eToro offers a great variety of financial instruments to choose from, but there’s likewise a wide selection of basic trading statistics and analytical tools to ease your trading process, including the ones necessary for technical and fundamental analysis. These are used in trading to estimate the future price behavior of the preferred assets and set trading positions accordingly. The debate on which one should be used for trading is ongoing and it is a good idea to understand both and choose the most suitable for yourself.
Below you can find a quick guide on what technical and fundamental analysis is and how it can be performed on eToro.
(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings. In fact, Around 67% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)
Technical analysis focuses on the identification of most probable price movement scenarios based on the preceeding price trends and trading volumes; in simple terms, technical analysis uses trends, trading statistics and patterns to do so. Technical analysis doesn’t consider any effects of the surrounding economy or the company issuing the actual stocks but does consider market research on the dynamics of supply and demand and patterns associated with repeated investor behavior based on historical data.
Essentially technical analysis tries to answer the question of what is more likely to happen to stock prices given historical data on prices and trading volumes. The key pillar that this method relies on is the belief that all the publicly available data on the company issuing the asset is already incorporated in its pricing done by the market.
Some of the benefits of technical analysis include the fact that offers speediness and to some extent the ability of automization. Another benefit is the fact that it can be used on many assets and not only stocks, but also futures, commodities, currencies and so on.
Technical Analysis tools on eToro
There is a wide variety of technical analysis tools available on the platform, and below you can find a quick overview of the more popular one’s:
how to set up Indicators on the eToro charts (Moving Average indicator)
- Moving Average: this is quite a commonly used indicator that demonstrates the direction of a trend over a certain period of time. This average allocates a greater weight to the more recent results rather than older periods, whereas a simple moving average allocated equal weights.
- Bollinger Bands: Bollinger bands are the two trend lines plotted 2 standard deviations around the values of the simple moving average (SMA) over a 20 day time period of an asset. These are used to identify whether the asset is likely to being currently overbought or oversold by analyzing trend’s strength: price moving above the upper boundary indicates a situation of possible overbuying whereas if it is below the lower boundary the asset is believed to be oversold. These trendlines change in accordance with changes in the volatility of an asset. Note that you can modify the default settings (2 standard deviations and 20 day time period) of this indicator to your own preference. An example is shown below.
- Support and Resistance levels: these are some of the most basic tools and can be seen as treshold indicators for when an investor should open or close a trading position. The price is expected to stay within the range bounded by these levels.
- Fibonacci Retracements: used to identify the price reversal points of an asset to help identify the highest and lowest possible prices. In simple terms they give an indication of when the support and resistance levels are likely to be reached. You can always adjust the position and the width of retracements.
- Relative Strength Index: this oscillating momentum indicator considers the price history of an asset and measures its relative strength against these historical values, on a scale from 0 to 100. It is used as a signal for bearish and bullish price trends needed to assess the conditions for the asset to be overbought or oversold.
- Stochastics Indicator: another oscillator used to estimate periods of overbuying or overselling derived by comparing an asset’s closing price to previous prices for a certain time period.
- Moving Average Convergence Divergence (MACD): this indicator is used to identify shifts in price movement direction, strength and duration of a trend.
- Ichimoku Clouds: these complex and composite indicators give a greater detail to the support and resistance levels, as well as indicate the direction of a trend and its momentum. See an example below.
A Note of Caution on Technical Analysis
As you might have realized by now, the outcomes of a technical analysis depend highly on the chosen timeframe and on the selection of indicators. The outcomes of your techincal likewise depends on your understanding of the psychology of market behavior and ability to understand investor decision making. It also tends to be bias to investor’s personal opinion and expecations, and thus should be interpreted with great caution and personal detachment.
Fundamental analysis tries to determine the intrinsic value of stock based on the valuation of the company that issued it, its performance in terms of income, profit and asset value, and then identifies the difference between the trading price of a stock and its actual value. If a trader decides that the company’s stock is currently undervalued they can expect for it to outperform in the long term, with an eventual price increase.
Fundamental analysis uses various financial statements of a company, such as its income statement, cash flows and balance sheet to derive key metrics and ratios used in performance evaluation. Economic factors are also considered for analysis, including interest rates, GDP growth and data on the industry the company operates in. In contrast to techincal analysis, which examines closely the price movement itself, fundamental analysis looks at all the various external factors affecting it.
What fundamental analysis tries to do is to determine the so called ‘real’ value of a company’s stock, apart from the short term changes caused by the forces of supply and demand on the trading market. The aim then at the end is to understand whether the current price over or underestimates the real value, and to sell or buy accordingly to profit off the current mispricing of the market.
Fundamental Analysis on eToro
There are several statistics and tools to help your fundamental analysis on the platform, such as the company statistics and the latest figures of company reports found on income statements, balance sheets and cash flow statements.
Fundamental analysis is quite lengthy and eToro facilitates that process by providing a set of information on the company issuing the stock, such as its general description, the strategy and the industry is operates in, as well as key statistics, which all can be viewed by clicking on the chosen stock and reviewing its Feed, Stats, Chart and Research sections, as shown below.
Above you can see an example of a short overview of company’s profile, the industry it operates in and a even a few advices on how to trade the stock, what causes the stock price to move, what type of investors tend to purchase it and how to invest provided by the platform itself. Do bear in mind that those are just general observations and do not guarantee risk-free results as stocks are volatile in nature.
The economic conditions surrounding the company is trading in may also be considered while deriving its intrinsic value. For this you may look at the newsfeed with the latest updates on the platform, as well as examine country-specific economic indicators. Likewise, the surrounding industry conditions may be considered to see how the company performs in relation to its peers.
Some of the statistics you may consider for that type of analysis are the earnings per share, return on equity, beta of the stock and other performance related indicators. The way a fundamental analysis is conducted depends on each investor’s personal approach, the method of valuation and the indicators they consider to be most important.
A Note of Caution on Fundamental Analysis
Fundamental analysis is quite time consuming and mainly focuses on the long term perspective of price performance. If you are looking for a fast way to make profits off short term movements this may not be suitable. It is also quite comprehensive as it comprises the analysis of the economy, the industry and the company itself. Many times it relies on publicly available data which may be limited in its interpretation; the outcome of the industry analysis likewise depends on your choice of similar peers in the assessment group, and may vary from trader to trader.
When to use Technical or Fundamental Analysis?
The debate on which method for analysis is best to use never ends in the trading community, but you could perhaps consider the investment horizon of your trading. Since technical analysis involves a close analysis of price trends, it is considered to be more suitable for short term trading. Fundamental analysis, on the other hand, is barely predictive of short term price changes and the associated volatility. A combination of the two can be considered in medium term investments.
Technical analysis is considered a more risky by the community because of the unpredictability of short term volatility, investor behavior, market psychology and price changes. Furthermore, it often relies on the personal judgement of a trader and can thus generate ambigous results. The outcomes of the fundamental analysis on the other hand depend greatly on the assumptions and discount rates used in valuation, as well as they depend heavily on the quantitative side of the business often without considering the value of the brand, its patents and human resources.
As you hopefully realized both types of asset price analysis are quite different and rely on two opposing beliefs of market behavior. Which one is more suitable for you likewise depends on you personal preference but also the investment horizon. It is probably best to understand both methods in your trading and make investment decisions accordingly. Hopefully this article clarified some of the key components and you can now enjoy trading ! Good luck!
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Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
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