Day Trading Trading Basics 3 — Questions and Answers
Question 1: What is a 'circuit breaker' in US stock market trading?
- A tool brokers use to cut off losing traders
- A regulatory halt triggered when major indexes drop by set percentages (Correct answer)
- A stop-loss order placed automatically by the exchange
- An SEC rule limiting short selling
Correct answer: A regulatory halt triggered when major indexes drop by set percentages
Circuit breakers are market-wide trading halts triggered when the S&P 500 drops 7%, 13%, or 20% in a single day to prevent panic selling.
Question 2: Which metric measures how many shares of a stock trade on average per day?
- Float
- Average daily volume (ADV) (Correct answer)
- Market capitalization
- Short interest
Correct answer: Average daily volume (ADV)
Average daily volume (ADV) is the average number of shares traded per day over a specified period, indicating a stock's liquidity.
Question 3: What happens to a day trader's PDT status if their account drops below $25,000?
- They are fined by FINRA
- Trading is suspended until the account is closed
- They may be restricted to 3 round-trip trades per 5 rolling business days (Correct answer)
- They must convert to a cash account immediately
Correct answer: They may be restricted to 3 round-trip trades per 5 rolling business days
If a PDT-flagged account falls below $25,000, the broker typically restricts the trader to 3 day trades per 5 rolling business days.
Question 4: What is a 'float' in the context of a stock?
- The portion of shares available for public trading (Correct answer)
- The total shares issued by a company
- The number of shares held by insiders
- The daily percentage move of a stock
Correct answer: The portion of shares available for public trading
Float refers to the number of shares available for public trading, excluding restricted shares held by insiders and major shareholders.
Question 5: In day trading, what does VWAP stand for and why is it used?
- Volume-Weighted Average Price; used as a benchmark to assess trade quality (Correct answer)
- Volatile Window Average Price; used to identify breakouts
- Variable Weekly Auction Price; used for after-hours trading
- Volume-Weighted Asset Position; used to size trades
Correct answer: Volume-Weighted Average Price; used as a benchmark to assess trade quality
VWAP (Volume-Weighted Average Price) is the average price weighted by volume and is used by traders and institutions as a benchmark for intraday trade execution quality.
Question 6: Which of the following is a characteristic of a 'bear market'?
- A sustained rise of 20% or more in stock prices
- A sustained decline of 20% or more from recent highs (Correct answer)
- High trading volume with sideways price movement
- A period of unusually low market volatility
Correct answer: A sustained decline of 20% or more from recent highs
A bear market is conventionally defined as a decline of 20% or more in a broad market index from its most recent peak.
Question 7: What is the role of a market maker in stock trading?
- To regulate trading activity on behalf of the SEC
- To provide liquidity by continuously quoting bid and ask prices (Correct answer)
- To execute large institutional orders without price impact
- To determine official opening and closing prices
Correct answer: To provide liquidity by continuously quoting bid and ask prices
Market makers provide liquidity to markets by continuously quoting both a buy (bid) and sell (ask) price, profiting from the spread.
Day Trading Trading Basics 3
What is a 'circuit breaker' in US stock market trading?