Fundamental Analysis

In many ways trading financial markets via instruments such as binary options, vanilla options, CFDs, spread betting or even good old, long-term equities reflects the evolution of the broader online world. Pre-internet, or the internet going mainstream and widely available at home in the mid to late 1990s, trading financial markets was something almost exclusively limited to institutional and professional investors. Day trading was only an option for ‘pit traders’ in booths on Wall Street, the City of London and other finance centres.

The rare breed of amateur enthusiasts that ‘traded’ rather than bought stocks long term, would receive financial markets data and charts daily through the post in a magazine-like format. These ‘original’ retail traders reminisce over how they would then call their order desk to get the markets’ Open, High, Low and Close and then draw on the empty section of their charts with a pen and ruler. The charts would have a blank section on the right that was roughly big enough for about a month of data to be added, getting the trader by until their next set of charts would arrive in the mail.

 

The dawn of the internet age of course changed all of that quickly and immensely. The ability to access real time data at any time and to action trades in real time turned financial markets into the far more rapidly moving beast they are today.

 

The huge volumes of data that the internet age provided easy and democratised access to led to the evolution of software-based tools to synthesis, process and present that data in a digestible format. Trading mirrored that with digital charting tools, indicators and automated formulas becoming available to private individuals trading from home.

Arguably the next major wave of how information was disseminated online was the rise of social networks. User generated or distributed content, its discussion and online networking became first normal and then a major feature of our day to day social and professional lives. And, as historical patterns probably demonstrated was inevitable, this new online development also influenced financial markets trading.

 

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Social Trading

Social trading can be described as a trading platform built into a social network, or a social network built around a trading platform. Traders share information with each other either in the form of interesting third party content such as opinion and analysis, their own personally generated content and their portfolios, trading history and real-time trading positions.

There are now several big social trading platforms and they all differ slightly in terms of their functionality and approach. Some are more discussion and content sharing orientated but they all let traders ‘copy trade’ other traders in one form or another, often letting followed traders make a small commission on their followers’ trades.

There are two big pluses to social trading. The first is as a resource for beginners who do not yet feel that their ability to read and forecast market trends is sufficient to be able to be consistently profitable. Social trading means they can replicate the trades of other users who have demonstrated consistent historical success.

 

Learning to trade to a level where profits are consistently realised is process that should not be underestimated. Most beginner traders never actually manage to reach that point and to do so involves putting in the considerable time and effort to master the principles of fundamental and technical analysis. Social trading can help accelerate the process and to potentially trade successfully in the meanwhile.

 

The second is that for social trading can be a great resource for more experienced traders when it comes to highlighting good conditions in which to take a position. With all of the different tradable securities out there it is simply not possible to follow them all, or even that many of them, simultaneously. Social trading allows traders to harness group power in this direction and to see the positions other traders they respect are taking. Spreading the net wider in this way will inevitably lead to social traders coming across more clear openings they can take advantage of.

 

What is Fundamental Analysis?

We’ve already touched on the need for traders to master fundamental and technical analysis if they hope to reach a level of knowledge and skill that will allow the realisation of consistent returns across their positions. We look at technical analysis within the context of social trading more specifically in another piece but it is, in a nutshell, the science of using market data visualised in charts to spot recurring patterns in market behavior. Proponents of technical analysis believe that market sentiment and trends are actually more important than intrinsic value when it comes to forecasting the price direction of a traded security, at least over the shorter term.

Fundamental analysis rests on the assumption that while shorter term trends may be influenced by sentiment and market psychology, securities have an ‘intrinsic value’ formed by bigger picture supply and demand dynamics. Fundamental analysts believe that sooner or later this intrinsic value is recognised by the market and price trends will reflect that by moving towards it.

 

As may already be clear, fundamental analysis is a far greater consideration and fundamental skill for traders who take longer term positions for weeks or months. However, it is also not irrelevant over shorter timeframes and influences shorter term market psychology by contributing to support and resistance points.

 

Fundamental analysis differs between categories of securities. In the case of currency pairs, for example, fundamental analysis will look at the macro economy of a country, international capital inflows into the currency via trade and FDI (foreign direct investment), political stability etc. For a commodity, future expectations for industrial or other form of demand will be assessed and the costs of production and supply. In the case of a company stock its revenue, costs, profits, management, growth, new product lines, prospective new markets and more.

Do I Need to Understand Fundamental Analysis to Copy Trade?

A first reaction might be that if a beginner trader were to utilise social trading to simply replicate the positions taken by the most consistently successful traders on the platform, do they really need to spend the time to learn fundamental analysis? Or technical analysis for that matter?

Of course, actually placing copy trades doesn’t necessarily require the follower to really understand the reasoning behind the lead trader’s positions. If the follower has enough blind faith in the trader(s) whose positions they are replicating they could simply take that approach. However, we would suggest that is unwise for a couple of reasons.

Firstly, blindly following a lead trader with a seemingly good record without understanding why means there is a far higher chance of and expensive lesson being learned if the winning streak ends. Traders, especially those of middling experience and some talent, often trick themselves into thinking they have hit upon a ‘fool-proof’ strategy if it works for a while. However, markets are constantly evolving and an approach that delivers consistent results one day, week or month will likely not continue to do so if not constantly updated to current conditions.

 

A trader who has had a good winning streak could very quickly find themselves in an extended losing run. Having no personal understanding of the reasoning behind a strategy or ability to assess it exposes a trader to unnecessary risk and the likelihood of wrong choices on traders to replicate.

 

Secondly, social trading, if utilised correctly is a great way to accelerate the learning curve when studying fundamental analysis. The beginner will see how more experienced traders are practically applying analysis and using it to pick out positions to take. This will help reinforce the theory learned, and develop it through clarification if some of the logic behind a trade is not clear and through seeing how overlapping concepts and strategies are combined.

 

Conclusion

Social trading can be a fantastic resource for beginner and more experienced traders alike but should not be used to simply blindly follow trade positions with no understanding of why the lead trader has taken them. A good comparison would be relying entirely one social media for the information one’s view on the world is shaped by. Social networks can be a valuable source of information but that information can be dangerous if the consumer has no context within which to assess its authority and validity.

More experienced traders will benefit from social trading by learning new things from other skilled traders, sharing knowledge and opinion and getting ideas for trades that can then be assessed on their own criteria. Beginner traders can use social trading to help accelerate their learning process and have support while their ability to do their own analysis competently and quickly is still developing.

Used in the right way social trading is a powerful new tool available to traders that can really enhance the trading experience. Used in the wrong way at best it will stimmy the development of analytical ability in beginner traders and at worst lead to expensive errors from blindly replicating the wrong trades. Use it the right way and don’t neglect your own analysis, fundamental or technical!