As one of the most important holidays for millions, the Lunar New Year is a celebration of the arrival of spring, sweeping away any ill fortune and ushering in good luck. For us in present times, the good luck we seek is usually health, longevity, and fortune.
It probably explains why we wish our family and friends “Gong Xi Fa Cai” — which translates to “wishing you prosperity in the coming year” instead of the usual “Happy New Year”. After all, who doesn’t want to be blessed with good fortune? I know I do.
Most conversations during the Lunar New Year revolve around professional growth and wealth management while partaking in the most quintessential activity of all: gambling. People look forward to testing out their new year fortune through games of blackjack, and several rounds of Mahjong.
However, it is easy to get carried away with the daring sentiments of making (or losing) money during the festivities, especially during this period of increased investment activity. Family and friends may prompt best market tips, get rich quick scheme suggestions or even recommend following ‘successful expert traders’ on social media to grow your wealth. But is it truly that simple?
Social trading is not new only in recent years, with explosive growth worldwide. According to research conducted by Investment Trends in 2023, social trading in Singapore is on the rise, with every other trader either engaging in social trading or planning to do so within the next 12 months.
The report indicates an uptrend in copy trading, with eight per cent of traders who have never followed social trading in the past plan to engage as a follower and seven per cent planning to engage as an expert trader/investor. Though the numbers for copy trade may seem few, rising accessibility to market insights on social media coupled with these participation indicators hint at an impending surge of interest in copy trading.
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Before getting swept away by the hype, traders must consider the inherent risks and responsible practices associated with social trading. But before diving in, what exactly is social trading, and should it be your compass in the Chinese New Year’s quest for financial fortune?
At its core, social trading is a vibrant ecosystem where investors connect, share insights, and even mimic the trades of others. It democratises access to financial markets, especially for beginners, offering a platform to learn from seasoned traders and potentially replicate their success.
However, within this broad umbrella lie three distinct approaches:
- Social trading: A bustling marketplace of ideas where discussions, strategies, and market analyses flow freely. This knowledge-sharing empowers individuals to make informed decisions based on their own understanding, not intended to perform blind imitation.
- Copy trading: This takes things a step further, allowing users to automatically mirror the trades of chosen “signal providers.” Their buy and sell orders are instantly reflected in your own portfolio, offering a hands-off approach with the potential for quick gains.
- Mirror trading: This is essentially automated asset management. It replicates not just individual trades but the entire portfolio allocation of a chosen trader, placing all your eggs in their proverbial basket.
The Investment Trends study further reports that social traders are generally younger and trade more often than non-peer-reliant traders. Two in five traders who have never used social trading can be encouraged to start doing so if given sufficient tutorials, risk analysis or (better) assurances of the trustworthiness of ‘top traders’ on the platforms. As social and digital platforms are set to rise with a younger demographic, it is important to understand the benefits and pitfalls of social trading and how to proceed with caution.
While the allure of copy and mirror trading’s convenience is undeniable, social trading, when done right, stands out as a more empowering option as it would foster education and understanding of market dynamics. However, the path paved with social trading is not without its treacherous potholes.
Blindly following the herd or chasing quick profits, fueled by the “get rich quick” mentality that can sometimes permeate these platforms, can lead to significant losses. One investor lost about 50 per cent of his portfolio.
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Such an instance highlights the importance of approaching this space with caution and a healthy dose of scepticism. Here are some specific pitfalls to be aware of:
- Downplaying the knowledge gap: While social trading democratises access, critics argue it can downplay the essential knowledge needed to navigate financial markets effectively. Blindly copying trades without understanding the underlying rationale can leave you vulnerable to market movements and unable to adapt your strategy when needed.
- The illusion of risk-free returns: One of the biggest misconceptions is that social trading somehow eliminates risk. All trading inherently involves risk, and losses are inevitable at some point. Simply trusting a third party’s judgment while shouldering all the potential downsides is a major drawback.
- Hidden costs: Be mindful of potential hidden costs associated with social trading. Some platforms, particularly those promoting “top traders” with frequent trading activity, may charge hefty commission fees that eat into your returns.
So, as the Lunar New Year spirit of seeking financial growth takes hold, remember these cautionary tales:
- The “celebrity trader” trap: Not all that glitters on social media is gold. Some signal providers may be more concerned with building their online persona than delivering genuine investment insights. Be wary of those who boast of unrealistic returns or flaunt lavish lifestyles. Do your due diligence, research their track record, and understand their investment philosophy before blindly trusting their calls.
- The echo chamber effect: Social trading platforms can create echo chambers where confirmation bias reigns supreme. Surrounding yourself solely with traders who share your existing views can blind you to potential risks and alternative perspectives. Seek out diverse voices, challenge your assumptions, and maintain a critical eye on the information you consume.
- The emotional rollercoaster: The fast-paced nature of social trading can easily trigger emotional decision-making. Fear of missing out (FOMO) and the lure of quick gains can lead to impulsive trades and disastrous consequences. Remember, sustainable wealth creation is a marathon, not a sprint. Prioritise long-term goals, maintain discipline, and avoid letting emotions cloud your judgment.
The Lunar New Year may be an auspicious time for financial endeavours, but remember, true financial prosperity is built on a foundation of knowledge, discipline, and independent thinking. Remember, financial literacy is still your responsibility, not something magically transferred through copying trades.
Don’t be lulled into a false sense of security, as returns may not be guaranteed. Invest in your own financial education, develop your analytical skills, and cultivate a healthy scepticism towards the hype and promises that may abound.
By navigating the social trading landscape with a discerning eye and a focus on long-term goals, you can transform the Chinese New Year’s investment rush from a perilous gamble to a journey towards sustainable financial well-being.
Disclaimer: The insights presented in this article are based on Investment Trends 2023 Singapore Leverage Trading Report. For further information or clarification on the research findings, please contact Investment Trends directly at info@investmenttrends.com.
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