Social Trading In Forex Markets

Dec 16 2011 By Aimee Gardiner

Forex trading was once the preserve of large investment banks, and investment trusts.  The recent rise in retail traders has meant that there has been a massive increase in the number of traders who operate on more social platforms so how does social trading occur in forex markets?

Traditional trading relies on fundamental or technical analysis or a mixture of both to predict the likely direction of the markets. This requires a trader to either have an in depth knowledge of the economic factors surrounding what he will trade, or to have an in depth mathematical knowledge to work out the probability of price movement within a certain time frame. The only way for a trader to know what another trader was doing was to communicate with them on the telephone before the advent of the internet. Recently, a new form of trading has emerged - namely social trading, where this process is made much easier.

New Form Of Trading

So what is social trading? Since the emergence of social networking, which has allowed people from all over the world to share their thoughts and data, traders have realised that their thoughts and data can also be exchanged via the same pathways. Traders have been quick to take advantage of this new technology and they are no longer restricted to predicting the market by economic data or daily pivots but can accurately gauge the sentiment of the market via social networking.

Since the number of retail traders has increased, brokers have increasingly started to produce gauges of sentiment using the number of traders that hold long or short positions based on the brokerage data. This can be used to assess whether the majority of traders will be trading the market at any given point.

On a commercial level, there are numerous companies that deal exclusively in social trading by providing trading signals that are given by the other traders. Other traders can rate how good a trader is, and thus the better traders get positive reviews and their views on the marketplace become more trusted.

What Social Trading Means For The Retail Trader

Social trading may involve sharing research, fundamentals and opinions on the market place. Opinions on recent news, pooling funds, or directly sharing trade entries and exits are all common topics within social trading. Traders can also swap details of their trading techniques, their portfolio performance and any stories they may have.  

As the number of retail traders has increased, it has become increasingly important to know what social trading is and how it can be beneficial. As information on the trade decisions of market participants becomes interwoven in the way people trade, social trading has become an invaluable resource. 

For example, if there is a region where it is known that there are a lot of stop limits from social trading, the price may advance into that area, irrespective of underlying fundamentals or technical analysis. This has become a relatively new phenomenon that successful traders must incorporate into their own trading to maximise their profits. Finding this information out through social trading can allow traders to make swifter decisions, increasing their success.