CPT Trading Strategies & Market Timing 5

Question 1

A position trader using 'economic cycle analysis' would most likely reduce equity exposure and rotate into defensive assets during which phase?

Accepted Answer

Late cycle phase when inflation rises and central banks tighten monetary policy

Answer

The late cycle phase—characterized by rising inflation, central bank rate hikes, and decelerating growth—historically precedes recessions, making defensive positioning prudent.

Question 2

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:

Accepted Answer

Low-volatility noise and false breakouts from normal market fluctuation

Answer

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.

Question 3

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:

Accepted Answer

Bearish divergence, suggesting the uptrend may be losing momentum

Answer

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.

Question 4

Which options strategy best defines a 'synthetic long stock' position?

Accepted Answer

Buying a call and selling a put at the same strike and expiration

Answer

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.

Question 5

The concept of 'tape reading' in modern electronic trading most closely refers to:

Accepted Answer

Analyzing real-time Level 2 quotes, time-and-sales prints, and order flow to gauge near-term supply and demand

Answer

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.

(CPT) Certified Pro Trader Practice Test

(CPT) Certified Pro Trader Practice Test

CPT Trading Strategies & Market Timing 5