instead of their own. To make the best of this then, it is perhaps a good idea to start your copy trading through a demo account and move to live account when you are ready and comfortable to proceed.
George Milios is the founder of onlineforextrading.net, the binary options and forex news portal which is dedicated to providing you with all the information you need to successfully trade.