Trading Strategies & Market Timing Flashcards
7 cards from real CPT practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Trading Strategies & Market Timing flashcards as text
A position trader using 'economic cycle analysis' would most likely reduce equity exposure and rotate into defensive assets during which phase?
Answer: Late cycle phase when inflation rises and central banks tighten monetary policy
The late cycle phase—characterized by rising inflation, central bank rate hikes, and decelerating growth—historically precedes recessions, making defensive positioning prudent.
A trader employs a 'volatility breakout' strategy using Average True Range (ATR). A buy signal is generated when price rises above the prior close by more than 1.5 times the 14-day ATR. This approach specifically aims to filter out:
Answer: Low-volatility noise and false breakouts from normal market fluctuation
By requiring a move greater than 1.5× ATR, the strategy filters out routine price fluctuations and targets only breakouts with abnormal momentum relative to recent volatility.
When a stock's price makes a new 52-week high but the Relative Strength Index (RSI) fails to confirm by also reaching a new high, this situation is known as:
Answer: Bearish divergence, suggesting the uptrend may be losing momentum
Bearish divergence occurs when price makes a higher high while an oscillator like RSI makes a lower high, indicating weakening momentum that can precede a reversal.
Which options strategy best defines a 'synthetic long stock' position?
Answer: Buying a call and selling a put at the same strike and expiration
A synthetic long stock is created by buying a call and selling a put at the same strike and expiration, replicating the risk/reward profile of owning the underlying stock.
The concept of 'tape reading' in modern electronic trading most closely refers to:
Answer: Analyzing real-time Level 2 quotes, time-and-sales prints, and order flow to gauge near-term supply and demand
Modern tape reading involves interpreting the time-and-sales feed, order book depth, and Level 2 data to read real-time supply/demand imbalances and short-term price direction.
A technical trader notices a stock has formed three consecutive 'inside bars' (each bar's range contained within the prior bar's range) on the daily chart. This pattern primarily indicates:
Answer: Volatility compression that often precedes a significant breakout move
Multiple consecutive inside bars reflect a narrowing price range and declining volatility, a condition that frequently precedes an explosive directional breakout.
A trader running a 'statistical arbitrage' strategy discovers that two historically correlated ETFs have diverged by 3 standard deviations from their mean spread. The correct pairs-trade action is to:
Answer: Buy the underperforming ETF and short the outperforming ETF, betting on mean reversion
Statistical arbitrage bets on mean reversion; when the spread diverges significantly, the trader buys the lagging asset and shorts the leading one, expecting the spread to revert to its historical mean.