Intro to trading 2
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Questions and Answers

According to the Random Walk Theory, what is the implication for traders?

  • Traders can predict future price movements through fundamental analysis.
  • Traders can consistently outperform the overall market average.
  • Traders can only outperform the overall market average by sheer chance. (correct)
  • Traders can outperform the overall market average through technical analysis.

    • What is one of the basic assumptions of the Random Walk Theory?

  • The amount of time each investor spends in the market is the same.
  • The movement in the price of one security is dependent on price movement in another security.
  • The price of each stock follows a discernible trend. (correct)
  • The stock market consists of a small number of investors.

    • What strategy do proponents of the Random Walk Theory recommend?

  • Buy and hold (correct)
  • Short selling
  • Swing trading
  • Day trading

    • Which type of analysis has become more widely used due to the arrival of computers?

    <p>Technical analysis</p> Signup and view all the answers

    What percentage of trading volume on exchanges is estimated to be generated through technical analysis?

    <p>70-80%</p> Signup and view all the answers

    What is the purpose of using technical indicators on a stock chart?

    <p>To predict future market trends</p> Signup and view all the answers

    Why is trading volume considered a critical technical indicator?

    <p>It indicates the stock's liquidity</p> Signup and view all the answers

    Which of the following is considered a bullish indicator for a stock?

    <p>High volume trading on Up Days</p> Signup and view all the answers

    What is the purpose of watching volume figures in stock trading?

    <p>All of the above</p> Signup and view all the answers

    Which moving average is considered a critical indicator on a stock chart?

    <p>200-day moving average</p> Signup and view all the answers

    What does it indicate if a stock's price crosses from below the 200-day moving average to above it?

    <p>A bullish market reversal</p> Signup and view all the answers

    According to the text, what is the main belief of fundamental analysis?

    <p>The genuine value of a security ultimately determines its price</p> Signup and view all the answers

    According to the text, what is the main belief of technical analysis?

    <p>Future price movements can be predicted based on trends, patterns, and historical price action</p> Signup and view all the answers

    According to the text, what is a key argument against the random walk theory?

    <p>There are some individual traders who consistently outperform the market average for long periods of time</p> Signup and view all the answers

    According to the text, what is the implication of technical analysis?

    <p>Traders with superior market analysis and trading skills can significantly outperform the market average</p> Signup and view all the answers

    Which of the following is true about a downside cross of price from above the 200-day moving average?

    <p>It is interpreted as a bearish indication for the stock.</p> Signup and view all the answers

    What is a 'golden cross'?

    <p>When the 50-day moving average crosses from below to above the 200-day moving average.</p> Signup and view all the answers

    What is a 'death cross'?

    <p>When the 50-day moving average crosses from above to below the 200-day moving average.</p> Signup and view all the answers

    What are trend indicators used for?

    <p>To identify the overall direction of a stock's price.</p> Signup and view all the answers

    Which of the following is NOT a commonly used financial metric in fundamental analysis?

    <p>Return on investment (ROI)</p> Signup and view all the answers

    What type of data do fundamental traders of the foreign exchange market analyze to assess the overall health of a nation's economy?

    <p>Gross domestic product (GDP) and consumer price index (CPI)</p> Signup and view all the answers

    What is the main focus of technical analysts when evaluating a security?

    <p>Market price action and price trends</p> Signup and view all the answers

    What is the main tool used by technical analysts for their analysis?

    <p>Price chart</p> Signup and view all the answers

    According to the Random Walk Theory, the price of securities moves randomly.

    <p>True</p> Signup and view all the answers

    The Random Walk Theory recommends using a 'buy and hold' strategy.

    <p>True</p> Signup and view all the answers

    The Random Walk Theory assumes that the movement in the price of one security is dependent on price movement in another security.

    <p>False</p> Signup and view all the answers

    True or false: Fundamental market analysts rely solely on technical indicators to evaluate a security's intrinsic value.

    <p>False</p> Signup and view all the answers

    True or false: Technical analysts believe that all relevant factors of supply and demand are reflected in a security's price movement.

    <p>True</p> Signup and view all the answers

    True or false: Fundamental analysis requires extensive research and is not suitable for all investors.

    <p>True</p> Signup and view all the answers

    True or false: Technical analysis involves analyzing market price action to identify current and future price trends.

    <p>True</p> Signup and view all the answers

    True or false: Learning to read a stock chart can make you a multi-millionaire.

    <p>False</p> Signup and view all the answers

    True or false: Anyone can become an expert at analyzing stock charts with practice.

    <p>True</p> Signup and view all the answers

    True or false: Fundamental analysis is no longer widely used in the market due to the dominance of technical analysis.

    <p>False</p> Signup and view all the answers

    True or false: Technical analysis is primarily used by individual traders and not by large market players like investment banks.

    <p>False</p> Signup and view all the answers

    True or false: Stock charts can only be viewed in daily time frames and cannot be customized to show other time frames.

    <p>False</p> Signup and view all the answers

    True or false: Trading volume is considered an important technical indicator and is shown on nearly every stock chart.

    <p>True</p> Signup and view all the answers

    True or false: Volume is considered to be a very important technical indicator because it is mostly influenced by individual traders.

    <p>False</p> Signup and view all the answers

    True or false: High volume trading on up days is considered a bearish indicator for a stock.

    <p>False</p> Signup and view all the answers

    True or false: Low volume trading on down days is a bullish indication since it indicates that not many investors are involved in the trading.

    <p>False</p> Signup and view all the answers

    True or false: The 200-day moving average is considered a critical indicator on a stock chart and is often used by both bullish and bearish traders.

    <p>True</p> Signup and view all the answers

    True or false: According to the text, the Random Walk Theory argues that stock prices follow patterns or trends even over the long run?

    <p>False</p> Signup and view all the answers

    True or false: Believers in technical analysis think that future price movements can be predicted based on trends, patterns, and historical price action?

    <p>True</p> Signup and view all the answers

    True or false: According to the random walk theory, a trader should only be able to outperform the overall market by chance or luck?

    <p>True</p> Signup and view all the answers

    True or false: The text suggests that fundamental analysis aims at identifying the real, intrinsic value of a security, based on the belief that the genuine value of something is what will ultimately determine its price?

    <p>True</p> Signup and view all the answers

    True or false: A downside cross of price from above the 200-day moving average is interpreted as a bullish indication for the stock.

    <p>False</p> Signup and view all the answers

    True or false: The interplay between the 50-day and 200-day moving averages is considered as a strong indicator for future price movement.

    <p>True</p> Signup and view all the answers

    True or false: A golden cross is an indication that the stock is set for substantially higher prices.

    <p>True</p> Signup and view all the answers

    True or false: A death cross is considered to bode well for a stock's future price movement.

    <p>False</p> Signup and view all the answers

    Study Notes

    The Complete Guide to Trading: Random Walk Theory and Fundamental vs. Technical Analysis

    • The random walk theory suggests that the price of securities moves randomly and that any attempt to predict future price movement is futile.
    • Supporters of the random walk theory recommend using a "buy and hold" strategy and investing in a selection of stocks that represent the overall market.
    • The theory assumes that the price of each stock follows a random walk and that the movement in the price of one security is independent of another.
    • Critics argue that trends can emerge in the short run and that a savvy investor can outperform the market by strategically buying low and selling high within a short time span.
    • Believers in technical analysis think that future price movements can be predicted based on trends, patterns, and historical price action.
    • Some traders consistently outperform the market average for long periods of time, which goes against the random walk theory.
    • Technical analysis involves analyzing market price action to identify current and likely future price trends.
    • Fundamental analysis aims to identify the intrinsic value of a security based on factors such as overall economic conditions, industry trends, and company management.
    • Fundamental traders rely on financial metrics like P/E ratio, P/B ratio, ROI, and ROA, as well as quarterly and annual earnings reports.
    • Technical traders use tools like price charts, trend lines, trading volume, moving averages, and support and resistance levels to analyze price action patterns.
    • Both fundamental and technical analysis have their advocates and detractors, and there are successful and unsuccessful traders in both camps.
    • Technical analysis offers a wealth of price analysis tools but can result in conflicting indications and trading signals from different technical indicators.

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