Solved - The Answers to eToro's Trading Knowledge Assessment
Published June 24, 2021.
Do you want to hop on the eToro train?
If so, do you think you can answer basic questions about the financial markets and pinpoint elementary functions of trading stocks, cryptocurrencies, commodities, CFDs, and ETFs? With retail investors becoming interested in various markets, from stocks to cryptocurrencies, many folks are getting involved in eToro.
But it is an exclusive club for those who understand the difference between a mutual fund and an exchange-traded fund (ETF). Suffice it to say, in order to open an account on eToro—one of the top social trading signal providers—you need to pass a knowledge test.
The team at eToro put together its knowledge assessment by using information established by the Australian Securities and Investments Commission (ASIC), Cyprus Securities and Exchange Commission (CySEC), the Financial Conduct Authority (FCA), and U.S. regulatory authorities.
Are you taking part in eToro's Trading Knowledge Assessment? Here is the cheat sheet for the current 2022 version, with answers and explanations, for your use.
Table of Contents
- eToro’s Trading Knowledge Assessment by Country
- eToro UK - FCA Regulation
- eToro Europe - CySEC Regulation
- eToro Australia - ASIC Regulation
- eToro US - FinCEN Regulation
eToro’s Trading Knowledge Assessment by Country
In order to find the correct answers for the regulation used by the country you live in, browse the countries below to learn which regulation you belong to. If you can't find your country, then eToro isn't allowed where you live, or see the full list of countries where eToro is available.
- Czech Republic
- The Netherlands
- United Arab Emirates
eToro UK - FCA Regulation
1. Please mark the correct statements
- a. Opening a trade with $100 and 20x leverage will equate to a $2000 investment. - Correct Answer
- b. If the equity in your account falls below the required margin, a "margin call" will not liquidate your trades.
- c. If the price of Google stock on NASDAQ goes up, the price of your CFD in Google will go down.
- d. My open positions will remain open when the stop loss is triggered.
- e. If the market moves rapidly and gaps through the stop loss price, the trade will not be closed
Also known as an investment multiplier, a $100 investment can allow the trader to take a large position with a 20x leverage, meaning that the individual account can achieve massive gains or steep losses.
eToro Europe - CySEC Regulation
1. Please mark the correct statements
- a. I deposit and invest $1,000 to open a position with $12,000 (using leverage of 20x). If the market moves 5% against my position, I’ll lose my investment.
- b. If the price of Google’s stock rises on NASDAQ, the price of my Google contract for difference (CFD) will go down.
- c. If the total equity (i.e., the combined value of positions and available cash) in my account falls below the required margin, a “margin call” with liquidate my positions. - Correct Answer
- d. My open positions will remain open even when a stop loss is triggered.
- e. If the market gaps through my stop loss, my position will close at the exact stop loss level.
If the equity in your trading account declines below a predetermined level, the broker will do one of two things: request more capital be deposited into the account or run a margin call and liquidate the investment position.
eToro Australia - ASIC Regulation
1. Which of the following best describes "gapping?"
- a. A trading strategy designed to profit from falling markets.
- b. A movement in price from one level to another is usually caused by a market event that leaves a gap in the chart. - Correct Answer
- c. A term used to describe a type of order.
- d. A new event is released each month with information regarding a countries trade deficit.
Gapping happens when the price of a stock or some other type of investment opens above or below the previous session's close without any trading activity in between.
There are four types of gaps that send signals to traders: common (uneventful), breakaway (high volumes), runaway (frenzy or panic state of investors), and exhausting (the end of an uptrend or downtrend).
2. To reduce the risk of trading leveraged products, which of the following is important?
- a. Understanding how the market operates.
- b. Keeping up with global news events which impact financial markets.
- c. Monitoring your open positions.
- d. All of the above. - Correct Answer
Whether you are a new trader or a seasoned investor, it is critical to understand the risks of trading on leverage (borrowed funds to increase your trading position). The best way to mitigate your risks is by attaining as much information and knowledge as possible.
Knowing the basics of how the market functions, keeping an eye on your investments, and watching global news events are just some of the measures to employ to limit your risks.
3. What best describes going "long" (buy position)?
- a. You make money if the price moves either up or down.
- b. If the price decreases in value, your position makes a profit.
- c. If the price increases in value, your position makes a profit. - Correct Answer
- d. None of the above.
A long buy position means that you are purchasing the security with the intent of it going up and then turning a profit when it goes above your entry price.
4. When markets are volatile, which of the following best describes trading leverages products?
- a. Safe
- b. Highly risky - Correct Answer
- c. Dangerous for inexperienced traders.
- d. Both 'A' and 'C'.
Leverage consists of borrowing capital from your broker to acquire a greater stake in a stock. When volatility comes to the financial markets, resulting in immense gains and sharp losses, your investment becomes highly risky since you could experience a tremendous decline.
5. Which of the following statements best describes high volatility?
- a. When the price fluctuates in a very wide range within a short period of time. - Correct Answer
- b. When the price fluctuates in a very narrow range within a long period of time.
- c. A term used to describe a price decrease.
- d. None of the above.
Volatility is best described as an immense movement in investment prices within a short period. There are various signals to monitor volatility: a stock hits new highs and lows quickly, moves up and down erratically, and records fast gains and steep falls.
For swing traders, this can yield short-term profits, but it can also force novice investors to become too emotional.
6. Which of the following statements are true?
- a. Forex and CFD contracts are over-the-counter (OTC) derivatives. - Correct Answer
- b. Forex and CFD's are traded on an exchange.
- c. Forex and CFD contracts are not over-the-counter (OTC) derivatives.
- d. Forex and CFD's are standardized financial products with rules set by exchanges.
The foreign exchange market is the most popular international over-the-counter market where currencies are purchased and sold through a network of banks. Contract for Differences (CFDs) also trade OTC through a network of brokers that maintain the market's supply and demand and adjust prices accordingly (they are not found on a major exchange like the New York Stock Exchange).
7. Where would you place a stop loss (SL) for a buy (long) trade?
- a. Above your entry price.
- b. Below your entry price. - Correct Answer
- c. At the same rate as the take profit.
- d. Not placing at all.
If you are going long on a trade, it is best to place a stop-loss below the market price. You will want a higher percentage distance away.
At the same time, if you are going short, you should place a stop-loss above the market price. This is helpful if you cannot keep watching the CNBC, Bloomberg, Yahoo! Finance, or MarketWatch tickers all day.
8. It is important to place a stop loss on a trade because?
- a. It can limit your loss. - Correct Answer
- b. I can increase your gain.
- c. It guarantees you will make lots of money.
- d. None of the above.
The most significant benefit of employing a stop-loss on a trade is that it helps manage your losses, which can be critical for investors who are trading on leverage. It also mitigates loss aversion by automatically exiting a trade instead of holding onto your losing positions.
eToro US - FinCEN Regulation
According to regulations produced by the United States Treasury's Financial Crimes Enforcement Network (FinCEN), there is no trading knowledge assessment. The primary reason is that there are limitations on the assets, namely cryptocurrencies, that you can trade.
By learning the questions and answers above, you will be sure to ace your eToro trading assessment and improve on your trading foundation.