Day Trading Trading Basics 5 — Questions and Answers
Question 1: What is the primary risk of using high leverage in day trading?
- It limits the number of trades you can make per day
- It amplifies both gains and losses, potentially exceeding your account balance (Correct answer)
- It requires you to hold positions overnight
- It triggers automatic PDT flagging by your broker
Correct 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.
Question 2: In technical analysis, what is a 'support level'?
- A price point where selling pressure has historically overcome buying pressure
- A price point where buying interest has historically prevented further declines (Correct answer)
- The average price over a specific time period
- The highest price a stock reached in the past year
Correct 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.
Question 3: What is the purpose of a stop-loss order in day trading?
- To lock in profits when a stock hits a target price
- To automatically exit a losing position at a predetermined price to limit losses (Correct answer)
- To prevent a position from being opened above a specific price
- To protect gains by trailing the price as it rises
Correct 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.
Question 4: Which time period is commonly known as 'power hour' in US day trading?
- 9:30–10:30 AM ET
- 11:00 AM–12:00 PM ET
- 2:00–3:00 PM ET
- 3:00–4:00 PM ET (Correct answer)
Correct 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.
Question 5: What does 'relative volume' (RVOL) indicate for a day trader?
- The ratio of a stock's price change to the market's price change
- How current trading volume compares to the stock's average volume for the same time of day (Correct answer)
- The percentage of float that has traded hands today
- The difference between buy volume and sell volume
Correct 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.
Question 6: 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?
- 1:1
- 1:2
- 1:3 (Correct answer)
- 2:1
Correct answer: 1:3
Risk = $50 − $48 = $2; Reward = $56 − $50 = $6; Risk-to-reward ratio = $2:$6 = 1:3.
Question 7: What is 'momentum trading' in day trading?
- Buying undervalued stocks and waiting for the market to recognize their value
- Trading in the direction of a strong existing price trend, expecting it to continue (Correct answer)
- Using moving averages to find mean-reversion entry points
- Opening positions opposite to the prevailing market trend
Correct 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.
Day Trading Trading Basics 5
What is the primary risk of using high leverage in day trading?