Correct Answers:
1) Which chart time frames are most respected by day traders?
Correct Answer: The majority of Day Traders use 5min charts and 1min charts, in conjunction with daily charts. Some traders who take longer term positions will also use 15min and 60min charts. I personally use 5min, 1min. Occasionally you will hear about traders who use 2min or 3min charts, but this is not as common.
2) Which moving averages are you going to use?
Correct Answer: There is no incorrect answer to this, it’s personally preference. I personally use the 9ema, 20ema, and 200ema for my 5min charts. On my daily chart I also add the 50ema, and I my 1min chart I only use the 20ema.
3) What is the difference between a Simple moving average and an Exponential moving average?
Correct Answer: A simple moving average takes the average price over the last x # of periods while an exponential moving average will weight the recent candles price higher than the older candles prices. That means if the price moves quickly, the exponential moving average price will reflect that change faster.
4) What is the VWAP and how is it used by traders?
Correct Answer: The Volume Weighted Average Price is used by traders around the world because it gives us the average price of a stock. Unlike the standard moving average, the VWAP uses the average price over the course of the entire day. What’s better is that it factors in the amount of volume that was traded at each price, to give you an accurate average price of the stock during the day. Buying a stock around its average is often a safe entry. If you are buying a stock off the lows, or shorting a stock off the highs, and return to the VWAP is a reasonable target.
5) When should you use Bollinger Bands?
Correct Answer: I primary use Bollinger Bands for identifying extremes. This helps me spot stocks that are trading far outside their typical range. Since 95% of price action will occur inside the Bollinger Bands, anytime the price is outside those bands it indicates an extreme position in price.
6) What does a Hammer candle represent when it’s in a downtrend?
Correct Answer: In the context of a downtrend, a Hammer Candle is considered to be “Hammering Out a Base”. A hammer candle drops down during the candle period, but buyer step in and it closes near the high, showing strength. I often buy the next candle, if it breaks the high of the hammer candle. Therefore, hammer candles indicate possible reversal points.
7) What does a Doji candle represent when it’s in sideways consolidation?
Correct Answer: In the context of sideways consolidation, Doji candles have very little meaning. Doji candles are considered candles of indecision because the price of the stock goes up, goes down, and closes about the same place where it opened. However, sideways consolidation is always indicative of indiecision. As a result, a doji in a sideways consolidation just further reflects the indecisive market action.
8) What does a Topping Tail candle in a Uptrend represent?
Correct Answer: A topping tail candle, also known as an Inverted Hammer, shows that even though the price squeezed up, sellers came in and brought the price back down as it closed at nearly the same place as the open. I often take a short position on the following candle if it breaks the low of the topping tail candle. This means a Topping Tail, or an Inverted Hammer, is a possible reversal indicator.
1) All of the following are types of charts a trader uses EXCEPT:
a. Candlestick
b. Bar
c. Table *CORRECT
d. Line
Correct Answer: All of the chart types above are used by various types of traders except table charts. I suspect this was an easy answer.
2) Trader A says that stock charts are a form of technical analysis. Trader B says that each candlestick represents a period of time. Who is correct?
a. Trader A
b. Trader B
c. Both A and B *CORRECT
d. Neither A nor B
Correct Answer: Both Trader A and Trader B are correct. Stock charts are technical analysis and each candle stick represents a period of time.
3) What is the min size a window should be on a daily chart in order to consider it of significance.
a. 20 cents
b. 10%
c. The Average True Range of the stock ** CORRECT
d. The Average True Range of the stock x2
Correct Answer: A window on the daily chart should have at least the ATR of the stock. Generally I’d like to see these windows bigger than 40-50 cents, but the ATR is preferred.
4) What is considered an “inside day?”
a. A day where a stock trades at an extreme
b. A day where a stock trades within the previous range of the prior day *CORRECT
c. A light volume trading day
d. A stock trading outside of its average true range
Correct Answer: An inside day is a day when the price action is entirely inside the range of the previous day. For example, if yesterday we had a low of 8 and a high of 10.00, and today we open at 9.00 and trade between 8.80 and 9.50, we are trading completely inside yesterday’s candle. I don’t usually trade inside days. I prefer follow through and breakout days.
5) What is a choppy market and why do we avoid them as traders?
a. A trending market that provides ample trading opportunities
b. A range bound, sideways market with inconsistent price action increasing the difficulty of trading *CORRECT
c. A strong, volume driven up and down market providing reversion trading opportunities
d. Markets that slowly grind in one direction that offer slower trend trading
Correct Answer: A choppy market is typically range bound, or trading many back to back inside days. When a stock is trading sideways over the course of several days or even weeks, it’s considered range bound. We prefer to trade stocks moving up sharply or moving down sharply, because they have more range, and therefore, more opportunities for profit.
6) What is relative volume?
a. The total volume on a stock at any given time throughout the day
b. The amount of volume traded relative to the overall market
c. The amount of volume traded relative to what the stock normally trades * CORRECT
d. The amount of volume relative to another stock in the same sector
Correct Answer: Relative volume is the average volume a stock trades over a set period of days. Today’s Relative Volume number will indicate if the stock is trading above or below its current average. It’s current average is 1, so if it’s trading with a relative volume of 2, we are trading 2x higher than average.
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