The difference between social trading and mirror trading
Social trading allows investors to copy the trades of other members of a network. It also also allows them to interact with these community members to exchange ideas and analysis. Mirror trading allows you to copy a trader's entire strategy or that of a group of traders.
Social trading
Social trading is more appropriate for beginning traders who are looking to learn trading techniques. The main advantage of social trading is that it significantly reduces the amount of time it takes for a novice trader to analyse the market, since he or she can see the ideas and analyses of other traders. The best use of a social trading network is to take advantage of the most experienced traders by supporting or by countering their ideas. Social trading can therefore be used as an indicator (trader sentiment) that helps you make decisions. However, it is very risky to follow others in total confidence, the information should be used as part of a decision-making process and not to copy others blindly.
Can you learn trading through social trading platforms?
A trader is someone who has learned how to make his or her own decisions and manages his or her emotions, regardless of what others think. Pure copying, without an understanding of trading fundamentals is even riskier. However, not everyone is cut out for trading: in this case, mirror trading and social trading networks can be a good starting point to learn trading.
Mirror trading
Mirror trading is ideal for people who do not have the time to learn or who don't feel comfortable trading. Mirror trading should be approached with the mindset of an investor and not a trader. Before copying someone's strategy, you need to take a few important things into consideration. First of all, you need to understand the trading strategy, risk parameters, the costs, the accuracy of performance reports, etc.
Here are some key factors that determine the success of an individual participating in mirror trading:
An analysis of performance
It is imperative that you understand and analyse the performance of a trader you want to follow. If you don't understand the trader's trading style, you cannot set the risk with the tools that the social trading network provides you with. You also neet to monitor the trader because he or she can change strategy for various reasons. Mirror trading is very different from a traditional financial investment, because it is risky and requires regular monitoring to refine the risk parameters and to modify the selection of traders.
Build a diversified portfolio
Try to build a diversified portfolio with a minimum of 3 traders who use different strategies. Building a portfolio of traders who are not correlated is not a simple task. To avoid this problem, you can for example limit the currency pairs available to each trader so that they are not all trading the same thing. You can also choose traders that have different investment horizons.
Let your selected traders trade for a sufficiently long period of time
A common mistake that people often make is to always get rid of traders as soon as their performance takes a turn for the worse. After you have made the effort to select the best trading strategies and set the appropriate risk levels, you need to give your portfolio a chance to work for a while to see if it meets your expectations. Any prior estimates or backtests you have done will be closer to reality if allow your portfolio enough time to perform, but that doesn't mean that you shouldn't take action when a trader gets out of hand, and this is in fact the main difficulty you'll encounter with mirror trading.
