Forex social trading enables Forex traders to interact in real-time, sharing knowledge, strategies and methods. Less experienced traders can leverage the help of traders with more experience and even copy their trades and techniques.
They can actually subscribe to actual trading signals and have them execute on their own accounts. This is known as copy trading. To learn the more about Forex trading check out our Forex tips.
History of Copy Trading and Social Trading
A primitive form of copy trading began when some traders would communicate out in newsletters when they were going to open a trade. They would send out an email to their subscribers to let them know it was time to buy or sell.
When the time came to reverse the order, an e-mail went out and the positions were closed. Later some traders would use this same basic concept, only communicating with the other traders in a chat room.
For this to work, you had to trust the skills of the trader who was calling the shots. There wasn’t really much to go on except personal experience, anecdotal evidence of those who had copied him or the trader’s personal reputation.
As technology advanced, replicating a trade from one account to others became possible. Forex platforms could track the success of the strategy and record all kinds of metrics so that everyone could see how successful it was.
Anyone could subscribe to these strategies, and the same signals that would be executed in the original trader’s account could be executed in the account of the subscriber.
The next step beyond subscribing to a trader and having his trades automatically executed in your account is to interact with that trader. It’s sort of a blend between copy trading and social media. You can observe others trading and duplicate their trades on your own.
What is a PAMM Account?
PAMM short for “Percentage Allocation Management Module” PAMM Is a copy trading system that today many forex brokers offer.
Copying trades from a Master account to one or more Follower accounts and automates the profit and loss distribution. Master account operates a personal capital through a PAMM Account, and his or her trading strategy is copied on the Followers capital.
How does PAMM work?
You decide how much capital you want to allocate and to which traders. Once you’ve allocated that money, it’s added to the managing trader’s pot of capital.
You’ll receive the same profits or have the same losses as the trader over the same period you invest with that PAMM account, on a percentage basis.
You (the follower) doesn’t need to do anything else other than monitor the trades taking place.
Forex Brokers offering PAMM Accounts for Investors
How Does Social trade and Copy trade Work?
In traditional Forex trading, individuals typically used their own understanding and knowledge of fundamental and technical analysis to form their own opinions about what would happen in the market.
When the time came to trade, in the days before the internet came along, they would call their broker. Nowadays, we would just click the buy or sell button on the appropriate currency pair.
But the point is that the broker is the one who makes the trade happen. They find buyers and sellers and match them together. This is no different in social and copy trading.
The Signal Provider or Expert
Signal providers are typically experienced traders, with a strong understanding the market and its underlying forces. They leverage this understanding to execute trades based on signs in the market that something is likely to happen that can be taken advantage of.
In social trading, followers can have all of an expert’s trades executed in their own accounts. This allows investors with limited knowledge of the market to profit by choosing the right expert to follow.
The trading platforms give a great deal of metrics on how the expert trader is performing, so you will have a solid idea of what to expect if you allow his trades to be carried out in your account.
The follower is someone who subscribes to a signal provider. They don’t necessarily need an understanding of what exactly moves the price in Forex or to construct their own strategy.
They can simply utilize the expertise, understanding, and strategies of the signal provider. In the case of social trading, you can follow an expert trader and all of his or her trades will be executed on your account.
What Do I Need to Do to Take Advantage of Copy Trading and Social Trading?
To start participating in copy trading and social trading, you will need an account on a platform that supports these features. It should be noted that not all platforms that support copy trading also support social trading.
Once you find a broker who supports the desired features, make sure you are aware of all the concerns that come with your account replicating the trades of another account. Evaluate the performance of the signal or expert you plan to follow.
You may see various warnings about concerns like the number of trades on the account not being sufficient to judge the signal or expert’s trading quality. Whether the data is sufficient enough for to trust it or not is your own personal decision.
Many signals and experts charge money to subscribe to or follow them. You will often have to agree to some terms of service for allowing their trades to be executed on your account. Take note of all the parameters that are required.
Risks of Copy Trading and Social Trading
Just like when you’re making the trading decisions for your account, a blockbuster news event can move the markets in a big way, ways no signal, human or bot, could anticipate. Ensure that your signals adhere to sensible stop-loss and take-profit levels and make sure you choose for them to be copied to your account.
If you subscribe to one or more signals, you may suffer from insufficient diversification, as all the signals may take advantage of the same strategy, leaving you exposed when the market conditions that made that strategy work have ended. This is why it’s important to choose signals that have a long track record.
If you are dependent upon a signal and that signal suddenly becomes discontinued or the signal provider drastically changes his strategy, it could leave you exposed to trades that don’t fit your allocation or could leave you without a plan at all. Other risks include technical ones like disconnection or getting out of sync with the signal trader.
Copy trading and social trading are exciting developments in trading. It allows novice traders to take advantage of the vast experience of talented and dedicated traders, providing an income stream for these expert traders and profit for the beginning trader.
Through social trading, it has never been easier to learn the ins and outs of Forex trading. Since Forex is the most heavily traded, most liquid market in the world, it makes perfect sense that copy trading and social trading are popular with Forex traders.