CPT Trading Strategies & Market Timing 2

Question 1

A swing trader holds a long position for 4 days and the stock forms a 'bearish engulfing' candlestick pattern on day 4. What is the most appropriate action?

Accepted Answer

Close or reduce the long position as a reversal signal appears

Answer

A bearish engulfing pattern signals a potential trend reversal, making it prudent to close or reduce a long position.

Question 2

Which market condition best describes a 'range-bound' or 'sideways' market?

Accepted Answer

Price oscillates between defined support and resistance levels without a clear trend

Answer

A range-bound market is characterized by price oscillating between consistent support and resistance levels with no clear directional trend.

Question 3

The 'opening range breakout' (ORB) strategy uses the high and low established during which time period as its reference?

Accepted Answer

The first 15 to 30 minutes of the current trading session

Answer

The ORB strategy uses the price range established in the first 15–30 minutes of the session as breakout levels for trade entries.

Question 4

In mean reversion trading, a stock's price is considered 'statistically stretched' when it trades more than two standard deviations from its moving average. This concept is formalized in which indicator?

Accepted Answer

Bollinger Bands

Answer

Bollinger Bands plot bands two standard deviations above and below a moving average, visually identifying statistically stretched price levels.

Question 5

A trader uses a 'pairs trade' by going long Stock A and short Stock B from the same sector. The primary risk being hedged is:

Accepted Answer

Broad market directional risk

Answer

Pairs trading hedges broad market (beta) risk by holding offsetting long and short positions in correlated securities, leaving exposure only to the relative performance spread.

(CPT) Certified Pro Trader Practice Test

(CPT) Certified Pro Trader Practice Test

CPT Trading Strategies & Market Timing 2