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

While marketing is evolving in favor of the new investment methods in the financial markets that constitute social trading and copy trading, trying to attract young neophytes especially by insisting on the potential quick gains, the apparent simplicity should not hide significant risks

that social commerce allows a financial investor to intervene online in the financial markets based on financial information (market analysis or suggestions for 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 that integrate these social networks.

Social trading consists of a set of services that may include the possibilities of copy trading or mirror trading, but primarily based on:

  • them published analyses on platforms or social networks in order to advise on positions to take in the markets,
  • them trading signals which are recommendations about a position on a financial market, sent by courier. The person who receives them chooses whether to follow the recommendation or not and whether to place the corresponding order on his account or not (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 in the training of a novice non-professional trader.

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

that mirror trade (or mirror trading), meanwhile, another version of social trading is equivalent to copying a trading strategy (and not a trader).

Practical methods of copy trading

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

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

You select the retailer(s). which you want to copy from information such as:

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

Then you specify some settingswhose:

  • the amount to be invested,
  • Take Profit – the level you set to close the position to take profit,
  • Stop Loss – level at which you decide to close the position to stop the loss,
  • desired leverage and margin.

Various investment products

Cost: beware of pseudo-free!

That costs (order execution, custody, etc.) charged by these social trading platforms are quite modest and comparable to that of online brokers – but remains set in competition.

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

Find out in which markets the orders are placed: read the document entitled ” Execution policy” as well as the general conditions. There are actually several trading platforms and some markets are less liquid than others.

Know the different types of stock market orders

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

– “limited price”, the simplest and safest,

– “on 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 returning to investing in the financial markets, because of its simplicity and above all because of the desire for quick high gains, is not recommended for these neo-traders, because . risks inherent, including:

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

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

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