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Question 1 of 10
1. Question
What is/are the features of Intermarket spreads?
I. Intermarket spreads consist of buying one commodity and simultaneously selling a related commodity.
II. The two markets are related, and they generally move in the same direction because the different market forces affect both.
III. The two markets move at same speeds.
IV. The Exchanges generally gives traders a break on the margin rates for trading the common spreads.
Correct
Intermarket spreads
Intermarket spreads consist of buying one commodity and simultaneously selling a related commodity. Two examples are buying silver and selling gold and buying Minneapolis wheat and selling Chicago wheat. In these examples, the two markets are related, and they generally move in the same direction because the same market forces affect both. However, they move at different speeds.
Incorrect
Intermarket spreads
Intermarket spreads consist of buying one commodity and simultaneously selling a related commodity. Two examples are buying silver and selling gold and buying Minneapolis wheat and selling Chicago wheat. In these examples, the two markets are related, and they generally move in the same direction because the same market forces affect both. However, they move at different speeds.
Question 2 of 10
2. Question
Which of the following is/are the examples if Intermarket spread?
I. Cattle versus feeder cattle
II. Benzene versus the unleaded gasoline
III. Purchase or sale of platinum versus the purchase or sale of gold
IV. Long or short corn versus oats
Correct
Soybean processors use the soybean crush to lock in profit margins, when available. This involves the purchase of soybeans (the raw material) and the simultaneous sale of the products: soybean meal and soybean oil. The reverse crush involves the purchase of the products and the sale of beans.
The new crop/old crop July cotton versus December is popular and can be volatile. In the meats, the hogs versus cattle, cattle versus feeder cattle are the most popular. Some traders like to trade the cattle crush, which involves a purchase of corn and feeder cattle (the two raw ingredients) versus the sale of live cattle (the finished product).
By far the most popular energy spread is the purchase or sale of heating oil versus the unleaded gasoline because traders try to take advantage of the seasonal tendencies of these two products to move toward or away from each other. The Crack Spread is the simultaneous purchase and sale of the crude oil contract versus the products, gasoline and heating oil.
In the metals, the gold/silver ratio spread is calculated by dividing the price of gold by the price of silver. It represents the number of ounces of silver required to equal the price of 1 ounce of gold. In 1980, when gold was $850 and silver $50, the ratio was 17; however, in 1996, with gold at $350 and silver at $5, the ratio was 70. I’m not sure there is an average or a correct number here, but recently the ratio has traded between 30 and 70, with the average for the past century at 32.5. The purchase or sale of platinum versus the purchase or sale of gold is another popular metal spread, with a margin break for buying one and selling the other.
Incorrect
Soybean processors use the soybean crush to lock in profit margins, when available. This involves the purchase of soybeans (the raw material) and the simultaneous sale of the products: soybean meal and soybean oil. The reverse crush involves the purchase of the products and the sale of beans.
The new crop/old crop July cotton versus December is popular and can be volatile. In the meats, the hogs versus cattle, cattle versus feeder cattle are the most popular. Some traders like to trade the cattle crush, which involves a purchase of corn and feeder cattle (the two raw ingredients) versus the sale of live cattle (the finished product).
By far the most popular energy spread is the purchase or sale of heating oil versus the unleaded gasoline because traders try to take advantage of the seasonal tendencies of these two products to move toward or away from each other. The Crack Spread is the simultaneous purchase and sale of the crude oil contract versus the products, gasoline and heating oil.
In the metals, the gold/silver ratio spread is calculated by dividing the price of gold by the price of silver. It represents the number of ounces of silver required to equal the price of 1 ounce of gold. In 1980, when gold was $850 and silver $50, the ratio was 17; however, in 1996, with gold at $350 and silver at $5, the ratio was 70. I’m not sure there is an average or a correct number here, but recently the ratio has traded between 30 and 70, with the average for the past century at 32.5. The purchase or sale of platinum versus the purchase or sale of gold is another popular metal spread, with a margin break for buying one and selling the other.
Question 3 of 10
3. Question
Which of the following statements is/are true regarding volatility?
I. It is the consequence of eliminating people.
II. Speed and volume are combined to make the markets less volatile than they have generally been in the past.
III. Volatility can lead to trader success; however, an anxious trader will be a successful trader.
IV. Succeeding in trading today requires the ability to cope with exploding volatility.
Correct
Exploding volatility
One consequence of eliminating people is volatility. Speed and volume have combined to make the markets more volatile than they have generally been in the past. Volatility can lead to trader anxiety; however, an anxious trader will not be a successful trader. Succeeding in trading today requires the ability to cope with exploding volatility.
Incorrect
Exploding volatility
One consequence of eliminating people is volatility. Speed and volume have combined to make the markets more volatile than they have generally been in the past. Volatility can lead to trader anxiety; however, an anxious trader will not be a successful trader. Succeeding in trading today requires the ability to cope with exploding volatility.
Question 4 of 10
4. Question
Which of the following reasons make sense for technical analysis?
I. “Footprints in the sand”: The smart money (who are generally the big players) cannot hide. They might be better informed, but their buying or selling has to show up in price, volume, and open interest.
II. The market discounts all fundamentals in demand.
III. History does repeat, and if you don’t learn from it, you are bound to fail.
IV. Markets do move in trends, and these trends are more likely to continue than not. It is the goal of technicians to determine the trend.
Correct
There are four reasons that technical analysis makes sense:
1. “Footprints in the sand”: The smart money (who are generally the big players) cannot hide. They might be better informed, but their buying or selling has to show up in price, volume, and open interest.
2. The market discounts all fundamentals in price.
3. History does repeat, and if you don’t learn from it, you are bound to fail.
4. Markets do move in trends, and these trends are more likely to continue than not. It is the goal of technicians to determine the trend.
Incorrect
There are four reasons that technical analysis makes sense:
1. “Footprints in the sand”: The smart money (who are generally the big players) cannot hide. They might be better informed, but their buying or selling has to show up in price, volume, and open interest.
2. The market discounts all fundamentals in price.
3. History does repeat, and if you don’t learn from it, you are bound to fail.
4. Markets do move in trends, and these trends are more likely to continue than not. It is the goal of technicians to determine the trend.
Question 5 of 10
5. Question
What are the features of the trendline chart tool?
I. In an uptrend, the market tends to make lower lows and higher highs.
II. A downtrend is characterized by lower highs and higher lows.
III. A trendline is drawn on the chart we analyze along the tops or bottoms of the price bars in the direction of the significant trend.
IV. In a bearish market, the trendline is drawn by connecting a straight line that connects higher lows.
Correct
The trendline is perhaps the most popular of all chart tools. Remember that if you can determine the trend of the market, you’ll make money. This is what the trendline is designed to do: determine the trend of the market and keep you with the trend until it changes.
Trendlines basically are one of two types: the up trendline and the down trendline. In an uptrend, the market tends to make higher lows and higher highs. A downtrend is characterized by lower highs and lower lows. You can prove to yourself that markets move in trends by simply looking at charts and doing an “eyeball.” Note how the moves of significance are characterized by a series of higher highs/higher lows or lower highs/lower lows.
A trendline is drawn on the chart you are analyzing along the tops or bottoms of the price bars in the direction of the significant trend. In a bull or rising market, the trendline is drawn by connecting a straight line that connects higher lows. At least two points are necessary, but I recommend a minimum of three to add validity.
Incorrect
The trendline is perhaps the most popular of all chart tools. Remember that if you can determine the trend of the market, you’ll make money. This is what the trendline is designed to do: determine the trend of the market and keep you with the trend until it changes.
Trendlines basically are one of two types: the up trendline and the down trendline. In an uptrend, the market tends to make higher lows and higher highs. A downtrend is characterized by lower highs and lower lows. You can prove to yourself that markets move in trends by simply looking at charts and doing an “eyeball.” Note how the moves of significance are characterized by a series of higher highs/higher lows or lower highs/lower lows.
A trendline is drawn on the chart you are analyzing along the tops or bottoms of the price bars in the direction of the significant trend. In a bull or rising market, the trendline is drawn by connecting a straight line that connects higher lows. At least two points are necessary, but I recommend a minimum of three to add validity.
Question 6 of 10
6. Question
Which of the following statements is/are true regarding a trendline chart?
I. A broken trendline (that is, price action moving below an up trendline or above a down trendline) is a danger signal that the trend has reversed.
II. When a down trendline is broken, longs should be liquidated and new shorts established. Shorts should do the opposite when a down trendline is broken.
III. Many traders place stops just under a down trendline or just above an up trendline to exit positions.
IV. If a trend is of significant duration, a trailing stop can be used, where the risk is reduced gradually daily as the stop loss is moved in the direction of the prevailing trend.
Correct
The rule of thumb is that the more points you have connected, the more “valid” the trendline. But here’s the rub: The more “valid” the trendline, by definition, the more price data you have to use, and, therefore, the older the trend and the closer it is to its inevitable conclusion. A broken trendline (that is, price action moving below an up trendline or above a down trendline) is a danger signal that the trend has reversed (see Figure 8.2). This is how technicians use trendlines. When an up trendline is broken, longs should be liquidated and new shorts established. Shorts should do the opposite when a down trendline is broken. Many traders place stops just under an up trendline or just above a down trendline to exit positions. If a trend is of significant duration, a trailing stop can be used, where the risk is reduced gradually daily as the stop loss is moved in the direction of the prevailing trend. In this way, the first risk is the greatest risk. The objective is first to achieve break-even, and then if everything goes according to plan, a modest profit is locked in. Over time, additional profits are locked in until the trendline is finally broken. The best and most reliable trendlines are older and, therefore, by definition, longer.
Incorrect
The rule of thumb is that the more points you have connected, the more “valid” the trendline. But here’s the rub: The more “valid” the trendline, by definition, the more price data you have to use, and, therefore, the older the trend and the closer it is to its inevitable conclusion. A broken trendline (that is, price action moving below an up trendline or above a down trendline) is a danger signal that the trend has reversed (see Figure 8.2). This is how technicians use trendlines. When an up trendline is broken, longs should be liquidated and new shorts established. Shorts should do the opposite when a down trendline is broken. Many traders place stops just under an up trendline or just above a down trendline to exit positions. If a trend is of significant duration, a trailing stop can be used, where the risk is reduced gradually daily as the stop loss is moved in the direction of the prevailing trend. In this way, the first risk is the greatest risk. The objective is first to achieve break-even, and then if everything goes according to plan, a modest profit is locked in. Over time, additional profits are locked in until the trendline is finally broken. The best and most reliable trendlines are older and, therefore, by definition, longer.
Question 7 of 10
7. Question
Which of the following is/are the disadvantages of a trendline chart?
I. In real-world market does not act in an orderly manner. There will be sharp and meaningless reversals in trend, which in the long run generate false trendline reversal signals.
II. False trendline reversal signals are more likely to occur when a trendline is too straight.
III. Steeper trendlines are generally those of shorter length; therefore, they are shorter in duration and, by definition, most likely to be
violated.
IV. If the market in short order resumes back in the direction of the major preceding trend we can construct a new trendline by using the new significant low or high.
Correct
The problem with using trendlines is that, in practice, markets are not always all that orderly. A straight line assumes some sort of symmetrical series of higher lows and highs or the reverse. In the real world, markets can act this way for a time, but because of human nature or computer programs, there will be sharp and meaningless reversals in trend, which in the long run generate false trendline reversal signals. False trendline reversal signals are more likely to occur when a trendline is too steep. Steeper trendlines are generally those of shorter length; therefore, they are shorter in duration and, by definition, most likely to be violated.
Figure 8.4. Redrawn trendlines after a trendline “break” When a trendline is broken, it certainly can be used as a danger signal. But what do you do if the market in short order resumes back in the direction of the major preceding trend? You can construct a new trendline by using the new significant low or high. Technical Analysis of Stock Trends by Edwards and Magee, first published in 1948, is often referred to as the “bible of technical analysis.” The basic premise of this book is that prices of stocks and commodities move in repeating and identifiable patterns, the result of the ebb and flow of supply and demand. Although some of the concepts presented in the book at that time were new, many had been around since the turn of the century. Although markets might have changed dramatically since the 1940s, human nature has not; therefore, many of the patterns presented by these two groundbreakers remain valid today.
Incorrect
The problem with using trendlines is that, in practice, markets are not always all that orderly. A straight line assumes some sort of symmetrical series of higher lows and highs or the reverse. In the real world, markets can act this way for a time, but because of human nature or computer programs, there will be sharp and meaningless reversals in trend, which in the long run generate false trendline reversal signals. False trendline reversal signals are more likely to occur when a trendline is too steep. Steeper trendlines are generally those of shorter length; therefore, they are shorter in duration and, by definition, most likely to be violated.
Figure 8.4. Redrawn trendlines after a trendline “break” When a trendline is broken, it certainly can be used as a danger signal. But what do you do if the market in short order resumes back in the direction of the major preceding trend? You can construct a new trendline by using the new significant low or high. Technical Analysis of Stock Trends by Edwards and Magee, first published in 1948, is often referred to as the “bible of technical analysis.” The basic premise of this book is that prices of stocks and commodities move in repeating and identifiable patterns, the result of the ebb and flow of supply and demand. Although some of the concepts presented in the book at that time were new, many had been around since the turn of the century. Although markets might have changed dramatically since the 1940s, human nature has not; therefore, many of the patterns presented by these two groundbreakers remain valid today.
Question 8 of 10
8. Question
What does a fan effect in a trendline chart indicates?
Correct
When trendlines are broken repeatedly and new trendlines are redrawn, the chart tends to look like a fan (as in Figure 8.4). A series of trendlines, all starting out at the same point, move in parallel. This fan effect either indicates that the major trend is still intact (albeit less steep) or the major trend is actually changing. Good interpretation and analytical tools come into play at this point; some traders have a sixth sense when this occurs.
Incorrect
When trendlines are broken repeatedly and new trendlines are redrawn, the chart tends to look like a fan (as in Figure 8.4). A series of trendlines, all starting out at the same point, move in parallel. This fan effect either indicates that the major trend is still intact (albeit less steep) or the major trend is actually changing. Good interpretation and analytical tools come into play at this point; some traders have a sixth sense when this occurs.
Question 9 of 10
9. Question
Which of the following statements is/are true regarding trend channels?
I. A channel is identified by constructing a line parallel to the major trendline.
II. If a market is trending higher and an up trendline has been constructed, the top line of the channel is drawn by connecting progressive lows. In a downtrend, a parallel to the down trendline is drawn, connecting progressive highs and a channel is born.
III. As long as the market remains within the channel, for the most part, the market is behaving normally during a trending type period.
IV. Nimble traders look to buy on the trendline and sell toward the upper channel line (assuming that they’re in an uptrend). Active traders might also look to reverse at the channel lines.
Correct
Trend channels
Prices in a classic trend commonly tend to trade roughly within a channel. A channel is identified by constructing a line parallel to the major trendline. If a market is trending higher and an up trendline has been constructed, the top line of the channel is drawn by connecting progressive highs. In a downtrend, a parallel to the down trendline is drawn, connecting progressive lows and a channel is born (see Figure 8.5). As long as the market remains within the channel, for the most part, the market is behaving normally during a trending type period. Nimble traders look to buy on the trendline and sell toward the upper channel line (assuming that they’re in an uptrend). Active traders might also look to reverse at the channel lines, but this generally is not recommended, because they would be fighting the trend.
Markets will eventually trade outside the bounds of the channel. This can be a significant clue to subsequent market action. The general rule of thumb is that when a market trades above the upper channel line (in an uptrend) or below the lower channel line (in a downtrend), odds are that the market is entering an accelerated phase in the direction of the major trend. In other words, a significant change in the normal supply and demand balance has taken place. With bona fide breakouts of channels, the market tends to move faster, with price action becoming more dramatic. Stops can be tightened, positions can be pyramided, and your “antenna should be up” for any signs of a subsequent trend reversal. The accelerated phase of any market can be the most profitable and most exciting time to play, but it also can be the shortest. Don’t fight it; go with it but remain alert. If acting right, after it has broken out, the market should not fall back into the channel because this would be the place to exit and reevaluate.
Incorrect
Trend channels
Prices in a classic trend commonly tend to trade roughly within a channel. A channel is identified by constructing a line parallel to the major trendline. If a market is trending higher and an up trendline has been constructed, the top line of the channel is drawn by connecting progressive highs. In a downtrend, a parallel to the down trendline is drawn, connecting progressive lows and a channel is born (see Figure 8.5). As long as the market remains within the channel, for the most part, the market is behaving normally during a trending type period. Nimble traders look to buy on the trendline and sell toward the upper channel line (assuming that they’re in an uptrend). Active traders might also look to reverse at the channel lines, but this generally is not recommended, because they would be fighting the trend.
Markets will eventually trade outside the bounds of the channel. This can be a significant clue to subsequent market action. The general rule of thumb is that when a market trades above the upper channel line (in an uptrend) or below the lower channel line (in a downtrend), odds are that the market is entering an accelerated phase in the direction of the major trend. In other words, a significant change in the normal supply and demand balance has taken place. With bona fide breakouts of channels, the market tends to move faster, with price action becoming more dramatic. Stops can be tightened, positions can be pyramided, and your “antenna should be up” for any signs of a subsequent trend reversal. The accelerated phase of any market can be the most profitable and most exciting time to play, but it also can be the shortest. Don’t fight it; go with it but remain alert. If acting right, after it has broken out, the market should not fall back into the channel because this would be the place to exit and reevaluate.
Question 10 of 10
10. Question
What does the channel line show about the market trends?
I. When a market trades above the upper channel line (in an uptrend) or below the lower channel line (in a downtrend), odds are that the market is entering an accelerated phase in the direction of the major trend.
II. In the direction of the major trend, a significant change in the normal supply and demand balance takes place.
III. With breakouts of channels, the market tends to move slower, with price action becoming more dramatic.
IV. Stops can be tightened, positions can be pyramided, and your “antenna should be up” for any signs of a subsequent trend reversal.
Correct
Markets will eventually trade outside the bounds of the channel. This can be a significant clue to subsequent market action. The general rule of thumb is that when a market trades above the upper channel line (in an uptrend) or below the lower channel line (in a downtrend), odds are that the market is entering an accelerated phase in the direction of the major trend. In other words, a significant change in the normal supply and demand balance has taken place. With bona fide breakouts of channels, the market tends to move faster, with price
action becoming more dramatic. Stops can be tightened, positions can be pyramided, and your “antenna should be up” for any signs of a subsequent trend reversal. The accelerated phase of any market can be the most profitable and most exciting time to play, but it also can be the shortest. Don’t fight it; go with it but remain alert. If acting right, after it has broken out, the market should not fall back into the channel because this would be the place to exit and reevaluate.
Incorrect
Markets will eventually trade outside the bounds of the channel. This can be a significant clue to subsequent market action. The general rule of thumb is that when a market trades above the upper channel line (in an uptrend) or below the lower channel line (in a downtrend), odds are that the market is entering an accelerated phase in the direction of the major trend. In other words, a significant change in the normal supply and demand balance has taken place. With bona fide breakouts of channels, the market tends to move faster, with price
action becoming more dramatic. Stops can be tightened, positions can be pyramided, and your “antenna should be up” for any signs of a subsequent trend reversal. The accelerated phase of any market can be the most profitable and most exciting time to play, but it also can be the shortest. Don’t fight it; go with it but remain alert. If acting right, after it has broken out, the market should not fall back into the channel because this would be the place to exit and reevaluate.
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