| Updated: October 30, 2024Social Trading vs. Copy Trading
This lesson will cover the following
- Differences between social and copy trading
- It is not about definitions only
- What should you choose
Social and copy trading have the same basis but they are different in many ways. In this section we will examine them both in relation to one anther and help you understand which one is better for you with your current level of understanding. Even though they are both good for new traders, its not necessarily a good idea to skip steps in the learning process. We will make sure that youre right on track and that you are progressing properly. This section will assume that youve already read the other sections concerning social and copy trading.
Fundamental Differences Between Social and Copy Trading
Even though weve already provided you with enough information about the nature of these two types of trading, we still feel compelled to compare them and explicitly show the differences because weve seen them used as synonyms in many websites on the Internet.
You can say that social trading is a broader term and copy trading is a part of social trading. This means that copy trading can be considered a type of social trading (which is where the confusion originates from). That being said, they are not one and the same. Not every type of social trading is copy trading because you dont let someone else manage your trades in an automated manner. You may use information from other traders and base your decisions on that information but ultimate if you decide to enter a trade, you are the one making the decision.
Copy trading is a very strict form of social trading that binds your account with the account of another trader. Their trades are reflected in your account. Their profits are your profits and their losses are your losses. You dont choose to open trades, the process is automated (although in some platforms you can manage this, while in others everything you can do is stop copying the trader). This is what we refer to when we say copy trading. Its an actual phenomenon having its own and own definition. In the same way, when we say social trading we dont mean copy trading – we mean the broad term.
Its Not Just About Definitions
This is not a simple technical difference we are talking about here. If youre a total newcomer and you dont know that social trading and copy trading are different things you might be prompted to make some questionable decisions. If you read what social trading is and think that its the same as copy trading, then you click the “Copy” button thinking that you will be getting information from a certain trader, you might end up losing a part of your portfolio because of disinformation. This is unlikely on some platforms because they ask you how much you want to invest which will make you question what youre doing. However, in other platforms the process is absolutely automated which means that you will expect to get information from a trader, while in fact you will be copying all of their trades. This means that if the trader youve copied is not successful you will end up losing a part of your portfolio.
What Should You Choose?
What you should choose is entirely up to you. However, for newer traders we would recommend that you first and foremost read everything you can about the subject at hand. Social trading will allow you to make trades based on the information provided by other traders. In the end, you will be the one making the decision of whether to trade or not. You have much more control over your portfolio and your trades. This is a double-edged sword, though. This means that if you misread something you might make the wrong move because youre inexperienced. Still, if you like to have control over your finances, this is the way you will learn how to trade. The risks can be a bit higher and you may lose a lot, at least in the beginning. That being said, if you think that you wont be losing any money as a trader, you might as well quit right now. Losses are as inevitable as taxation.
On the other hand, copy trading literally doesnt require anything of you except for clicking the “copy trader” button. From that point onward all of their actions will be copied on your account (including their currently open trades). The upside is that you dont have to do anything more than that – the system is automated and will take care of everything. If the trader wins, you win, if they lose, you lose. Its simple. The downside is that if you pick a trader or they experience a bad streak, this will hurt your portfolio. Furthermore, you may get lazy and not learn how to trade at all (if you are good at picking traders, this might not really be a downside). With copy trading you have much less control over the trades.
At the end of the day, its your choice. If you want to have more control then you should go for social trading. If you want to trade but youre confident in your own abilities (even with the help of the community) you can go for copy trading. You can still learn from the traders mistakes and try to predict what they will do next, what the right course of action would be, etc. Things change in time – just because youve chose a certain path doesnt mean that you have to follow it.
Final Words
Social trading and copy trading are not the same thing. Its important to make a distinction between the two. Its also important to consider what youre striving for in order to make the choice easier. Make sure you pick something youre comfortable with. You should always know the reasons behind your choices. Think carefully about what you want and what fits you. You cant go wrong either way.