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September 23, 2013

Social Trading Networks: What You Need To Know

By Richard Cox for Economy Watch

To say that the trading environment has changed drastically over the last ten years would be an understatement. The all-encompassing use of the internet from home computers and mobile devices has taken investors out of the trading exchanges and into the environment of their choice.

Options trades can now be placed at any time of day and all relevant market information can be accessed in seconds. This essentially means that options trading has democratized, and market access is now open to all that wish to play these markets. There are very few downsides in these developments and here we will look at some of the positives -- the most important of which is the rise of social trading as an alternative to the traditional exchange environment.

Traditional Options Trading Floors

Historically, traders speculated in the financial markets on trading floors in chaotic environments where most of the relevant information was available only to those with privileged connections and a direct connection to the associated exchange.

Those days are over. What we are now seeing is a new crop of social trading communities where investors mull over and debate position outlooks using forum posts and real-time news alerts. Ultimately, this means market sentiment will be a much more accurate reflection of what is truly happening in the world economy and in the minds of individual traders. This is also the reason social trading communities mark the future in speculator interaction.

Advantages of Social Options Environments

Success in options trading is largely determined by sentiment. In order to win, markets have to push prices above or below your strike price. Success or failure is determined by whether or not your position agrees with the majority of the market. If the wider market does not agree with your trading decisions, losses will follow. To help with this, social trading networks have started popping up, allowing traders to interact, debate, discuss strategies, and even copy trades of more experienced participants. These types of communities (something like a FaceBook for traders) have many advantages -- especially for those just getting started in the markets.

One example of a social trading network can be found in the MQL5 Community, with its well-detailed performance record. In addition to educational resources, traders can access sample trade ideas from experts that are updated in real-time. These types of networks allow less experienced traders to follow the progress of the experts (with detailed stats on winning and losing trades) and to base positions on their recommendations. But what is best about these arrangements is that newer traders can find more experienced traders that share the same strategies and outlook on the market. For example, you might be a trend trader and you are looking for a more experienced mentor to guide you through the steps of finding the best trading opportunities. In other cases, you might have a conservative risk tolerance and you are looking for ways to find less aggressive trading opportunities that are less likely to accrue large losses.

Alternative Trading Strategies

There are many types of trading strategies (scalping, swing trading, breakout trading, etc) so it is usually not enough to side with the advice of any one trader. It makes much more sense to become an active member of a trading community, and then align your methods with the subset that is most in-line with your trading goals. For example, if you do not have time to be in front of your trading station for a few hours each day, it would not make sense to follow the trades of a scalper or news trader. In these cases, you would want to establish a partnership with groups that use longer term time horizons that do not require positions to be opened and closed each day.

But, of course, the biggest advantage of working with a social trading network is that you are able to learn the process of trading without the risk of loss that most new traders encounter. New traders usually find themselves in one of two positions: We either jump into the markets with live money (and lose most or all of it), or we spend a lot of time demo trading in order to learn the inner workings of the market (but this does not generate real money gains). Working with mentors and trading networks helps solve both of these problems, as this allows us to find and enter high probability positions without the added risk of trading with live accounts while we are still in the early stages of the learning process.

All of these advantages combined suggest that social trading networks are the way of the future, as investors move away from the traditional exchanges and into more specialized facilities. These networks have much to offer, even for those with more trading experience as they provide an outlet to display their knowledge and gain a following with like-minded traders. As always, it makes sense to research the reputations of these networks before any live money is used in a trade. Internet forums offer an excellent way of doing this, as you will likely come across other traders that have tested these services and can report back on whether or not a given network deserves its reputation.

Courtesy Richard Cox for Economy Watch (EconMatters author archive here

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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