Until around the late 1990s when online trading exploded, trading financial instruments was a thing that only understood within the walls of large financial institutions. The last 20 years have witnessed many changes and developments in the practice of trading financial instruments online. Most of these changes have been brought about by the increased use of the internet. Social media is one of the major internet-based factors of change in the nature and practice of online trading, and especially foreign currency trading (Forex).
Forex Market & Social Media
Whether social media is a key player in online Forex trading is a hot debate in 2019. Before we delve into finding out why the use of social media in online trading has attracted so much interest, lets first define online trading and put Forex into context.
What is online trading?
Online trading is the practice of conducting the sale and purchase of financial instruments over the internet. Instruments traded online include:
- Equity investments (e.g. shares)
- Fixed income instruments such as bonds
- Commodities like gold
Currencies are traded on the Forex market, which is the largest and most liquid of all financial markets. Daily turnover in the Forex market is estimated at more than
$5 trillion. In addition, Forex has been proven to be the deepest financial market due to the large numbers of currencies traded and of individuals involved.
Why has the popularity of Forex grown terrifically in the last two decades following the introduction of online trading? As noted earlier, online trading exploded towards and after the year 2000. About this time, some of the internet-based social platforms that have taken the world by storm were being formed. For instance, LinkedIn was launched in 2003, Facebook in 2004, and Twitter in 2006.
Social media has grown into a significant influence on the way online trading is done. Today, there is evidence to conclude that it might be one of the key drivers of Forex. We explore three major pieces of this evidence below.
1. The rise of online social trading networks
Online social trading networks form a significant subcategory of online social networks. There are hundreds of these platforms where millions of users share and get Forex trading ideas. Typical users fall into two groups: traders and followers. Joining such networks is usually free, and the platform allows you to trade all currencies in the world from any location using your PC or smartphone.
Social trading platforms are unlike the traditional online trading platforms which did not have user-to-user interactions. The platforms allow traders to set up profiles which can disclose not only their identity but also their trading history, current holdings, trading strategies, and past portfolio performance. Each trader has followers – investors following the trader’s strategy.
Communication between traders and followers or among followers of a particular trading strategy is done through comments on forums or personal messages. As a follower, you are always looking for a convincing investment idea used by a trader so that you can replicate the trader’s investment decisions in your own account. Your actual trading account may be located on the social trading platform or linked to a third-party brokerage.
2. Customers as financial advisers
Peer-based advice transmitted via social media has become one of the most common sources of information for investment decision making for many online traders. Social trading platforms as well as other social media networks are always updated with Forex trading articles. These articles usually contain the analyses and predictions of currency movements made by investors who write them.
The result is a social media effect on the volumes of currencies traded as well as their short-term future values. As an online Forex trader, you want to stay updated on which currencies are mostly talked about online. The sentiments, views and advice given about trading them eventually become reflected in the currencies’ prices. In other words, evaluating the sentiments of traders can help you when predicting their price movements.
3. Social media brought the era of DIY (do-it-yourself) financial analysis
One of the reasons that made online Forex trading exclusive for financial institutions in the 90s was the fact that only finance pros could get their head around the financial instruments and trading tools. Social media is probably the biggest contributor to the demystification of Forex. Today, you can do your own analysis of the currencies you want to trade using the vast information availed on social media platforms by fellow online traders.
Proponents of peer-based online trading advice say that DIY financial analysis helps to cut the cost of investing. Unlike prior to the advent of online Forex trading
where you’d have to pay some fee to a brokerage for research and investment advice, you can now do your own research and use it to make investment decisions. This enables you to realize maximum return from investing in currencies trading.
Social media is expected to gain more influence over online trading in 2019 and beyond. If you want to make the most out of the opportunity to make money through Forex, using social media platforms can help you reach your goal. Registering for membership of a social trading platform can help you to learn about Forex and enable you to build a successful online trading career from the ground.