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Now that you have finished our Advanced Trading Strategies course, let’s do a brief recap of all the knowledge you’ve gained.

When we trade the financial markets, we do so with the aim of making a profit. Doing so is easier said than done; it is, therefore, essential to understand what you are doing and to have a well-reasoned plan behind your trading decisions.

To try and help you in your trading journey, we have covered a variety of trading terms, techniques and pointers.

You should now understand the following terminology:

  • Leverage: the margin required for a position is only a fraction of the underlying value of the asset
  • Trend-following: a strategy attempting to identify and profit from a persistent directional movement in a market
  • Countertrending: a “sell high, buy low” approach suited to markets that are trading in a range
  • Market-neutral strategy: a trading approach that seeks to minimise market risk by trading more than one position simultaneously

What elements can impact trading decisions?

You should also be familiar now with some of the elements that can inform a trading decision, such as:

  • Market conditions: recognising what type of behaviour the market is exhibiting
  • Trading style: whether you intend to follow the trend or look for reversals
  • Risk management: how position sizing is a key component of a trading system
  • Order selection: why you might use a stop or a limit
  • Exit planning: the importance of selecting a stop level

What are the advantages of CFDs?

You should now have a good understanding of what CFDs are and how they work. CFDs can offer a number of advantages to a trader, including a choice of leverage which also comes with a high risk of loss; the ability to go short as well as long; and no stamp duty to pay when trading shares*.

What trading strategies are available?

We’ve discussed how you can use stop and limit orders, both to open new positions or to close existing ones, and how they offer the convenience of automatically executing a trade should the market meet your specified price condition. We’ve also introduced some potential strategies that orders can help to facilitate, such as using a limit to attempt to improve your entry level, or using a stop as a way of enforcing trading discipline.  

We also talked about how market conditions can change and how a flexible approach allows a trader to match their actions to price behaviour. We discussed how trend-following attempts to “go with the flow” in the hope that a market will continue to move in a certain direction, and how countertrending is essentially an opposite approach that looks to profit from prices reversing.

You should now be familiar with the concept of a market-neutral strategy and a specific type of this strategy called pairs trading.

We looked at the concept of correlated financial instruments and ran through an example of how a pairs trade might work in theory, relying on an assumption that the price relationship between two correlated instruments is likely to revert to the mean in the future.

Finally, we went through the component parts of a mechanical trading system. We saw that to be a complete system, we need a variety of rules, including what markets to trade, how much to trade, when to enter, when to cut a loss and when to take a profit.

GREAT JOB!

Test yourself on what you have learned

Take a Quiz!

QUESTION 1 OUT OF

You can go short as well as long with CFDs, true or false?

True
False

Correct!

Incorrect!

You sell the UK100 Index at 7410. Six days later, you buy back at 7455 for a 45-point loss. What other cost will also affect your loss?

Import fees
A holding cost. There is a charge for each night you hold your position.
Capital Gains Tax
Stamp duty

Correct!

Incorrect!

True or false: a stop can only be used to close an existing position.

True
False. A stop can also be used to open a position.

Correct!

Incorrect!

You buy 50 shares of Tesla at a price of $210 and also leave an instruction to close at a price of $240. Is this a limit or a stop?

This is a limit.
This is a stop.

Correct!

Incorrect!

A trend-following strategy will do well in a sideways market, true or false.

True
False

Correct!

Incorrect!

True or false: the price ratio of a well-correlated pair of stocks will remain at a constant value at all times.

True
False

Correct!

Incorrect!

Pairs trading relies on which one of the following assumptions?

Selection bias is present
The price relationship of closely correlated instruments is likely to revert to the mean with time
Markets will trend upward with time
Any two markets will share a close correlation

Correct!

Incorrect!

Position sizing is not an important part of a trading system. True or False?

True. It’s unimportant.
False. Position sizing is a crucial part of a trading system.

Correct!

Incorrect!

A mechanical trading system seeks to provide consistency by removing which element from trading?

Human emotion
Risk management
Systemic risk
Tax

Correct!

Incorrect!

To invest with a CFD, you must apply leverage, True or False?

False
True

Correct!

Incorrect!

You buy 10 shares in Goldman Sachs at $350 and place a stop-loss at $340. One Friday, Goldman Sachs closes at $342. There is bad news for the banking sector over the weekend and Goldman Sachs’ share price opens at $325 on the following Monday. Where does your position close out?

Your position remains open despite the stop being hit
At $340
At the best price available

Correct!

Incorrect!

You can do better.
Not Bad, ready for more
Great score! Well done.
/
It looks like you haven’t yet mastered these topics. Revisit the course, paying attention to bolded sentences, tips, and highlights. These key points will help solidify your understanding. Keep at it, and you’ll see progress in no time. Good luck!
You’re on the right track! Consider trying another course to consolidate your knowledge, paying attention to bolded sentences, tips, and highlights. Understanding key points will help solidify your knowledge. Keep going, you’re almost there!
Congratulations on your high score! You’ve grasped these topics well. Keep up the great work by exploring another course in the eToro Academy. Well done!”
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*Tax laws are subject to change and depend on your jurisdiction and individual circumstances. Please check with a tax advisor if in doubt.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% 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.

This communication is intended for information and educational purposes only and should not be considered investment advice or investment recommendation.


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