FINRA Series 3 Free Practice Questions 85

If it’s a false signal, look to reverse your course. I’ve found that a classic H&S failure often offers an excellent opportunity to get back in sync with the major trend. If the market again trades above the right shoulder’s top (or below the right shoulder’s bottom for a reverse H&S), odds favor, at a minimum, one last thrust to a new high or new low. I would buy the market at this point, with the objective of a new high, risking to under the neckline. For an inverted H&S failure, sell the market under the low of the right shoulder, with a minimum objective of a new low, risking to above the neckline.
10. After a false signal is confirmed, watch the market action closely as soon as a new high or low is registered. I’ve noticed that an H&S failure that turns out not to be the final high or low, ultimately leads to a new contract high or low in short order. The H&S was telling us we were close to the major top or bottom, but the bulls or bears were able to mount one last hurrah. If the market is unable to show much follow-through after this climatic top or bottom (following an H&S that didn’t work), be ready to take action because a major top or bottom is now in place.

Six rules for trading news
The following are six news rules:
1. If bad news is announced and the market starts to sell off in large volume, it’s a good bet that the market’s going lower.
2. If the market fails to react to good news, it has probably already been discounted in the price.
3. Moves of importance invariably tend to begin before any news justifies the initial price move. When the move is under way, the emerging fundamentals will slowly come to light. A big rally (decline) on no news is usually very bullish (bearish).
4. It is generally not a good practice to buy after very bullish news or sell after an extremely bearish report because both good and bad news can already be discounted in the price.
5. Always consider whether the trend is down or up when the news is made known because a well-established trend will generally continue, regardless of the news. As an example, I remember getting caught in the emotion of a very bullish corn report in January 1994. Looking back, this news was the very top. An opposite (very bearish) report the following year turned out to be the springboard for one of the biggest corn bull markets in history and led me to develop the SNI.
6. When unexpected news occurs (news that the market has not had time to prepare for) and the market opens in a wide range or “gaps” lower or higher, sell out your longs or cover your shorts and wait. Watch the market for 30 minutes to an hour. If the market opened sharply lower with heavy selling and was not able to trade much lower than that, it’s into support and you can buy it with a tight risk point. Watch the market closely at this point and note the tone of the rally. If it’s small and the market is able to again fall under the levels made when the bad news came out (or rise above the levels made when the good news came out), it’s safe to assume the market is going lower (higher).

When unexpected news occurs (news that the market has not had time to prepare for) and the market opens in a wide range or “gaps” lower or higher, sell out your longs or cover your shorts and wait. Watch the market for 30 minutes to an hour. If the market opened sharply lower with heavy selling and was not able to trade much lower than that, it’s into support and you can buy it with a tight risk point. Watch the market closely at this point and note the tone of the rally. If it’s small and the market is able to again fall under the levels made when the bad news came out (or rise above the levels made when the good news came out), it’s safe to assume the market is going lower (higher).

Four rules for trading SNI
Here’s how to successfully use the SNI in your trading:
1. If the news is considered bullish, the SNI is your major support number and, if acting properly, the market should remain above it. If the market is acting properly after a bullish event, you can enter a long position with a stop just below the SNI.
2. After a bullish news event, a move below the SNI generates an automatic sell signal, and you can immediately enter a short sale with a tight stop just above the SNI.
3. If the news is considered bearish, the SNI is your major resistance number, and the market should remain below it if acting properly. If the market is acting properly after a bearish event, you can enter a short position with a stop just above the SNI.
4. After a bearish news event, a move above the SNI generates an automatic buy signal, and you can immediately enter a long position with a tight stop just below the SNI.

A trader can select any number of days or periods and then use the SMA formula:
SMA = (P1 + P2 + P3 + … + PN) / N
where P is the price of the commodity being averaged, and N is the number of days (or periods) in the moving average.
The value of an SMA is determined by the values that are being averaged and the time period. For example, a 10-day SMA shows the average price for the past 10 days, a 20-day SMA shows the average price for the past 20 days, and so on. The time period depends on the trader’s time horizon—it can be years, months, weeks, days, minutes, or even ticks. You can calculate moving averages based on opens, closes, highs, lows, and even the average of the day’s ranges. I recommend using the close, or settlement price, for each day or interval. On daily charts, it’s the most important price of the day since it’s the price used to calculate margin calls. If the market closes on the high, or in the high range, most of the short players (unless they shorted right at the high[s]) will have funds transferred out of their accounts and placed into the long’s accounts. This action makes the shorts a bit weaker and the longs a bit stronger (at least for the next day). The same logic works on shorter-term intervals. Even on a five-minute chart, if a close is on the high of the bar this means that every short during the five-minute interval is on the losing side of that 5-minute price range…at least in the short run.

When the closing price turns down and under the average, a sell signal is generated.
You can connect each day’s value on a chart to produce a line. You can chart this line and overlay it onto a price chart to generate trading signals. A simple trading program would look like this: As long as the line on any particular day is under the closing price, the trader would stay long because the SMA has determined that the trend is up. After the line crosses over the closing price, the trader would go short because the trend has turned down. If the position is long
and the line crosses over the closing price, the trader would reverse the position by selling double the number of contracts owned. The problem with this simple
trading program is if you do this every time the line crosses price (especially when using shorter-term averages), you can easily get “whipsawed” (bounced back and forth, with small losses and commissions eating you up). A market can trade in a wild range, moving up and down wildly in the same session, but as I have mentioned before, I believe that the closing price is the most significant.

How many days should you use in your moving average?
The length of the moving average greatly impacts trading activity and, therefore, profitability. Some traders use 5-day moving averages, some 10-day, others use
20-day; I’ve seen funds use 50-or 100-day, and so on. The length is your decision, depending on the type of trader you are, but length directly determines the sensitivity of any moving average. The length determines how much time a moving average has to respond to a change in price. It is a matter of “lag time.” This is a simple but important concept: Shorter moving averages are more sensitive than longer moving averages. A 5-day moving average is more sensitive than a 10-day moving average, and both are more sensitive than a 20-day moving average. The more sensitive a moving average is, the smaller the loss will be on a reversal signal; however, there will be a higher likelihood of a whipsaw (a false reversal signal causing a trader to reverse a trade too soon). A false signal occurs when a minor movement, which ultimately does not change the major trend, is enough to push the moving average in the opposite direction of the settlement price, resulting in a false position change. It is false simply because the trader will subsequently need to reverse once again when the major trend reasserts itself.
It’s important to use a moving average that is long enough so that it is not overly sensitive. However, if the moving average is too long, the trader will tend
to take too big a loss (or give up too big a portion of unrealized paper profits) before even being aware of a trend change. A longer moving average will keep
you in a trade longer, thereby maximizing paper profits, but it can eat into realized profits because it moves too slowly. Like the porridge in the story of the
three bears, the moving average cannot be too hot or too cold; it needs to be “just right.” The most popular question I’m asked has to do with what is the “right”
moving average to use. “Just right” is not always easy to determine and will change with market conditions. Voluminous studies have been done to determine which length is right for which specific market, but I believe that these are useless because market conditions change for all markets. The silver market of the Hunt era is not the same as the silver market of today. Soybeans in a drought market act far differently than in a normal-weather market.

For a 20-day SMA, the SF is 2 divided by 21 = .096.

Entering a new pivot trade from the long side requires three steps:
1. Setup bar
2. Buffered entry price
3. Triggered entry

To determine the buffered entry price, you take the high price of the setup bar, multiply it by .05%, and add that to the high price. The resulting number is the
buffered order entry price.