FRM Advanced Topics 1

Question 1

What is the purpose of backtesting a trading strategy?

Accepted Answer

Testing a strategy against historical data to evaluate its potential performance before risking real money

Answer

Backtesting applies your strategy to historical market data to see how it would have performed, helping identify strengths, weaknesses, and realistic expectations.

Question 2

What is a trailing stop order?

Accepted Answer

A stop-loss that automatically adjusts upward as the price rises, locking in profits while protecting against reversals

Answer

Trailing stops move with the price in a favorable direction but stay fixed when the price moves against you, automatically locking in gains.

Question 3

What is algorithmic trading?

Accepted Answer

Using computer programs to automatically execute trades based on predefined rules and conditions

Answer

Algorithmic trading uses software to automatically identify opportunities and execute trades based on predefined criteria like price, volume, timing, or technical indicators.

Question 4

What is a short squeeze?

Accepted Answer

A rapid price increase that occurs when short sellers are forced to buy back shares, driving the price even higher

Answer

When a heavily shorted asset's price rises, short sellers rush to buy back (cover) their positions to limit losses, which further drives up the price in a feedback loop.

Question 5

What is paper trading?

Accepted Answer

Practicing trading with simulated money to test strategies without financial risk

Answer

Paper trading simulates real trading conditions with virtual money, allowing beginners to practice and experienced traders to test new strategies without risk.

FRM Practice Test

FRM Practice Test

FRM Advanced Topics 1