“Social trading and Copy trading”: promises… and risks

While marketing is developing in favor of new ways of investing in the financial markets, such as social trading and copy trading, trying to attract young neophytes in particular by insisting on the potential quick gains, the apparent simplicity should not hide significant risks

the social trading allows a financial investor to intervene online in financial markets based on financial information (market analysis or proposal of investment strategies – “trading signals”) generated by other investors on social networks or even to follow the investment strategies of more experienced traders. It is based on automated trading platforms integrating these social networks.

Social trading is made up of a set of services that may include the possibilities of copy trading or mirror trading, but based above all on:

  • them published analyzes on platforms or social networks with a view to advising on positions to take on the markets,
  • them trading signals which are recommendations on a position on a financial market, sent by courier. The person who receives them chooses whether or not to follow the recommendation and whether or not to place the corresponding order on his account (this is the classic version of AMF social trading).

In its basic version of exploitation and analysis of trading signals, social trading can be one of the elements of the training of a beginner non-professional trader.

The most original version of social trading is the copy tradingwhich consists of automatically copying the positions taken by a trader in real time.

the mirror trading (or mirror trading), meanwhile, another version of social trading, amounts to copying a trading strategy (and not a trader).

Practical methods of copy trading

First we must choose your platform. We can cite AvaTrade, XTB, Alvexo, ZuluTrade, Admirals, BDSwiss, Darwinex, PrimeXTB and check that it has theAMF approval (or an equivalent European passport) and finally that it has not been blacklisted by these authorities due to abuses. But it must be noted that the market leader is eTorowhich is approved by the Cypriot authority.

If tomorrow a dispute arises with a company under the freedom to provide services, ie approved by another regulator, the AMF does not have the powers to intervene. In the event of a problem, the customer must contact the mediator or justice in the country of origin, so in a foreign language. In fact, it can be seen that 60% of complaints from savers received by the AMF over the past two years against foreign investment companies (with an average loss per saver of €33,548) concerned establishments registered in Cyprus .

You choose the trader(s) that you want to copy from information like:

  • its return over 1 year – its performance,
  • its risk score,
  • the number of people who copy it, as well as its popularity over the last 7 days,
  • the markets it targets,
  • their trading strategies.

Then you indicate some settingswhose :

  • the amount to be invested,
  • Take Profit – the level you set for closing the position for taking profit,
  • the Stop Loss – level that you determine to close the position to stop the loss,
  • desired leverage and margin.

Various investment products

Costs: beware of pseudo-free!

The costs (execution of orders, custody, etc.) levied by these social trading platforms are quite modest and comparable to those of online brokers – but remain to be put in competition.

There may also be additional costs, such as exchange costs where applicable or capital withdrawal costs. And especially of inactivity fee.

Find out on which markets the orders are placed: read the document entitled “ Execution policy” as well as the general conditions. Indeed, several trading platforms exist, and some markets are less liquid than others.

Know the different types of stock market orders

To buy or sell a security on the financial markets, there are many types of order, including:

– “limited price”, the simplest and safest,

– “at the market”, executed immediately, at a less controlled price,

– “at the best limit”, at a price limited to the best price at the time of its integration into the order book,

– “triggered”, also called “stop” or “stop-loss”.

Understand the different types of stock market orders.

Copy trading: the risks

Copy trading, which is in vogue among young people who are returning to investing in the financial markets, due to its simplicity and above all because of the desire for rapid high gains, is not to be recommended to these neo-traders, because of the risks inherent, including:

  • a activity still poorly regulated,
  • the absence of guarantee of results,
  • them past performance is not indicative of future performance (especially if they are appreciated over an investment period that is too short for a risky investment),
  • of the proposed traders to be followed non-professionally,
  • them “popular” traders (who are rewarded by the platform according to the number of people who follow them and their level of performance) are led to take strong risks to gain visibility,
  • of the accounts to follow which can be virtual,
  • capital losses which can be very high over very short periods (e.g. intraday cryptocurrency)
  • of difficulties in stopping losses due to the automaticity of the duplication of orders,
  • of the customer service not always accessible and rarely by telephone.

Another potential scam: some intermediaries offer to recover the lost money, claiming to be from the AMF or consumer associations with theobjective to extract moneyby international transfer.

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