48 Questions
According to the Random Walk Theory, what is the implication for traders?
Traders can only outperform the overall market average by sheer chance.
What is one of the basic assumptions of the Random Walk Theory?
The price of each stock follows a discernible trend.
What strategy do proponents of the Random Walk Theory recommend?
Buy and hold
Which type of analysis has become more widely used due to the arrival of computers?
Technical analysis
What percentage of trading volume on exchanges is estimated to be generated through technical analysis?
70-80%
What is the purpose of using technical indicators on a stock chart?
To predict future market trends
Why is trading volume considered a critical technical indicator?
It indicates the stock's liquidity
Which of the following is considered a bullish indicator for a stock?
High volume trading on Up Days
What is the purpose of watching volume figures in stock trading?
All of the above
Which moving average is considered a critical indicator on a stock chart?
200-day moving average
What does it indicate if a stock's price crosses from below the 200-day moving average to above it?
A bullish market reversal
According to the text, what is the main belief of fundamental analysis?
The genuine value of a security ultimately determines its price
According to the text, what is the main belief of technical analysis?
Future price movements can be predicted based on trends, patterns, and historical price action
According to the text, what is a key argument against the random walk theory?
There are some individual traders who consistently outperform the market average for long periods of time
According to the text, what is the implication of technical analysis?
Traders with superior market analysis and trading skills can significantly outperform the market average
Which of the following is true about a downside cross of price from above the 200-day moving average?
It is interpreted as a bearish indication for the stock.
What is a 'golden cross'?
When the 50-day moving average crosses from below to above the 200-day moving average.
What is a 'death cross'?
When the 50-day moving average crosses from above to below the 200-day moving average.
What are trend indicators used for?
To identify the overall direction of a stock's price.
Which of the following is NOT a commonly used financial metric in fundamental analysis?
Return on investment (ROI)
What type of data do fundamental traders of the foreign exchange market analyze to assess the overall health of a nation's economy?
Gross domestic product (GDP) and consumer price index (CPI)
What is the main focus of technical analysts when evaluating a security?
Market price action and price trends
What is the main tool used by technical analysts for their analysis?
Price chart
According to the Random Walk Theory, the price of securities moves randomly.
True
The Random Walk Theory recommends using a 'buy and hold' strategy.
True
The Random Walk Theory assumes that the movement in the price of one security is dependent on price movement in another security.
False
True or false: Fundamental market analysts rely solely on technical indicators to evaluate a security's intrinsic value.
False
True or false: Technical analysts believe that all relevant factors of supply and demand are reflected in a security's price movement.
True
True or false: Fundamental analysis requires extensive research and is not suitable for all investors.
True
True or false: Technical analysis involves analyzing market price action to identify current and future price trends.
True
True or false: Learning to read a stock chart can make you a multi-millionaire.
False
True or false: Anyone can become an expert at analyzing stock charts with practice.
True
True or false: Fundamental analysis is no longer widely used in the market due to the dominance of technical analysis.
False
True or false: Technical analysis is primarily used by individual traders and not by large market players like investment banks.
False
True or false: Stock charts can only be viewed in daily time frames and cannot be customized to show other time frames.
False
True or false: Trading volume is considered an important technical indicator and is shown on nearly every stock chart.
True
True or false: Volume is considered to be a very important technical indicator because it is mostly influenced by individual traders.
False
True or false: High volume trading on up days is considered a bearish indicator for a stock.
False
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.
False
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.
True
True or false: According to the text, the Random Walk Theory argues that stock prices follow patterns or trends even over the long run?
False
True or false: Believers in technical analysis think that future price movements can be predicted based on trends, patterns, and historical price action?
True
True or false: According to the random walk theory, a trader should only be able to outperform the overall market by chance or luck?
True
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?
True
True or false: A downside cross of price from above the 200-day moving average is interpreted as a bullish indication for the stock.
False
True or false: The interplay between the 50-day and 200-day moving averages is considered as a strong indicator for future price movement.
True
True or false: A golden cross is an indication that the stock is set for substantially higher prices.
True
True or false: A death cross is considered to bode well for a stock's future price movement.
False
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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