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- There's no time limit, so you can spend as long as you like on each question.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Which of the following statements is true?
Explanation
Planned volatility refers to market movements that are anticipated or expected based on known events or scheduled releases, typically on the economic calendar. Unplanned volatility is also known as unexpected or shock volatility and refers to market movements that occur suddenly without any anticipation.
True or false: higher volatility generally leads to higher risk in trading.
Explanation
Higher volatility in the market generally indicates greater uncertainty and potential for larger price swings, which can increase the level of risk for traders.
Which trading strategy aims to maximise on factors other than the direction of the market?
Explanation
Non-directional trading, also known as market-neutral trading, involves strategies that aim to profit from factors other than the direction of the market. Instead of speculating on price movements, non-directional traders focus on exploiting market inefficiencies, volatility changes, or relative price relationships.
Which volatility indicator measures the average range between the high and low prices over a specified period?
Explanation
Average true range (ATR) measures the average range between the high and low prices over a specified period, typically 14 days. It provides a measure of the average volatility of an asset and moves up or down according to whether an asset’s price movements are becoming more or less dramatic. A higher ATR value represents greater volatility in the underlying market, and a lower ATR represents the opposite.
Which of the following indicators helps traders identify potential price reversals based on overbought and oversold conditions?
Explanation
Bollinger Bands are primarily used to identify overbought and oversold conditions in the market. They consist of a middle band (typically a simple moving average or SMA) and two outer bands that represent standard deviations of the price from the middle band. Each band is plotted two standard deviations away from the SMA of the market, and they are capable of highlighting areas of support and resistance. The width of the bands expands, and contracts based on the volatility of the market. Wider bands indicate higher volatility, while narrower bands suggest lower volatility.
Which risk management measure helps traders limit their potential losses by automatically closing a trade at a predetermined price level?
Explanation
Guaranteed stop-loss orders offer extra safety by guaranteeing that a trade closes at a set price, no matter what's happening in the market. Remember, you pay a fee when a guaranteed stop is triggered.
Which common mistakes should traders avoid when trading volatility? Choose all that apply.
Explanation
Overleveraging positions can amplify both profits and losses, leading to significant financial risk, especially in volatile markets. Ignoring market news in turbulent times can result in missing important information when making trading decisions. Failing to adjust stop-loss levels in response to increased volatility can expose traders to larger-than-anticipated losses if price movements exceed their risk tolerance.
What does the VIX measure?
Explanation
The volatility index, aka the VIX, is a measure of market volatility and investor sentiment in the stock market. It measures the expected volatility of the S&P 500 index over the next 30 days, reflecting the market's expectation of future price fluctuations, which is considered a benchmark for the broader stock market.
True or false: trading volatility successfully relies predominantly on a trader's intuition.
Explanation
It's essential for traders to avoid overreacting to sudden market movements caused by unplanned events. Emotional responses and knee-jerk reactions can lead to impulsive trading decisions and increased losses.
Which of the following are potential cons of trading volatility? Select all that apply?
Explanation
Higher volatility often means higher risk. Price movements can be unpredictable, leading to greater potential for losses. Volatility can also lead to increased trading costs, including wider spreads, higher slippage, and potentially higher margin requirements.
2006-2024
