Whats Better, Social Trading or Algo Trading?
Social Trading vs. Algorithmic Trading: What’s Better?
Technology continues to stand at the forefront of Forex trading as it innovates how we perceive the markets and bank pips. Two pieces of technology in particular hold the attention of tech-savvy investors.
Social trading and algorithmic trading are both great automatic trading solutions.
Social trading is a unique method of trading that allows traders, particularly newer traders, to place the same trades made by other traders within the same platform. Typically, social traders look to use experienced or profitable traders with the hopes that they get a return on their investment for making the same trade.
Algorithmic trading, on the other hand, uses a pre-programmed piece of software containing specific parameters, rules and conditions that must be met in order for the trade to be considered a valid signal. When a valid signal is received, the trade is automatically copied into the traders platform.
But which form of automated trading is better, social trading or algorithmic? Let’s take a look at the pros and cons of each one.
Social trading, also referred to as copy or mirror trading, definitely has its advantages. Social trading has a more human element to it, that allows traders to feel more comfortable knowing their following an experienced market veteran. Because of its simplicity, social trading is more popular compared to algo trading.
The barrier to entry is small, and traders tend to gain more confidence with their own trading abilities. In fact, according to a report conducted by Finance Magnates, social traders will end up making up to 311% higher returns compared to manual-based traders who trade alone.
But don’t think social trading comes without risk, if it didn’t, then everyone using social trading platforms would become millionaires. One reason social trading may not work for new traders is due to the notion that expert traders are not willing to give away their money-making strategy for free.
Some experts might make create a mixture of good and bad trades on purpose just to get their name out there and have new traders signup for their signal service. This can be seen on social trading platforms that do not compensate their consistently profitable traders. On the other hand, a trader may even be completely average but finds a way to make his or her social stats look like they’re experienced traders. This situation can also lead to losses.
Fortunately, social trading platforms allow traders to set the copied signals on automatic, semi-automatic or manual, which gives traders more options in regards to how they use social signals.
Algorithmic trading is less social, more robotic, but more of a time-saver. Through algo trading traders don’t even need to watch the markets. When a software’s parameters are met, the trade is copied into the traders platform, no questions asked.
The benefits of this are that traders get the exact same market execution as the signal that is received, it removes bias and eliminated human emotions. Algorithmic trading is also commonly used by large firms, hedge funds and even brokers who take market positions in large volumes.
The downfall of algo trading is also its strength. After it’s programmed and trades make automatic executions, not much can be done if something goes, i.e. a parameter is flawed, no stop losses are used, etc. Any minor problem with the software can result in massive losses. There’s also a security concern with algorithms. If a software is not completely secure, it can potentially be maliciously hacked.
Choosing between these two automated trading solutions boils down to who you are as a person and what you plan to accomplish as a trader. Obviously, programmers and computer-oriented individuals are drawn to algorithms. While the younger social types, particularly millennials, will gravitate towards social trading.