Day Trading Advanced Topics 4

Question 1

What is 'mean reversion' trading in the context of intraday equities, and what assumption underpins it?

Accepted Answer

Fading extreme price moves with the assumption that prices revert toward their average

Answer

Mean reversion trading assumes that after an extreme intraday move away from an average or equilibrium, the price will eventually return to that level, so traders fade the extreme move.

Question 2

How does 'correlation trading' between related securities benefit day traders?

Accepted Answer

It uses the movement of a correlated asset as a leading indicator or confirmation for trading another

Answer

Correlation trading exploits the tendency for related assets (e.g., sector peers or futures vs. ETFs) to move together, allowing one instrument's move to signal entry or confirmation in another.

Question 3

What is the purpose of the 'Commitment of Traders' (COT) report for a day trader focusing on futures?

Accepted Answer

It reveals the net positioning of commercial hedgers, large speculators, and small traders on a weekly basis

Answer

The COT report, published by the CFTC weekly, shows how different categories of futures market participants are positioned, which can reveal when speculative positioning is extreme.

Question 4

In the context of index futures day trading, what is 'basis' and why does it matter?

Accepted Answer

The difference between the futures price and the spot index value, reflecting cost-of-carry

Answer

Basis is the difference between a futures contract's price and the underlying spot index value; when basis deviates significantly from fair value, it can signal arbitrage opportunities and predict ETF movements.

Question 5

What is 'realized volatility' and how does it differ from implied volatility in day trading options?

Accepted Answer

Realized volatility is the actual historical price movement; implied volatility is the market's forward expectation embedded in option prices

Answer

Realized (historical) volatility measures how much an asset actually moved over a past period, while implied volatility reflects what the options market expects future volatility to be.

Day Trading Practice Test

Day Trading Practice Test

Day Trading Advanced Topics 4