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

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

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

Social trading consists of a set of services that can include the possibilities of copy trading or mirror trading, but based above all on:

  • They published analyzes on platforms or social networks in order to recommend positions to be taken on the markets,
  • They exchange signals which are recommendations on a position on a financial market, sent by courier. Those who receive them choose whether or not to follow the recommendation and whether or not to place the corresponding order on their 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 non-professional novice trader.

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

the specular 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 mention AvaTrade, XTB, Alvexo, ZuluTrade, Admirals, BDSwiss, Darwinex, PrimeXTB and verify that it has theMFA approval (or equivalent European passport) and finally that it has not been blacklisted by these authorities due to abuse. But it should be noted that the market leader is eToroapproved by the Cypriot authority.

If a dispute arises tomorrow with a company in free provision of services, that is, approved by another regulator, the MFA has no powers to intervene. In case of problems, the customer should contact the mediator or judge of the country of origin, therefore in a foreign language. It can in fact be noted that 60% of the complaints of savers received by the MFA in the last two years against foreign investment companies (with an average loss per saver of 33,548 euros) concerned establishments registered in Cyprus.

You choose the trader (s) you want to copy from information such as:

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

Then point out a few settingsof which :

  • the amount to invest,
  • Take Profit: the level you have set to close the position to take profit,
  • the Stop Loss – level that is determined to close the position to stop the loss,
  • desired leverage and margin.

Various investment products

Costs: beware of pseudo-free!

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

It might even be there additional costs, such as foreign exchange costs where applicable or capital withdrawal costs. And above all of inactivity fee.

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

Know the different types of stock market orders

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

– “limited price”, the simplest and safest,

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

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

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

Understanding the different types of stock market orders.

Copy trading: the risks

Le copy trading, pourtant en vogue chez les jeunes qui reviennent vers l’vestissement sur les marchés financiers, par sa simplicité et surtout du fait d’envie de gains élevés rapides, n’est pas à recommander à ces néo-traders, du fait of the risks inherent, including:

  • a still little regulated activity,
  • the absence of guarantee of results,
  • They past performance is not indicative of future performance (especially if appreciated in an investment period that is too short for a risky investment),
  • of the traders proposed to be followed not professionally,
  • They “popular” traders. (who are rewarded by the platform based on 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 for very short periods (e.g. intraday cryptocurrency)
  • from difficulty in stopping leaks for the automatic duplication of orders,
  • of the customer service not always accessible and rarely by telephone.

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

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