Trading Basics Flashcards

What is the primary risk of using high leverage in day trading?

Answer: It amplifies both gains and losses, potentially exceeding your account balance

Leverage magnifies both profits and losses proportionally, meaning a small adverse move can result in losses larger than the initial capital invested.

In technical analysis, what is a 'support level'?

Answer: A price point where buying interest has historically prevented further declines

A support level is a price zone where demand has historically been strong enough to halt or reverse a downtrend, acting as a 'floor' for the stock's price.

What is the purpose of a stop-loss order in day trading?

Answer: To automatically exit a losing position at a predetermined price to limit losses

A stop-loss order automatically sells a security when it reaches a specified price, helping traders limit their maximum loss on a trade.

Which time period is commonly known as 'power hour' in US day trading?

Answer: 3:00–4:00 PM ET

The final hour of trading (3:00–4:00 PM ET) is called 'power hour' because volume and volatility typically surge as institutions rebalance and traders close positions.

What does 'relative volume' (RVOL) indicate for a day trader?

Answer: How current trading volume compares to the stock's average volume for the same time of day

Relative volume (RVOL) compares a stock's current volume to its average volume for the same time period, helping traders identify unusually active stocks.

A trader enters a long position at $50 with a stop-loss at $48 and a profit target at $56. What is the risk-to-reward ratio?

Answer: 1:3

Risk = $50 − $48 = $2; Reward = $56 − $50 = $6; Risk-to-reward ratio = $2:$6 = 1:3.

What is 'momentum trading' in day trading?

Answer: Trading in the direction of a strong existing price trend, expecting it to continue

Momentum trading involves buying securities that are trending strongly upward (or shorting those trending downward), betting that the trend will continue.