Trial 6
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Question 37—A Plan for SellingFind the incorrect statement about a written plan for selling:1. It guarantees success.2. It reduces stress.3. It allows you to separate analysis from trading.4. It makes you less prone to react to the market’s zigzags.Question 38—The Three Types of SellingThe three logical types of selling do not include which of the following?1. Selling at a profit target above the market2. Selling on a stop below the market3. Selling in response to the “engine noise” of changing marketconditions4. Selling after feeling impatient about the tradeQuestion 39—Planning to SellPrior to buying a stock, serious traders ask themselves all of the following questions except:1. How high is the stock likely to rise—what is the profit target?2. How low does the stock have to fall to activate a protective stop?3. What is the stock’s reward-to-risk ratio?4. Should I move my target farther away after the stock reaches it?Question 40—Targets for SellingWhich of the following tools can help set targets for selling?A. Moving averagesB. Envelopes or channelsC. Support and resistance zonesD. Other methods
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1. A2. A and B3. A, B, and C4. All of the aboveQuestion 41—A Stock below Its Moving AverageFind two correct statements about a stock that trades below its movingaverage:A. The stock is trading below value.B. It is definitely headed lower.C. It is definitely headed higher.D. If the indicators are pointing higher, the first target is the moving average.1. A and D2. B and D3. A and C4. A and BQuestion 42—Moving Averages as Selling TargetsFind the incorrect statement about using moving averages as sellingtargets:1. Selling at a moving average works especially well on weekly charts.2. Prices tend to oscillate above and below their moving averages.3. It is highly desirable that the distance to the target be longer thanthe distance to the stop.4. When you sell at a target, the sell grade is unimportant.
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Question 43—Regrets About SellingA trader feels intense regret after he sells at an EMA but prices continue to rise. Which of the following statements is correct?1. Regret is good because it motivates you not to exit the next tradetoo soon.2. A strong feeling of regret about exiting early can lead to overstaying the next trade.3. If your analysis is good, you should know not to sell early.4. Leaving money on the table is a sign of a poor trader.Question 44—The Timing of a Sale Near the EMAWhat is the best time to use an EMA as a target for a rally?1. When prices rally from bear market lows2. In the midst of an ongoing uptrend3. When prices are boiling near their historic highs4. All of the aboveQuestion 45—Channels as Price TargetsFind the correct statement about using channels as price targets:1. A powerful upmove on the weekly charts is the best time to targetchannels on the dailies.2. Uptrends rarely show an orderly pattern of tops and bottoms.3. The best time to go long in an uptrend is when prices hit the upperchannel.4. It does not pay to sell at a channel because prices may rally higher.
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Question 46—Measuring Performance Using ChannelsMeasuring the percentage of a channel height captured in a trade canhelp a swing trader:A. Focus on points rather than dollars.B. Provide a yardstick for measuring one’s progress.C. Set a realistic profit target.1. A2. A and B3. All of the aboveQuestion 47—Selling TargetsPlease find statements that match among the following two pairs ofstatements:A. The first target for selling into a rally off the lowsB. The first target for selling in an ongoing uptrend1. At or below value, as defined by moving averages2. Near the overvalued zone, as defined by the upper channel lineQuestion 48—Reaching for a Greater ProfitAlways reaching out for a greater profit makes a trader:A. More relaxedB. More stressedC. More successfulD. More hyperactive1. A and B2. A and C3. B and D4. B and C
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Question 49—The Top of a RallyFind the correct statement about the top tick of a rally:1. Forecasting it will provide a reasonable target for selling.2. It can be forecast with a good degree of consistency.3. Trying to sell at the top tick tends to be a very expensive undertaking.4. If one can sell consistently at the absolute top, one can also sellshort there.Question 50—Prices above the Upper Channel LineAssume that prices have rallied above the upper channel line; find thecorrect statement among the following:1. A trader must immediately take profits.2. When prices close above the upper channel line for two days in arow, a trader must take profits.3. When prices close above the upper channel line, it means the rallywill continue.4. When prices close above the upper channel line but then fail toreach a new high, the trader should consider selling that day.Question 51—Setting Profit TargetsFind the correct statement about setting profit targets:1. Let the trade run as far as it will without worrying about targets.2. There is a perfect profit target for any market.3. The longer your time horizon, the farther away the profit target.4. A moving average provides the best profit target for any trade.
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Question 52—Support and Resistance Zones as TargetsSupport and resistance zones provide attractive price targets for longterm trades for all of the following reasons, except:1. Congestion zones show where the masses of market participantsare prepared to buy or sell.2. A trading range represents a general consensus of value among hugemasses of traders.3. The duration of trading ranges tends to be longer than that of pricetrends.4. A trend always stops at the edge of a trading range.Question 53—A Protective StopUsing a protective stop makes sense for all of the following reasons,except:1. It is a reality check, reminding you that prices can move against you.2. It works against the ownership effect, when people fall in love withtheir stocks.3. It reduces the emotional stress of making decisions in open trades.4. It puts an absolute limit on the amount of dollars you can lose inany given trade.Question 54—Breaking through ResistanceIf a stock rises to its resistance level, stays there, and then rallies andcloses above that level, it gives us a signal to:A. Go long immediately.B. Get ready to sell short if the stock sinks back into its resistance zone.C. Sell short immediately.D. Get ready to buy if the stock declines towards its resistance zone.1. A or D2. A or B3. B or C4. C or D
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Question 55—A Trade without a StopA trade without a stop is:1. Permitted only for experienced traders2. A gamble3. A way to be more flexible4. A realistic approach to tradingQuestion 56—Changing StopsWhich of the following are allowed during a trade?A. Raising stops on longsB. Raising stops on shortsC. Lowering stops on shortsD. Lowering stops on longs1. A and B2. B and C3. A and C4. C and DQuestion 57—Re-Entering a TradeBuying a stock, getting stopped out, and then re-entering the trade bybuying that stock back is:1. A common tactic among professionals2. Throwing good money after bad3. A sign of stubbornness4. A waste of time and money that could be spent on better opportunities
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Question 58—Deciding Where to Set a StopThe single most important question in setting a stop is:1. What is the volatility of the market you are trading?2. How much money are you prepared to risk?3. What is your profit target?4. How many shares are you planning to buy?Question 59—The Impact of the Last TradeWhat impact should the size of your latest profit or loss have on yourplans for the next trade?1. Trade a bigger size after a profitable trade.2. Trade a smaller size after an unprofitable trade.3. Trade a bigger size after an unprofitable trade.4. None of the aboveQuestion 60—“The Iron Triangle”Please match the components of “The Iron Triangle” of risk controlwith their descriptions:A. Money managementB. Stop placementC. Position sizing1. Set it on the basis of chart analysis.2. Decide how much money you will risk in this trade.3. Divide one of the three factors by another.
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Question 61—A Limit OrderA limit order is preferable to a market order for all of the followingreasons except:1. It prevents slippage.2. It guarantees execution.3. It works best for entering trades.4. It is useful for taking profits at target levels.Question 62—Soft StopsWhich of the following statements about soft stops is correct?1. They are very useful for system traders.2. They offer a good way to get started in the markets.3. They help avoid whipsaws.4. They are easier to set than hard stops.Question 63—A Stop One Tick below the Latest LowPutting a protective stop on a long position one tick below the latestlow is problematic for all of the following reasons, except:1. Even a small sell order thrown at the market near the lows canbriefly push it below the latest low.2. A bullish pattern occurs when a market takes out its previous lowby a small margin and reverses.3. Professionals like to fade (trade against) breakouts.4. Once the low is taken out, prices are likely to decline much lower.
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Question 64—A Stop at the Level of the Previous LowPlacing a stop exactly at the level of the previous low can be good forall of the following reasons, except:1. A downtrend often slows down as it approaches the level of theprevious low.2. If the stock declines to its previous low, it is likely to go even lower.3. Stocks often accelerate immediately after taking the previous low.4. Slippage tends to be higher when the stop is at the level of the previous low rather than one tick below that low.Question 65—A Stop That Is “Tighter by a Day”Find the correct statement about a stop that is “tighter by a day”(“Nic’s Stop”):1. Examine the bars that bracket a recent low and place your stop alittle below the lower of those two bars.2. Using a tight stop is not suitable for short-term trading.3. This method is especially useful for long-term position trades.4. A tight stop like this one eliminates slippage.Question 66—Trade DurationThe outcome of a trade depends in part on the duration of that trade.Find the incorrect statement about the impact of trade duration:1. Longer-term trades give you the luxury of time to think and makedecisions.2. If a day-trader stops to think, he loses.3. The more time a stock has, the farther it can move.4. Long-term position trades provide the best learning experience.
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Question 67—Wider StopsFind the correct statement about using wider stops:1. A major uptrend is less volatile than a minor one.2. The wider the stop, the greater the risk of a whipsaw.3. A stop belongs outside of the zone of the normal chop of prices.4. The wider the stop, the larger position you can carry.Question 68—Moving StopsWhich of the following statements about moving stops is incorrect?1. You may move stops only in the direction of the trade but neveragainst it.2. When you switch to a trailing stop after the prices reach their targetyou increase your risk.3. When prices hang just above your stop, it makes sense to lower itto reduce the risk of a whipsaw.4. When prices move in your favor, it makes sense to raise your stopto protect a part of your paper profit.Question 69—The SafeZone StopsFind the correct statement about the SafeZone stop:1. It acts as a filter that suppresses the signal of the trend.2. Noise is any part of today’s range that protrudes outside of the previous day’s range.3. SafeZone tracks Average Upside Penetration in uptrends andAverage Downside Penetration in downtrends.4. SafeZone works best during trends and worst during trading ranges.
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Question 70—Trading with the SafeZoneWhich of the following statements about SafeZone stops is incorrect?1. SafeZone is a mechanical trading system.2. You have to establish the lookback period for the SafeZone.3. You need to choose the coefficient by which to multiply the normalnoise to obtain the SafeZone stop.4. Usually, a coefficient between two and three provides a margin ofsafety.Question 71—The Volatility-Drop MethodWhich of the following statements about the Volatility-Drop method isincorrect?1. A Volatility-Drop ensures getting greater profit from every trade.2. This methods allows a trader to start out with a modest target, butreach out for more while in the trade.3. Using a Volatility-Drop stop involves risking some of the paper profit.4. Using this method helps automate profit-taking decisions.Question 72—“Engine Noise” in the MarketsSelling “engine noise” refers to selling when:1. Your target is reached.2. Your stop is hit.3. You want to take partial profits.4. You do not like how the market is acting.
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Question 73—Selling “Engine Noise”Which statement about selling “engine noise” is incorrect?1. A system trader may not sell “engine noise.”2. A discretionary trader may exit the market sooner or later thanplanned.3. Selling “engine noise” is especially well suited for beginning traders.4. Selling “engine noise” carries a risk of cutting profits.Question 74—Not Liking Market’s ActionYou are holding a long position but do not like the toppy signals ofindicators. Which statement about the courses of action open to you isincorrect?1. If you are a system trader, you must hold your position as planned.2. If you are a discretionary trader, you may sell your position.3. If you are a system trader, you may switch to a different system thatallows an earlier exit.4. If you are a discretionary trader, you may take partial profits butretain the core position.Question 75—Earnings ReportsWhich statement about the impact of earnings reports is incorrect?1. Prices are largely driven by the anticipation of future earnings.2. An earnings report never changes a long-term stock trend.3. Earnings reports rarely come as a surprise to professional watchers.4. Insider trading is usually linked to the way a company is managed.
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Question 76—The Market “Rings a Bell”The market “rings a bell” when:1. It makes a multiyear high.2. It falls to a multiyear low.3. An event occurs far outside the norm for this market.4. The market flashes a signal anyone can recognize.Question 77—Trading with the New High–New Low IndexWhich statement about the New High–New Low Index (NH-NL) isincorrect?1. When NH-NL is above zero it shows that bulls are stronger than bears.2. New Highs are the leaders in weakness and New Lows are the leaders in strength.3. Bearish divergences are commonly seen near the ends of bullmarkets.4. A severe downspike of weekly NH-NL usually signals a marketbottom.Question 78—A Decision-Making Tree vs. a Trading SystemThe key difference between a decision-making tree and a trading system is that only one of them includes:1. The rules for entering a trade2. The rules for exiting a trade3. The permission to bend your exit rules4. The parameters for trade sizing
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Question 79—A Decision-Making TreeWhich of the following questions does not belong in a decisionmaking tree:1. Is this a short-term or a long-term trade?2. Where will you place your stop?3. What kind of “engine noise” will you listen to while in a trade?4. What kind of record-keeping will you perform for a trade?Question 80—Value Buying and Selling Targets
CA
B
D
Figure 2.80
Please identify value buying zones and selling targets among the letterpoints on this chart:1. Value buying zones2. Selling targets in overvalued zones
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Question 81—Support, Resistance, and Targets
ED
A
B
C
Figure 2.81
Please match the following descriptions with the letters on the chart:1. Line of support broken2. Prices close above support, giving a signal to buy3. Support established4. Second selling target at the upper channel line5. First selling target at the EMA
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Question 82—Multiple Targets
ABCD1
Figure 2.82
Please match the following descriptions with the letters on this monthlychart:1. The minimal price target2. Support3. The bull market target
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Question 83—Holding, Adding, or Profit-Taking
A
B Zone togo long
Figure 2.83
At point A′ the stock declined to 58.78. At point B′ it fell to 58.71 butrecoiled from its new low. This false downside breakout was accompanied by bullish divergences in several indicators. If a trader wentlong with a target near the upper channel line, which of the followingactions are legitimate at the right edge of this chart?A. Sell and take profits.B. Sell half, hold half.C. Continue to hold, tighten the stop.D. Add to the winning position.1. A2. A or B3. A, B, or C4. All of the above
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Question 84—Handling a Profitable TradeDB
EA
C
Figure 2.84
A trader recognizes an uptrend and starts buying the stock near value,selling near the upper channel line. He goes long at point A and sellsat B, long at point C and sells at D, long again at point E. When pricesgap above the upper channel line he decides to hold for a greater gain.What is the wise course of action at the right edge of this chart?1. Sell and take profits.2. Sell half the position.3. Hold the position.4. Add to the position.
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Question 85—Placing a Stop
Low29.50
Low29.34
Low29.99
Figure 2.85
A trader recognizes a bullish divergence accompanied by a false downside breakout. He decides to go long, but needs to place a stop. Atwhich of the following levels would he be advised to place it?1. 29.492. 29.333. 29.344. 29.985. 28.99
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Question 86—The Decision at the Right Edge of the ChartB
CA
Figure 2.86
A trader recognizes an uptrend and goes long at point A. He sells atpoint B, after prices blow out of their channel but then fail to make anew high. He buys again at point C, after prices decline below valueand stop making new lows. What would be the reasonable course ofaction at the right edge of this chart?1. Continue to hold.2. Add to long position.3. Sell.
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T H R E E
HOW TO SELL SHORT
M
arkets rise and fall, but the vast majority of traders andinvestors miss half of the action. They try to profit only fromgoing long. Every beginner buys something, but it takes an experienced trader to recognize an overvalued market and sell it short.Shorting—profiting from market declines—is one of the favoritegames of market professionals. They account for the bulk of shortingin most markets. Whenever you see a situation in which the mass ofamateurs is crowding one side of an issue, while the more experiencedand better capitalized professionals are on the opposite side, ask yourself—which side is more likely to win? That is the side of the marketyou want to be on.It pays to run your trading account like a hedge fund, with somelong and some short positions at any given time, shifting their balanceas your view of the market changes. Being comfortable with sellingshort allows you to wrestle with the market while standing on bothfeet. This is a much better stance for a battle than standing on just onefoot, only going long. The ability to go short when circumstances warrant is one of the key assets of a serious trader.Selling short has its own challenges and peculiarities which youmust master. This chapter will test your knowledge of the basic concepts of shorting tops and downtrends. It will quiz you on the plusesand minuses of shorting, on short interest, and on selecting stocks forshorting. It will also ask you about shorting non-equity instruments.
45
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Answer SheetQuestions
Max. Pts.Available
87
1
88
1
89
1
90
1
91
1
92
1
93
1
94
1
95
1
96
1
97
1
98
1
99
1
100
1
101
1
102
1
103
1
104
1
105
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106
1
107
1
108
1
109
1
110
1
Trial 1
Trial 2
Trial 3
Trial 4
Trial 5
Trial 6
(continuing)
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Answer Sheet, continuedQuestions
Max. Pts.Available
111
1
112
1
113
1
114
1
115
1
Total points
29
Trial 1
Trial 2
Trial 3
Trial 4
Trial 5
Trial 6
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Question 87—Shorting a StockSelling a stock short means:1. Selling an overvalued stock from your portfolio2. Selling a borrowed stock3. Selling a stock in a severe downtrend4. Selling a stock you expect to be delistedQuestion 88—Risk Factors in ShortingThe major risk factors in selling short include all of the following,except:1. A stock might rally.2. A stock might issue a dividend.3. A stock might be called back by the owner.4. A stock might crash.Question 89—The Impact of ShortingPeople who sell stocks short help create a more orderly market throughall of the following, except:1. Dampening price increases2. Cushioning price declines3. Increasing price swings4. Dampening volatilityQuestion 90—Short vs. LongThe main advantage of shorting over buying is that:1. Tops are easier to recognize than bottoms.2. Stocks fall faster than they rise.3. It is easier to sell into a rally than buy into a decline.4. Stocks rise faster than they fall.
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Question 91—Disadvantages of ShortingThe greatest disadvantage in shorting stocks is that the stock market:1. Keeps fluctuating2. Has relatively slow rises and fast declines3. Rises over time4. Has an uptick ruleQuestion 92—Learning to Sell ShortWhich statement about learning to sell short is incorrect?1. Find a stock you’d hate to own.2. Trade a large size to make the experience worthwhile.3. Avoid shorting stocks making new highs.4. Look for expensive stocks.Question 93—Shorting vs. BuyingFind the correct statement among the following comparisons of buyingand shorting:1. Tops take longer to form than bottoms.2. Stock bottoms are built on hope and greed.3. Precise timing is more important in buying than shorting.4. Fear is the dominant emotion of stock tops.Question 94—Shorting Stock Market TopsWhich statement about shorting stock market tops is incorrect?1. Stops need to be placed relatively farther away, due to highvolatility.2. Wider stops require larger positions.3. There is nothing wrong with trying to re-enter a trade after gettingstopped out.4. Trading positions smaller than the maximum allowed by moneymanagement rules increase holding power.
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Question 95—Shorting in DowntrendsFind the correct statement regarding shorting in downtrends:1. Shorting in the middle of a channel means shorting above value.2. Covering near the lower channel line means buying below value.3. There is only one good shorting opportunity within a channel.4. Grading your trades by the percentage of a channel does not workfor shorting.Question 96—The Tactics of Shorting DowntrendsFind the incorrect statement about shorting in downtrends:1. Make a strategic decision on the weekly chart, make tactical planson the daily.2. Shorting within a channel lowers both the risk and the potentialrewards.3. Shorting within a channel increases the risk of a whipsaw.4. A single short within a channel will not catch a major move.Question 97—Shorting the FundamentalsFind the correct statement about shorting on the basis of fundamentalinformation:1. A fundamental analyst can cover more markets than a technician.2. One can use technical studies as an idea generator and fundamentals as a trigger.3. Fundamental information overrides technical factors.4. The most powerful situation exists when the fundamentals suggesta trade and technical factors confirm that signal.Question 98—Looking for Shorting CandidatesWhich of the following is not a valid method of looking for shortingcandidates?
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1. Looking at the weakest stock industry groups2. Listening to rumors and tips, then checking them using your analyticmethod3. Looking for the weakest stocks among the Nasdaq 1004. Selling short stocks that are being upgraded by major analystsQuestion 99—The Short Interest RatioThe Short Interest Ratio reflects the intensity of shorting by measuring:1. The number of shares held short by the bears relative to the “freefloat.”2. The number of stocks shorted by a trader relative to the number ofshares he bought.3. The number of traders holding shorts relative to the number oftraders holding longs.4. The number of traders whose accounts are set up for shorting relative to the total number of traders.Question 100—Trading the Short Interest RatioTracking the Short Interest Ratio can help a trader in all of the following ways, except:1. A rising Short Interest Ratio confirms a downtrend.2. A Short Interest Ratio over 20% warns that the stock is liable to havea sharp rally.3. A Short Interest Ratio under 10% means that shorting is relatively safe.4. A falling Short Interest Ratio calls for a break in the stock.Question 101—Markets Need ShortingWhich of the following markets could exist without shorting?1. Stocks2. Futures3. Options4. Forex
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Question 102—Who Shorts FuturesMost shorts in the futures markets are being held by:1. Public speculators2. Commercials or hedgers3. CFTC4. Hedge fundsQuestion 103—Shorting FuturesFind the incorrect statement about shorting futures:1. A seller enters into a binding contract for future delivery.2. The floor for a commodity price is defined by its cost of production.3. Insider trading is illegal in futures.4. The ceiling for a commodity price is defined by the cost of substitution.Question 104—Long Rallies and Sharp BreaksWhat is the main factor that makes many commodities prone to steady