What about social commerce? – Savings guide

Social commerce: what exactly are we talking about?

Social commerce is paramount. Many platforms offer this type of service (eToro, Admiral Markets XTB, etc.). Or rather these services, because social trading can be found in different varieties: trading signals, copy trading, mirror trading. But the risks are very high and the long-term gains ultimately turn out to be weak or even non-existent. We explain why.

The different forms of social commerce

We can understand individuals’ interest in social trading: easy to set up, achievements that make you dream, a pool of thousands of traders to copy… There are several types of social trading:

  • Trading signals: transmitted via a Telegram channel with indications of the orders to be placed on an asset,
  • “Packaged” products: portfolios of pre-selected assets which can be copied freely or automatically as in controlled life insurance,
  • Copy trading: fully automatic, where all trades made by the copied trader will be reproduced in your portfolio, respecting the capital scales.

Risks of social trading

Among forms of social trading, copy trading is unsurprisingly the riskiest form.

The risk factors are:

  • Copy trading is not regulated by the AMF
  • Poorly designed or even non-existent risk management
  • Opposing goals between broker and customer

Copy trading is not regulated by the AMF

This is the whole paradox of social trading, which is not considered investment advice. Authorizing a trader to automatically place orders in your account is portfolio management.

In normal times, investment advice and portfolio management are strictly monitored. You must have a CIF (Financial Investment Advisor) license to be authorized to carry out these activities:

  • As part of a life insurance mandate
  • On a trading post

The lack of regulation of copy trade opens the door to many excesses. It is therefore surprising to note that the AMF is not stricter on copy trading services if the purpose is to protect clients from the actions of brokers. Many merchants are causing their copiers to lose money, but there is no remedy at this time. Especially since the majority of brokers offering this service are regulated in Cyprus.

Poorly designed or even non-existent risk management

The problem with copy trading comes from performance escalation. If a trader wants to attract the maximum number of copiers, he must show very high performance and the most enticing possible. However, performance is never without taking risks. And newbies are rarely interested in a trader who posts +20% for the year…

To maintain his base of copiers, the trader must continue to take risks:

  • By increasing its leverage
  • By increasing the size of his positions
  • By trading the most volatile assets

So yes, the trader will deliver a performance of +500% for the year, but at the cost of very poorly designed risk management – ​​even outright relegated to oblivion. Behind traders who post +500% during the year, we often observe a drawdown

over 70% (withdrawal = maximum little loss, a withdrawal of 70% indicates that the account has at some point lost 70% of the capital).

These dealers will make you money for 1 or 2 months, yes. But they end up bringing your account down to zero at some point. This is why copy trading remains above all a (very) temporary process. Trusted reviews on eToro (the leader in social trading) make it clear: copy trading cannot be an end in itself.

Opposing goals between broker and customer

The real winners of copy trading are signal brokers and traders. The copied traders are compensated for the order volumes they generate through their subscribers. The more copiers they have, the more likely they are to make a profit

the money! The broker is remunerated by trade commissions. If an expert dealer multiplies order volume thanks to his subscriber base, so much the better. And if traders use leverage, even better. In the end, the customer turns out to be the only loser. It is he who pays the commissions, it is his capital that is trimmed by the losses…

Conclusion

In the medium term, copying a trader will not make you a winning trader. As we have seen, the dice are somewhat stacked against the customer, which leaves more lengths. If you want to make money in the financial markets in the long term, invest in yourself. Training, money management, a good trading strategy… Social trading through trading signals and copy trading are only temporary and risky steps.

Financial markets / Risk warning : Investment involves risk. By investing in the financial markets, you can lose all or part of your capital. We recommend that you only invest in financial products that match your knowledge and experience. Past performance is not a predictor of future performance, is not constant over time and is in no way a guarantee of future performance or capital.

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