Day Trading Advanced Topics 3

Question 1

What is the 'opening range breakout' (ORB) strategy based on?

Accepted Answer

Using the high and low established in the first period as breakout levels for the rest of the day

Answer

The ORB strategy defines a price range established in the first 5, 15, or 30 minutes and then trades breakouts above or below that range with the expectation of continuation.

Question 2

In the context of order flow analysis, what does a 'footprint chart' reveal that standard candlestick charts do not?

Accepted Answer

The volume transacted at each individual price level within a candle, split by buy and sell aggression

Answer

Footprint charts display the actual volume of buy-initiated vs. sell-initiated trades at each price level inside a candle, revealing where buyers and sellers were most aggressive.

Question 3

What characterizes a 'liquidity vacuum' in day trading, and why is it dangerous?

Accepted Answer

A price zone with very few resting orders, allowing price to move rapidly through it

Answer

A liquidity vacuum is an area in the order book with few limit orders, so when price enters this zone it can move very quickly, creating significant slippage for traders with stop orders.

Question 4

Which concept describes how the bid-ask spread widens around major economic news releases, and what risk does it create?

Accepted Answer

Spread expansion; it increases transaction costs and execution risk during volatile periods

Answer

Around major economic releases, market makers widen spreads to protect themselves from directional risk, which can dramatically increase entry and exit costs for day traders.

Question 5

What is 'spoofing' in electronic markets, and why is it illegal under the Dodd-Frank Act?

Accepted Answer

Placing and quickly canceling large orders to create a false impression of supply or demand

Answer

Spoofing involves placing large fake orders with no intention of filling them to manipulate other traders' perceptions of supply and demand, which distorts price discovery and is explicitly prohibited.

Day Trading Practice Test

Day Trading Practice Test

Day Trading Advanced Topics 3