Day Trading Trading Basics 4 — Questions and Answers
Question 1: What is a 'gap up' in day trading?
- When a stock's price jumps higher at open compared to the previous close (Correct answer)
- When there is a large difference between bid and ask price
- When volume surges during the last 30 minutes of trading
- When a stock moves above its 52-week high during the session
Correct answer: When a stock's price jumps higher at open compared to the previous close
A gap up occurs when a stock opens significantly higher than its previous closing price, often due to overnight news or earnings.
Question 2: What is 'scalping' as a day trading strategy?
- Trading based on long-term fundamental analysis
- Making many small, quick trades to capture tiny price movements (Correct answer)
- Holding a position through multiple intraday trend cycles
- Shorting stocks that have gapped up significantly at open
Correct answer: Making many small, quick trades to capture tiny price movements
Scalping involves making dozens or hundreds of trades per day to capture small price increments, relying on high volume and tight spreads.
Question 3: How does short selling generate a profit?
- By buying shares at a low price and holding until they rise
- By borrowing shares to sell high, then repurchasing them at a lower price (Correct answer)
- By collecting dividends on borrowed shares
- By selling options on shares you do not own
Correct answer: By borrowing shares to sell high, then repurchasing them at a lower price
In short selling, a trader borrows shares and sells them at the current price, then buys them back later at a lower price to return to the lender, pocketing the difference.
Question 4: What is the significance of the 'opening range' in day trading?
- It sets the official daily high and low for reporting purposes
- It defines the price range established in the first few minutes of trading used to plan entries (Correct answer)
- It is the spread between the pre-market high and low
- It represents the range at which institutional orders are filled at open
Correct answer: It defines the price range established in the first few minutes of trading used to plan entries
The opening range (typically the first 15–30 minutes) establishes a key price channel that traders use to identify breakout or breakdown levels for the rest of the session.
Question 5: What does it mean when a stock is 'halted' during regular trading hours?
- The stock has hit its daily maximum loss limit
- Trading in the stock is temporarily suspended by an exchange (Correct answer)
- Short selling has been banned on the stock for the day
- The stock is being delisted from the exchange
Correct answer: Trading in the stock is temporarily suspended by an exchange
A trading halt temporarily suspends all buying and selling in a stock, typically due to a pending news announcement, regulatory review, or unusual price volatility.
Question 6: Which factor most directly determines whether a day trade is considered a 'round trip'?
- The trade spans more than one trading day
- Both the opening and closing of a position occur within the same trading day (Correct answer)
- The same stock is bought and sold in the same week
- A position is opened in pre-market and closed after hours
Correct answer: Both the opening and closing of a position occur within the same trading day
A round trip (also called a day trade) occurs when a security is both bought and sold within the same trading session on the same day.
Question 7: What is the difference between a stock's 'intrinsic value' and its 'market price'?
- Intrinsic value is set by the exchange; market price is set by analysts
- Intrinsic value is an estimate of what a stock is fundamentally worth; market price is what it currently trades for (Correct answer)
- Intrinsic value is always higher than market price in a bull market
- They are the same thing measured at different times of day
Correct answer: Intrinsic value is an estimate of what a stock is fundamentally worth; market price is what it currently trades for
Intrinsic value is a calculated estimate of a stock's true worth based on fundamentals, while market price is the actual price determined by supply and demand in the market.
Day Trading Trading Basics 4
What is a 'gap up' in day trading?