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Question 1 of 30
1. Question
Which of the following statements is/are true for the number of open interest?
I. OI numbers go up or down based on how many new traders are entering the market and how many old traders are leaving.
II. OI goes up by one when one new buyer and one new seller enter the market. This act creates a new contract.
III. OI goes down by one when a trader who is long closing out one contract with someone who is already short. Because this contract is now closed out, it disappears from the OI statistics.
IV. If a new buyer buys from an old buyer (who is selling out), total OI changes by one. If a new seller buys back, or covers from a new seller entering the market, OI also does not change.Correct
OI numbers go up or down based on how many new traders are entering the market and how many old traders are leaving. OI goes up by one when one new buyer and one new seller enter the market. This act creates one new contract. OI goes down by one when a trader who is long closing out one contract with someone who is already short. Because this contract is now closed out, it disappears from the OI statistics. If a new buyer buys from an old buyer (who is selling out), total OI remains unchanged. If a new seller buys back, or covers from a new seller entering the market, OI also does not change. The old bear had to buy to cover, with the other side of this transaction being a sell by the new bear.
Incorrect
OI numbers go up or down based on how many new traders are entering the market and how many old traders are leaving. OI goes up by one when one new buyer and one new seller enter the market. This act creates one new contract. OI goes down by one when a trader who is long closing out one contract with someone who is already short. Because this contract is now closed out, it disappears from the OI statistics. If a new buyer buys from an old buyer (who is selling out), total OI remains unchanged. If a new seller buys back, or covers from a new seller entering the market, OI also does not change. The old bear had to buy to cover, with the other side of this transaction being a sell by the new bear.
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Question 2 of 30
2. Question
Which of the following statements is/are false for open interest?
I. OI is simply the number of contracts outstanding—the total number held by buyers or (not and) sold short by sellers on any given day.
II. The OI number gives you the total number of longs and the total number of shorts because the short interest is not equal to the long interest.
III. Each long is willing to either accept delivery of a particular commodity or offset a contract(s) sometime before the expiration date.
IV. Each short is willing to either make a delivery or offset a contract(s) after the expiration date.Correct
Open interest
Open interest (OI) analysis is a powerful trading tool that futures traders use. (Stock traders do not have access to this tool.) OI is simply the number of contracts outstanding—the total number held by buyers or (not and) sold short by sellers on any given day. The OI number gives you the total number of longs and the total number of shorts because, unlike in stocks, in futures, the short interest is always equal to the long interest. Each long is willing to either accept delivery of a particular commodity or offset a contract(s) sometime before the expiration date. Each short is willing to either make a delivery or offset a contract(s) before the expiration date. With this in mind, you can plainly see that OI is a measurement of the willingness of longs and shorts to maintain their opposing positions in the marketplace. It is a quantitative measurement of this difference of opinion.Incorrect
Open interest
Open interest (OI) analysis is a powerful trading tool that futures traders use. (Stock traders do not have access to this tool.) OI is simply the number of contracts outstanding—the total number held by buyers or (not and) sold short by sellers on any given day. The OI number gives you the total number of longs and the total number of shorts because, unlike in stocks, in futures, the short interest is always equal to the long interest. Each long is willing to either accept delivery of a particular commodity or offset a contract(s) sometime before the expiration date. Each short is willing to either make a delivery or offset a contract(s) before the expiration date. With this in mind, you can plainly see that OI is a measurement of the willingness of longs and shorts to maintain their opposing positions in the marketplace. It is a quantitative measurement of this difference of opinion. -
Question 3 of 30
3. Question
If heating oil has a total OI of 10,000 contracts, and the next day it rises to 10,100. Then which of the following statement is/are true about OI?
I. This means 100 new contracts were created by 10 new buyers and 10 new sellers were added.
II. 10 new net buyers and sellers of 10 contracts each.
III. The market has 10,000 contracts’ worth of shorts and 10,100 contracts’ worth of longs at the end of the day.
IV. The short and long interests are always the same on any particular day.Correct
Incorrect
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Question 4 of 30
4. Question
What does the size of open interest predict?
I. The size of the OI reflects the intensity of participants’ willingness to sell positions.
II. When we think about the ramifications of changes in OI, we must think about it in the context of which way the market is moving at the time.
III. An increase in OI shows a willingness on the part of the participants to enlarge their commitments.
IV. If the market is moving lower and OI is increasing, we can assume that some of the hurt longs have left the party, but they are being replaced by new longs, and many existing longs are still there.Correct
OI statistics is a valuable tool that you can use to predict price trends and reversals. The size of the OI reflects the intensity of participants’ willingness to
hold positions. Whenever prices move, someone wins and someone loses—a zero-sum game. This is important to remember because when you think about the ramifications of changes in OI, you must think about it in the context of which way the market is moving at the time. An increase in OI shows a willingness on the part of the participants to enlarge their commitments. Let’s say the market is moving lower and OI is increasing. You can assume that some of the hurt longs have left the party, but they are being replaced by new longs, and many existing longs are still there. If they were liquidating en masse, OI would drop. Likewise, if the short holders were primarily taking profits and leaving the party, OI would also drop. However, because the OI is increasing and the price is dropping, you can assume that the bulls are losing money, but many must be hanging in there or they are recruiting buddies at an increasing rate. What are the ramifications of an OI decline? It is a sign that the losers are in a liquidation phase (it doesn’t matter which way the market is moving), the winners are cashing in, and new players are not entering in sufficient numbers to replace them.Incorrect
OI statistics is a valuable tool that you can use to predict price trends and reversals. The size of the OI reflects the intensity of participants’ willingness to
hold positions. Whenever prices move, someone wins and someone loses—a zero-sum game. This is important to remember because when you think about the ramifications of changes in OI, you must think about it in the context of which way the market is moving at the time. An increase in OI shows a willingness on the part of the participants to enlarge their commitments. Let’s say the market is moving lower and OI is increasing. You can assume that some of the hurt longs have left the party, but they are being replaced by new longs, and many existing longs are still there. If they were liquidating en masse, OI would drop. Likewise, if the short holders were primarily taking profits and leaving the party, OI would also drop. However, because the OI is increasing and the price is dropping, you can assume that the bulls are losing money, but many must be hanging in there or they are recruiting buddies at an increasing rate. What are the ramifications of an OI decline? It is a sign that the losers are in a liquidation phase (it doesn’t matter which way the market is moving), the winners are cashing in, and new players are not entering in sufficient numbers to replace them. -
Question 5 of 30
5. Question
What is/are the ramifications of an OI decline?
I. It is a sign that the losers are in a liquidation phase.
II. The market can move in any direction.
III. The winners are cashing in, and new players are not entering in sufficient numbers to replace them.
IV. The bulls are losing money, but many must be hanging in there or they are recruiting buddies at an increasing rate.Correct
An increase in OI shows a willingness on the part of the participants to enlarge their commitments. Let’s say the market is moving lower and OI is increasing. You can assume that some of the hurt longs have left the party, but they are being replaced by new longs, and many existing longs are still there. If they were liquidating en masse, OI would drop. Likewise, if the short holders were primarily taking profits and leaving the party, OI would also drop. However, because the OI is increasing and the price is dropping, you can assume that the bulls are losing money, but many must be hanging in there or they are recruiting buddies at an increasing rate. What are the ramifications of an OI decline? It is a sign that the losers are in a liquidation phase (it doesn’t matter which way the market is moving), the winners are cashing in, and new players are not entering in sufficient numbers to replace them.
Incorrect
An increase in OI shows a willingness on the part of the participants to enlarge their commitments. Let’s say the market is moving lower and OI is increasing. You can assume that some of the hurt longs have left the party, but they are being replaced by new longs, and many existing longs are still there. If they were liquidating en masse, OI would drop. Likewise, if the short holders were primarily taking profits and leaving the party, OI would also drop. However, because the OI is increasing and the price is dropping, you can assume that the bulls are losing money, but many must be hanging in there or they are recruiting buddies at an increasing rate. What are the ramifications of an OI decline? It is a sign that the losers are in a liquidation phase (it doesn’t matter which way the market is moving), the winners are cashing in, and new players are not entering in sufficient numbers to replace them.
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Question 6 of 30
6. Question
Which of the following statements indicates the market, if prices are in an uptrend and OI is rising?
I. This is a bearish sign.
II. In this situation, the bulls are in charge and are adding to positions and making the money, thus becoming more powerful.
III. Longs are being stopped out, but new sellers are taking their place.
IV. As the market continues to rise, the longs get stronger, and the shorts get weaker.Correct
1. If prices are in an uptrend and OI is rising, this is a bullish sign In this situation, the bulls are in charge. They are adding to positions and making
the money, thus becoming more powerful. Shorts are also being stopped out, but new sellers are taking their place. As the market continues to rise, the longs get
stronger, and the shorts get weaker.Incorrect
1. If prices are in an uptrend and OI is rising, this is a bullish sign In this situation, the bulls are in charge. They are adding to positions and making
the money, thus becoming more powerful. Shorts are also being stopped out, but new sellers are taking their place. As the market continues to rise, the longs get
stronger, and the shorts get weaker. -
Question 7 of 30
7. Question
What indication is given for the market if prices are in a downtrend and OI is rising?
I. This is a bearish sign.
II. Bulls are adding to their positions, and they are the ones making money.
III. Weaker longs are possibly being stopped out and new sellers are taking their place.
IV. As the market continues to fall, the shorts get stronger, and the longs get weaker.Correct
If prices are in a downtrend and OI is rising, this is a bearish sign
The bears are in charge of this case. They are adding to their positions, and they are the ones making money. Weaker longs are possibly being stopped out, however, new buyers are taking their place. As the market continues to fall, the shorts get stronger, and the longs get weaker. Another way to look at the first two rules is that, as long as the OI is increasing in a major trend, it will have the financing it needs to draw upon and prosper.Incorrect
If prices are in a downtrend and OI is rising, this is a bearish sign
The bears are in charge of this case. They are adding to their positions, and they are the ones making money. Weaker longs are possibly being stopped out, however, new buyers are taking their place. As the market continues to fall, the shorts get stronger, and the longs get weaker. Another way to look at the first two rules is that, as long as the OI is increasing in a major trend, it will have the financing it needs to draw upon and prosper. -
Question 8 of 30
8. Question
What indication is given, if prices are in an uptrend and OI is falling?
I. The old longs are taking profits and liquidating.
II. The old longs are replaced by some new sellers who will be strong on balance.
III. The declining OI is an indication that the weak shorts are bailing.
IV. Weak shorts will be replaced to some extent by new shorts who are stronger than the old shorts were.Correct
If prices are in an uptrend and OI is falling, this is a bearish sign
The old longs—the smart money (I call them “smart money” because they have been right to this point)—are taking profits and liquidating. They are replaced by some new buyers who will not be as strong on balance, but the declining OI is an indication that the weak shorts are also bailing. They will be replaced to some extent by new shorts who are stronger than the old shorts were.Incorrect
If prices are in an uptrend and OI is falling, this is a bearish sign
The old longs—the smart money (I call them “smart money” because they have been right to this point)—are taking profits and liquidating. They are replaced by some new buyers who will not be as strong on balance, but the declining OI is an indication that the weak shorts are also bailing. They will be replaced to some extent by new shorts who are stronger than the old shorts were. -
Question 9 of 30
9. Question
What indication is given when prices are in a downtrend and OI is falling?
I. This is a bearish sign.
II. The smart money, the shorts, is covering or liquidating.
III. The shorts will be replaced to a degree by new longs who are not as strong as they were.
IV. The declining OI indicates that the weakened longs will be replaced by fresh longs who were not as weakened by the lower prices.Correct
If prices are in a downtrend and OI is falling, this is a bullish sign—the mirror image of rule 3
The smart money, the shorts, is covering or liquidating. They will be replaced to a degree by new shorts who are not as strong as they were, but the declining
OI indicates that the weakened longs are largely throwing in the towel. They will be replaced by fresh longs who were not as weakened by the lower prices.
Another way to look at Rules 3 and 4 is that when the pool of losers is depleted, the party will be over.Incorrect
If prices are in a downtrend and OI is falling, this is a bullish sign—the mirror image of rule 3
The smart money, the shorts, is covering or liquidating. They will be replaced to a degree by new shorts who are not as strong as they were, but the declining
OI indicates that the weakened longs are largely throwing in the towel. They will be replaced by fresh longs who were not as weakened by the lower prices.
Another way to look at Rules 3 and 4 is that when the pool of losers is depleted, the party will be over. -
Question 10 of 30
10. Question
Which of the following statements is/are true for overbought?
I. It means the market is too high.
II. Its running out of market makers.
III. It’s about to fall of its own weight.
IV. The market is too low, running out of sellers.Correct
Overbought basically means the market is too high in the respect that it’s running out of buyers; in effect, it’s about to fall of its own weight. Oversold is the antonym: The market is too low, running out of sellers (at least for the current time period), and ready for a bounce.
Incorrect
Overbought basically means the market is too high in the respect that it’s running out of buyers; in effect, it’s about to fall of its own weight. Oversold is the antonym: The market is too low, running out of sellers (at least for the current time period), and ready for a bounce.
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Question 11 of 30
11. Question
In which of the following range does the RSI fluctuate?
Correct
The RSI spends most of its time fluctuating between 25 and 75. At extremes, it moves under 25 or over 75. These are the standard oversold (less than 25) and overbought (greater than 75) areas.
Incorrect
The RSI spends most of its time fluctuating between 25 and 75. At extremes, it moves under 25 or over 75. These are the standard oversold (less than 25) and overbought (greater than 75) areas.
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Question 12 of 30
12. Question
How many days is the standard or default to determine the RSI?
Correct
To determine the RSI, a trader selects the number of days; nine is the standard, or default, in most programs
Incorrect
To determine the RSI, a trader selects the number of days; nine is the standard, or default, in most programs
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Question 13 of 30
13. Question
Which of the following is/are needed to calculate the nine-day RSI?
I. The average of the change of the previous nine up days
II. The average of the previous nine up days.
III. The average of the change of the previous nine down days.
IV. The average of the previous nine down days.Correct
To calculate the nine-day RSI, you need to average the change of the previous nine up days and divide this number by the average of the change of the previous nine down days. The RSI ranges from just above 0 to just under 100, but it is extremely rare to see a number close to either of these extremes. The RSI spends most of its time fluctuating between 25 and 75. At extremes, it moves under 25 or over 75. These are the standard oversold (less than 25) and overbought (greater than 75) areas.
Incorrect
To calculate the nine-day RSI, you need to average the change of the previous nine up days and divide this number by the average of the change of the previous nine down days. The RSI ranges from just above 0 to just under 100, but it is extremely rare to see a number close to either of these extremes. The RSI spends most of its time fluctuating between 25 and 75. At extremes, it moves under 25 or over 75. These are the standard oversold (less than 25) and overbought (greater than 75) areas.
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Question 14 of 30
14. Question
Which of the following statements is/are true for using the RSI?
I. Some traders attempt to buy when the RSI wanders into oversold range and sells in the overbought range.
II. In the major moves and at extremes (the most profitable time for the trend follower), the RSI can remain in the extreme ranges for long periods of time and for quite a few points.
III. It does not work in normal markets, but when the market is in the blow-off or panic stage, it can remain in overbought or oversold territory for an extended period and become quite costly.
IV. The RSI tends to get low in the mature stages of a bull market and high in the mature stages of a bear.Correct
How do you use the RSI? When this number gets too small or too large, it is time to put your antenna up. The market could be getting close to a reversal point. Some traders attempt to buy when the RSI wanders into oversold range and sells in the overbought range. My opinion is that if you attempt to do this, you better have deep pockets. At times (range-bound markets), this can be an excellent way to pick tops and bottoms. However, in the major moves and at extremes (the most profitable time for the trend follower), the RSI can remain in the extreme ranges for long periods of time and for quite a few points. (And, hey, it’s “only” points, right?) This is the major drawback of the RSI: It works in normal markets, but when the market is in the blow-off or panic stage, it can remain in overbought or oversold territory for an extended period and become quite costly.
Still, I do believe the RSI is a useful tool, but only when used in conjunction with other indicators. You need to know what type of market you are in (trading range or trending, young or mature). If you can determine this, the RSI can help you identify the point in the life cycle of the market. The RSI tends to get high in the mature stages of a bull market and low in the mature stages of a bear, but there is no magic number that signals the bottom. In fact, I’ve found it is a good
practice to watch for the RSI to turn up after it falls under 25 to signal a bottom and vice versa for the bull. Yet, even this tactic tends to lead to numerous false and money-losing signals because the RSI is a coincident indicator. It moves with a price. A minor upswing has to turn the RSI up.Incorrect
How do you use the RSI? When this number gets too small or too large, it is time to put your antenna up. The market could be getting close to a reversal point. Some traders attempt to buy when the RSI wanders into oversold range and sells in the overbought range. My opinion is that if you attempt to do this, you better have deep pockets. At times (range-bound markets), this can be an excellent way to pick tops and bottoms. However, in the major moves and at extremes (the most profitable time for the trend follower), the RSI can remain in the extreme ranges for long periods of time and for quite a few points. (And, hey, it’s “only” points, right?) This is the major drawback of the RSI: It works in normal markets, but when the market is in the blow-off or panic stage, it can remain in overbought or oversold territory for an extended period and become quite costly.
Still, I do believe the RSI is a useful tool, but only when used in conjunction with other indicators. You need to know what type of market you are in (trading range or trending, young or mature). If you can determine this, the RSI can help you identify the point in the life cycle of the market. The RSI tends to get high in the mature stages of a bull market and low in the mature stages of a bear, but there is no magic number that signals the bottom. In fact, I’ve found it is a good
practice to watch for the RSI to turn up after it falls under 25 to signal a bottom and vice versa for the bull. Yet, even this tactic tends to lead to numerous false and money-losing signals because the RSI is a coincident indicator. It moves with a price. A minor upswing has to turn the RSI up. -
Question 15 of 30
15. Question
Which of the following statements is/are true for Stochastics?
I. In bull markets, the close is more likely to occur near the day’s lows.
II. In bear markets, the close is more likely to occur near the day’s high.
III. Stochastics is a measurement of how the most current close relates to where prices have been during the period under study.
IV. The trader can choose the number of days for the formula. Shorter terms (7 days is popular) are sensitive and act quickly but lead to many more whipsaws. Longer terms (14 days is widely used) identify longer-term moves and eliminate some of the whipsaws of the shorter variety.Correct
Stochastics
Stochastics are another popular oscillator. While George Lane is generally credited as the developer of stochastics, some in the industry contend that Ralph Dystant was actually the creator of this widely followed indicator. The stochastics formula is a bit more complex than the RSI and is readily available for those who want to see the mathematics. I won’t discuss it here (you can let the computer figure it out for you as most other traders do), but I will talk about the basics of how to interpret stochastics data.
The stochastics formula measures how the close impacts the trend. Here is the theory: In bull markets, the close is more likely to occur near the day’s high, and
in bear markets, the close is more likely to occur near the day’s lows. The way the market closes determines how the stochastic trends. In essence, stochastics
is a measurement of how the most current close relates to where prices have been during the period under study.
Stochastics consists of two lines: the %K, which is more sensitive, and the %D, which is slower moving. As with the RSI, the trader can choose the number of days for the formula. Shorter terms (5 days is popular) are sensitive and act quickly but lead to many more whipsaws. Longer terms (14 days is widely used) identify longer-term moves and eliminate some of the whipsaws of the shorter variety.Incorrect
Stochastics
Stochastics are another popular oscillator. While George Lane is generally credited as the developer of stochastics, some in the industry contend that Ralph Dystant was actually the creator of this widely followed indicator. The stochastics formula is a bit more complex than the RSI and is readily available for those who want to see the mathematics. I won’t discuss it here (you can let the computer figure it out for you as most other traders do), but I will talk about the basics of how to interpret stochastics data.
The stochastics formula measures how the close impacts the trend. Here is the theory: In bull markets, the close is more likely to occur near the day’s high, and
in bear markets, the close is more likely to occur near the day’s lows. The way the market closes determines how the stochastic trends. In essence, stochastics
is a measurement of how the most current close relates to where prices have been during the period under study.
Stochastics consists of two lines: the %K, which is more sensitive, and the %D, which is slower moving. As with the RSI, the trader can choose the number of days for the formula. Shorter terms (5 days is popular) are sensitive and act quickly but lead to many more whipsaws. Longer terms (14 days is widely used) identify longer-term moves and eliminate some of the whipsaws of the shorter variety. -
Question 16 of 30
16. Question
After what value stochastic is considered to be overbought?
Correct
Overbought is generally considered to be a value in excess of 80, and oversold is less than 20.
Incorrect
Overbought is generally considered to be a value in excess of 80, and oversold is less than 20.
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Question 17 of 30
17. Question
Before what value stochastic is considered as oversold?
Correct
Overbought is generally considered to be a value in excess of 80, and oversold is less than 20.
Incorrect
Overbought is generally considered to be a value in excess of 80, and oversold is less than 20.
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Question 18 of 30
18. Question
How is divergence used with stochastic to give better signals?
I. Bullish divergence is when prices hit new lows, but the stochastic makes a higher low than its previous low.
II. Bearish divergence is when prices hit a new high, but the stochastic makes a lower high.
III. Traders look for the stochastic lines to cross to exit an existing position or enter a new one.
IV. The best signals come when divergence is present, and then the %D line crosses the %K line that confirms the divergence.Correct
They can be used as in the RSI, but they tend to give better signals when they diverge from price (as with the RSI). Divergence can precede the market. Bullish divergence is when prices hit new lows, but the stochastic makes a higher low than its previous low. Bearish divergence is when prices hit a new high, but the stochastic makes a lower high. Both of these occurrences can give strong indications of market tops and bottoms. Traders also look for the stochastic lines to cross to exit an existing position or enter a new one. (See Figure 8.25.) The best signals come when divergence is present, and then the %K line crosses the %D line that confirms the divergence.
Incorrect
They can be used as in the RSI, but they tend to give better signals when they diverge from price (as with the RSI). Divergence can precede the market. Bullish divergence is when prices hit new lows, but the stochastic makes a higher low than its previous low. Bearish divergence is when prices hit a new high, but the stochastic makes a lower high. Both of these occurrences can give strong indications of market tops and bottoms. Traders also look for the stochastic lines to cross to exit an existing position or enter a new one. (See Figure 8.25.) The best signals come when divergence is present, and then the %K line crosses the %D line that confirms the divergence.
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Question 19 of 30
19. Question
Which of the following statements is/are true for Elliot wave analysis?
I. There is a “natural order” to the markets and that they travel in unpredictable cycles.
II. The market rallies in six waves when in an uptrend and falls in three-wave corrective moves.
III. When in a downtrend, the main trend is five waves down, with three-wave corrective up moves.
IV. The five-wave pattern is made up of three odd-numbered waves—1, 3, and 5—which are connected by two corrective waves—2 and 4. Each major odd-numbered wave can be subdivided into five waves, and corrective waves can be broken into three parts.Correct
Elliot wave analysis
Ralph Elliot was an accountant who developed his theory on market cycles in 1939. Basically, Elliot believed that there is a “natural order” to the markets and
that they travel in predictable cycles. He believed that the market rallies in five waves when in an uptrend and falls in three-wave corrective moves. When in a
downtrend, the main trend is five waves down, with three-wave corrective up moves. This five-wave pattern is made up of three odd-numbered waves—1, 3, and 5—which are connected by two corrective waves—2 and 4. Each major odd-numbered wave can be subdivided into five waves, and corrective waves can be broken into three parts (the ABC correction). (See Figure 8.26.)Incorrect
Elliot wave analysis
Ralph Elliot was an accountant who developed his theory on market cycles in 1939. Basically, Elliot believed that there is a “natural order” to the markets and
that they travel in predictable cycles. He believed that the market rallies in five waves when in an uptrend and falls in three-wave corrective moves. When in a
downtrend, the main trend is five waves down, with three-wave corrective up moves. This five-wave pattern is made up of three odd-numbered waves—1, 3, and 5—which are connected by two corrective waves—2 and 4. Each major odd-numbered wave can be subdivided into five waves, and corrective waves can be broken into three parts (the ABC correction). (See Figure 8.26.) -
Question 20 of 30
20. Question
Which of the following statements is/are true for Point and figure charts?
I. The point and figure (P&F) are based on time.
II. Time is irrelevant; the only price matters.
III. Xs and Os indicate price signals. A P&F chartist uses Xs to illustrate rising prices and Os for falling prices.
IV. As long as the price is rising, Xs are added. Os come into play when they are dropping.Correct
Point and figure charts
The point and figure (P&F) is another type of price charting; the unique thing about P&F is that it ignores time. Time is irrelevant; only price matters. Xs and
Os indicate price signals. A P&F chartist uses Xs to illustrate rising prices and Os for falling prices. As long as the price is rising, Xs are added. Os come into
play when they are dropping. The decision to start a new column of Xs or Os is based on the market making a price change of a certain amount designated by the technician. This would be a box. The technician also must designate (in addition to the size of each box) what determines a reversal. For example, a popular reversal size is three boxes. So, if you use a scale of 10 points for cattle, a reversal size would be 30 points. The values for the box and reversal are arbitrary, depending on how sensitive the trader wants the P&F chart to be.
The larger the box size and reversal values, the less sensitive the chart is and vice versa. A 1¢ box for wheat is obviously more sensitive than a 10¢ box. If the
chart is too sensitive and the boxes too small, you increase the chances of being whipsawed by insignificant fluctuations. If the boxes are too large, you miss out
on significant portions of some moves and take too much risk. Figure 8.27
illustrates a typical P&F chart.Incorrect
Point and figure charts
The point and figure (P&F) is another type of price charting; the unique thing about P&F is that it ignores time. Time is irrelevant; only price matters. Xs and
Os indicate price signals. A P&F chartist uses Xs to illustrate rising prices and Os for falling prices. As long as the price is rising, Xs are added. Os come into
play when they are dropping. The decision to start a new column of Xs or Os is based on the market making a price change of a certain amount designated by the technician. This would be a box. The technician also must designate (in addition to the size of each box) what determines a reversal. For example, a popular reversal size is three boxes. So, if you use a scale of 10 points for cattle, a reversal size would be 30 points. The values for the box and reversal are arbitrary, depending on how sensitive the trader wants the P&F chart to be.
The larger the box size and reversal values, the less sensitive the chart is and vice versa. A 1¢ box for wheat is obviously more sensitive than a 10¢ box. If the
chart is too sensitive and the boxes too small, you increase the chances of being whipsawed by insignificant fluctuations. If the boxes are too large, you miss out
on significant portions of some moves and take too much risk. Figure 8.27
illustrates a typical P&F chart. -
Question 21 of 30
21. Question
Which of the following statements is/are true for Japanese candlestick charts?
I. Candlestick charts use rows of candles with wicks on either end.
II. The body of each candle is the distance between the opening and closing prices.
III. If the closing price is lower than the open, the body is left empty or white (or it could be one color, like blue).
IV. If the closing price is higher than the open, the body is filled in with black (or another color, like red). The upper wick represents the high, and the lower wick represents the low.Correct
Japanese candlestick charts
Candlestick charts are the third major charting method available on most charting programs. The Japanese used candlestick charts before charting ever became popular in the West (rice futures were active in Japan as early as the 1700s), and they are the earliest form of technical analysis. Whereas bar charts use bars and point and figure charts use Xs and Os, candlestick charts use rows of candles with wicks on either end. The body of each candle is the distance between the opening and closing prices. If the closing price is higher than the open, the body is left empty or white (or it could be one color, like blue). If the closing price is lower than the open, the body is filled in with black (or another color, like red). The upper wick represents the high, and the lower wick represents the low. The wicks are not as important as the body. In other words, candlestick chartists are not as interested in the day’s high or low as they are in the relationship between the open and the close. I am not an expert on candlestick charts; entire books have been written on the various patterns for those who want to delve deeper.Incorrect
Japanese candlestick charts
Candlestick charts are the third major charting method available on most charting programs. The Japanese used candlestick charts before charting ever became popular in the West (rice futures were active in Japan as early as the 1700s), and they are the earliest form of technical analysis. Whereas bar charts use bars and point and figure charts use Xs and Os, candlestick charts use rows of candles with wicks on either end. The body of each candle is the distance between the opening and closing prices. If the closing price is higher than the open, the body is left empty or white (or it could be one color, like blue). If the closing price is lower than the open, the body is filled in with black (or another color, like red). The upper wick represents the high, and the lower wick represents the low. The wicks are not as important as the body. In other words, candlestick chartists are not as interested in the day’s high or low as they are in the relationship between the open and the close. I am not an expert on candlestick charts; entire books have been written on the various patterns for those who want to delve deeper. -
Question 22 of 30
22. Question
What does the bullish and bearish engulfing line consist of?
I. The bullish engulfing line consists of a white (or colored in, at times empty) body that totally engulfs, or covers, the previous day’s body.
II. The high of the body is higher than the high of the previous body, and the low is below the previous high.
III. The white body is formed by a low opening met by strong buying, which pushes the price to close above the previous candle. This is a bullish indicator that is seen often at major bottoms.
IV. Bearish engulfing lines are seen at tops—a long black (or colored in, at times empty) candle that totally engulfs, or covers, the previous day’s candle. This is often seen at a blow-off top.Correct
The bullish engulfing line consists of a white (or colored in, at times empty) body that totally engulfs, or covers, the previous day’s body. In other words, the
high of the body is higher than the high of the previous body, and the low is below the previous low. The white body is formed by a low opening met by strong buying, which pushes the price to close above the previous candle. This is a bullish indicator that is seen often at major bottoms. Bearish engulfing lines are the mirror image seen at tops—a long black (or colored in, at times empty) candle that totally engulfs, or covers, the previous day’s candle. This is often seen at a blow-off top. It is a powerful signal for candlestick people.Incorrect
The bullish engulfing line consists of a white (or colored in, at times empty) body that totally engulfs, or covers, the previous day’s body. In other words, the
high of the body is higher than the high of the previous body, and the low is below the previous low. The white body is formed by a low opening met by strong buying, which pushes the price to close above the previous candle. This is a bullish indicator that is seen often at major bottoms. Bearish engulfing lines are the mirror image seen at tops—a long black (or colored in, at times empty) candle that totally engulfs, or covers, the previous day’s candle. This is often seen at a blow-off top. It is a powerful signal for candlestick people. -
Question 23 of 30
23. Question
How Spreads can be used as a valuable forecasting tool?
I. Spreads can be used to predict the market path of most resistance.
II. The commodity futures markets are in “carrying charge” or “normal” configurations. This is when the distant months buy at a higher price (or premium) to the closing months.
III. An inverted market is the product of a perceived or real near-term shortage of the commodity in question.
IV. Inversion could be caused by a mining strike, a government program, big near-term export demand, or a classic short squeeze—actually, any number of things. The important point here is that the spreads can give you important clues about the strength or weaknesses within a market.Correct
Spreads—a valuable forecasting tool
I’ve found that by monitoring the spread of action in many of the actively traded physical commodities, a trader can get valuable clues about how bullish or bearish a market is. Spreads also can be used to predict the market path of least resistance. Typically, commodity futures markets are in “carrying charge” or “normal” configurations. (In London, they would say the market is in contango.) This is when the distant months sell at a higher price (or premium) to the closing months.
This configuration is called an inverted market. (In London, it’s called backwardation.) What causes a market to invert? In most cases, an inverted market is the product of a perceived or real near-term shortage of the commodity in question. This can be caused by weather. For example, cold weather tends to push the nearby natural gas over the back or could even push the nearby cattle contracts above the backs because cattle do not gain weight efficiently in cold weather and could conceivably be “pushed back”—not ready for market in a timely manner. Inversion could be caused by a mining strike, a government program, big near-term export demand, or a classic short squeeze—actually, any number of things. The important point here is that the spreads can give you important clues about the strength or weaknesses within a market.Incorrect
Spreads—a valuable forecasting tool
I’ve found that by monitoring the spread of action in many of the actively traded physical commodities, a trader can get valuable clues about how bullish or bearish a market is. Spreads also can be used to predict the market path of least resistance. Typically, commodity futures markets are in “carrying charge” or “normal” configurations. (In London, they would say the market is in contango.) This is when the distant months sell at a higher price (or premium) to the closing months.
This configuration is called an inverted market. (In London, it’s called backwardation.) What causes a market to invert? In most cases, an inverted market is the product of a perceived or real near-term shortage of the commodity in question. This can be caused by weather. For example, cold weather tends to push the nearby natural gas over the back or could even push the nearby cattle contracts above the backs because cattle do not gain weight efficiently in cold weather and could conceivably be “pushed back”—not ready for market in a timely manner. Inversion could be caused by a mining strike, a government program, big near-term export demand, or a classic short squeeze—actually, any number of things. The important point here is that the spreads can give you important clues about the strength or weaknesses within a market. -
Question 24 of 30
24. Question
What should be done when a spread cross zero?
I. When spreads “cross zero,” more times than not, this indicates a significant indicator of a change in the price-and-demand balance of the commodity being studied.
II. If the spread in question crosses zero to the upside, play the bull spreads (long nearby, short the deferred) or play the market from the short side.
III. If the market crosses zero to the downside, play the bear spreads (short the nearby, long the deferred), or play the market from the short side.
IV. Spreads can give important clues about the strength or weaknesses within a market.Correct
Here’s another powerful trading tip: Watch for spreads to cross “even money.” I’ve noticed that when spreads “cross zero,” more times than not, this indicates a
significant indicator of a change in the supply-and-demand balance of the commodity being studied. My advice is to go with the flow. If the spread in question crosses zero to the upside, play the bull spreads (long nearby, short the deferred) or play the market from the long side. If the market crosses zero to the
downside, play the bear spreads (short the nearby, long the deferred), or play the market from the short side. For example, consider the spread between May
2003 sugar and March 2004 sugar, shown in Figure 8.29. Note that this action took place during mid-2002 into early 2003 (the 2004 contract is listed two years
prior to its expiration).Incorrect
Here’s another powerful trading tip: Watch for spreads to cross “even money.” I’ve noticed that when spreads “cross zero,” more times than not, this indicates a
significant indicator of a change in the supply-and-demand balance of the commodity being studied. My advice is to go with the flow. If the spread in question crosses zero to the upside, play the bull spreads (long nearby, short the deferred) or play the market from the long side. If the market crosses zero to the
downside, play the bear spreads (short the nearby, long the deferred), or play the market from the short side. For example, consider the spread between May
2003 sugar and March 2004 sugar, shown in Figure 8.29. Note that this action took place during mid-2002 into early 2003 (the 2004 contract is listed two years
prior to its expiration). -
Question 25 of 30
25. Question
Which of the following statements is/are true for Head and shoulders?
I. The H&S is a reversal pattern that signals a change in the prevailing major trend.
II. When we see an H&S pattern, it’s time to either exit and take your profits, cut your losses, or establish a new position in the new direction.
III. The H&S tells that a market is making a top or bottom, and it also tells us how far the ensuing move will travel.
IV. The H&S picks the top or the bottom.Correct
Head and shoulders
The H&S is a reversal pattern that signals a change in the prevailing major trend. We’ll take up some ink reviewing this concept here because, in my experience, it remains one of the most reliable. (I also will add my own twists to identifying and analyzing this pattern.) When you see an H&S pattern, it’s time to either exit and take your profits, cut your losses, or establish a new position in the new direction. An interesting characteristic of the H&S is that it not only tells you a market is making a top or bottom, but it also tells you how far the ensuing move will travel. The H&S does not actually pick the top or the bottom, but it gives you the sign after the top or bottom is in place.Incorrect
Head and shoulders
The H&S is a reversal pattern that signals a change in the prevailing major trend. We’ll take up some ink reviewing this concept here because, in my experience, it remains one of the most reliable. (I also will add my own twists to identifying and analyzing this pattern.) When you see an H&S pattern, it’s time to either exit and take your profits, cut your losses, or establish a new position in the new direction. An interesting characteristic of the H&S is that it not only tells you a market is making a top or bottom, but it also tells you how far the ensuing move will travel. The H&S does not actually pick the top or the bottom, but it gives you the sign after the top or bottom is in place. -
Question 26 of 30
26. Question
Which of the following is/are the characteristics of Head and shoulder patterns?
I. The head (H) is a price low.
II. Peak lower than the head to the left is the left shoulder (LS), and another peak lower than the head to the right is the right shoulder (RS).
III. The line connecting the lows of the declines from the shoulders and the head is called the neckline (NL).
IV. The neckline is often vertical (similar to a support line). However, it can also be upward sloping, similar to an up trendline, or downward sloping, similar to a down trendline.Correct
The head (H) is a price peak; another peak lower than the head to the left is the left shoulder (LS), and another peak lower than the head to the right is the
right shoulder (RS). The line connecting the lows of the declines from the shoulders and the head is called the neckline (NL). In a classic H&S, the neckline is often horizontal (similar to a support line). However, it can also be upward sloping (as in Figures 8.31 and 8.32), similar to an up trendline, or downward sloping, similar to a down trendline. This is where your analytical skills come into play. Many of the best H&S patterns are mutants, which resemble the original but in a skewed way.Incorrect
The head (H) is a price peak; another peak lower than the head to the left is the left shoulder (LS), and another peak lower than the head to the right is the
right shoulder (RS). The line connecting the lows of the declines from the shoulders and the head is called the neckline (NL). In a classic H&S, the neckline is often horizontal (similar to a support line). However, it can also be upward sloping (as in Figures 8.31 and 8.32), similar to an up trendline, or downward sloping, similar to a down trendline. This is where your analytical skills come into play. Many of the best H&S patterns are mutants, which resemble the original but in a skewed way. -
Question 27 of 30
27. Question
How is Head and shoulder patterns analyzed?
I. H&S starts developing when the left shoulder and the head are in place and the market starts to rally from the neckline.
II. If it fails at a lower high than the major high, the left shoulder is in formation. A classic H&S often has a right shoulder of the approximate same size and duration as the left.
III. It can be lower or higher, longer or shorter, but its peak will ultimately end up lower than the head. The pattern is not complete until the right shoulder is completed and the decline from the right shoulder’s peak breaks under the neckline.
IV. When peak breaks under the neckline, a bottom is presumed. It is time to exit longs and go short. After the initial breakout below the neckline, the market often rallies back up to approximately the neckline, giving the trader an excellent low-risk shorting.Correct
You can spot an H&S developing when the left shoulder and the head are in place and the market starts to rally from the neckline. If it fails at a lower high than the major high, the right shoulder is in formation. A classic H&S often has a right shoulder of the approximate same size and duration as the left. However, it
can be lower or higher, longer or shorter, but its peak will ultimately end up lower than the head. The pattern is not complete until the right shoulder is completed and the decline from the right shoulder’s peak breaks under the neckline. When that happens, a top is presumed. It is time to exit longs and go short. After the initial breakout below the neckline, the market often rallies back up to approximately the neckline, giving the trader an excellent low-risk shorting
opportunity. H&S patterns can also sometimes provide false signals. Suspect a false signal if the market is able to rally back above the peak of RS (this is the
place to initially set your risk point). This will not occur with the best H&S signals; most will not rally beyond NL. If the market trades above the peak of
the right shoulder, you can safely assume that all bets are off and this one isn’t “right.”Incorrect
You can spot an H&S developing when the left shoulder and the head are in place and the market starts to rally from the neckline. If it fails at a lower high than the major high, the right shoulder is in formation. A classic H&S often has a right shoulder of the approximate same size and duration as the left. However, it
can be lower or higher, longer or shorter, but its peak will ultimately end up lower than the head. The pattern is not complete until the right shoulder is completed and the decline from the right shoulder’s peak breaks under the neckline. When that happens, a top is presumed. It is time to exit longs and go short. After the initial breakout below the neckline, the market often rallies back up to approximately the neckline, giving the trader an excellent low-risk shorting
opportunity. H&S patterns can also sometimes provide false signals. Suspect a false signal if the market is able to rally back above the peak of RS (this is the
place to initially set your risk point). This will not occur with the best H&S signals; most will not rally beyond NL. If the market trades above the peak of
the right shoulder, you can safely assume that all bets are off and this one isn’t “right.” -
Question 28 of 30
28. Question
What are the characteristics of an inverted head and shoulder pattern?
I. An H&S occurs at major bottoms as well and looks like the mirror image of one that forms at the top.
II. The head is at the lowest point, with one higher shoulder, one on each side.
III. It is not traded the same way.
IV. The extended and complex bottoming pattern signaled the start of a major move that greatly exceeded the minimum objective.Correct
An H&S occurs at major bottoms as well and looks like the mirror image of one that forms at the top. Some traders call these inverted head and shoulders or reverse head and shoulders. In this variety, the head is at the lowest point, with two higher shoulders, one on each side. Other than the fact that these are the mirror image of the tops, you trade them the same way. The gold H&S bottom shown in Figure 8.34 is of the simple, classic variety; the soybean is more complex. Note how the extended and complex bottoming pattern illustrated in Figure 8.35 signaled the start of a major move that greatly exceeded the minimum objective.
Incorrect
An H&S occurs at major bottoms as well and looks like the mirror image of one that forms at the top. Some traders call these inverted head and shoulders or reverse head and shoulders. In this variety, the head is at the lowest point, with two higher shoulders, one on each side. Other than the fact that these are the mirror image of the tops, you trade them the same way. The gold H&S bottom shown in Figure 8.34 is of the simple, classic variety; the soybean is more complex. Note how the extended and complex bottoming pattern illustrated in Figure 8.35 signaled the start of a major move that greatly exceeded the minimum objective.
-
Question 29 of 30
29. Question
Which of the following is/are the rules for trading H&S?
I. Never anticipate. When I first discovered H&S patterns, I had a great trade, but then it seemed I started finding them everywhere. I would start to sell after a right shoulder and a head developed, only to lose money. I would see complete H&S patterns develop and take action before penetration of the neckline, only to have my head handed to me.
II. The bigger the H&S pattern and the shorter it takes to develop, the bigger the subsequent resulting move.
III. The count is a minimum measurement. Odds actually favor the move carrying much further.
IV. After the market breaks the neckline, watch for the return move back to the neckline. This occurs in at least half of all valid cases and offers a place to enter with a close stop.Correct
10 rules for trading H&S
Here are ten rules for successfully trading using H&S patterns:
1. Never anticipate. When I first discovered H&S patterns, I had a great trade, but then it seemed I started finding them everywhere. I would start to sell after a right shoulder and a head developed, only to lose money. I would see complete H&S patterns develop and take action before penetration of the neckline, only to have my head handed to me. As Yogi Berra said, “It ain’t over till it’s over.” Wait until the pattern is completed before you trade it.
2. The bigger the H&S pattern and the longer it takes to develop, the bigger the subsequent resulting move.
3. The count is a minimum measurement. Odds actually favor the move carrying much further. However, a warning here: As with all other chart patterns, you are not dealing with a certainty here. If your count says the market will fall 400 points, and it falls 380 and starts to reverse, it would be a shame to let all your profits evaporate over a lousy 20 points.
4. After the market breaks the neckline, watch for the return move back to the neckline. This occurs in at least half of all valid cases and offers a place to enter with a close stop.
5. Watch the slope of the neckline. Downward-sloping necklines for H&S tops increase the odds for a more powerful bear move to follow. Upward sloping necklines for inverted H&S bottoms increase the odds for a more powerful bull move to follow.
6. Be volume aware. The most reliable neckline breakouts are accompanied with higher-than-average volumes. I have sometimes seen the highest daily volume days of the year associated with H&S patterns.
7. Watch for the head to also form an “island” (see Figure 8.36). This combines two very powerful patterns and geometrically increases the validity of the signal.Incorrect
10 rules for trading H&S
Here are ten rules for successfully trading using H&S patterns:
1. Never anticipate. When I first discovered H&S patterns, I had a great trade, but then it seemed I started finding them everywhere. I would start to sell after a right shoulder and a head developed, only to lose money. I would see complete H&S patterns develop and take action before penetration of the neckline, only to have my head handed to me. As Yogi Berra said, “It ain’t over till it’s over.” Wait until the pattern is completed before you trade it.
2. The bigger the H&S pattern and the longer it takes to develop, the bigger the subsequent resulting move.
3. The count is a minimum measurement. Odds actually favor the move carrying much further. However, a warning here: As with all other chart patterns, you are not dealing with a certainty here. If your count says the market will fall 400 points, and it falls 380 and starts to reverse, it would be a shame to let all your profits evaporate over a lousy 20 points.
4. After the market breaks the neckline, watch for the return move back to the neckline. This occurs in at least half of all valid cases and offers a place to enter with a close stop.
5. Watch the slope of the neckline. Downward-sloping necklines for H&S tops increase the odds for a more powerful bear move to follow. Upward sloping necklines for inverted H&S bottoms increase the odds for a more powerful bull move to follow.
6. Be volume aware. The most reliable neckline breakouts are accompanied with higher-than-average volumes. I have sometimes seen the highest daily volume days of the year associated with H&S patterns.
7. Watch for the head to also form an “island” (see Figure 8.36). This combines two very powerful patterns and geometrically increases the validity of the signal. -
Question 30 of 30
30. Question
How can you tell if a head and shoulder pattern is true?
I. One good indication is that your margin account will start to show a drastic profit.
II. Don’t freeze when it’s not acting properly; when in doubt, get out.
III. Be suspicious if the pattern occurs at a high volume.
IV. The market can retrace to the neckline (this is normal and a good place to position), but if the pattern is good, the retracement really shouldn’t go much further.Correct
When the pattern is complete, it should act correctly. These patterns are fairly reliable and do not often deviate from their true purpose, unless, of course, they are false. How can you tell if a pattern is false? One good indication is that your margin account will start to show a loss. Don’t freeze when it’s not acting properly; when in doubt, get out. Be suspicious if the pattern occurs at a low volume. Remember that the market can retrace to the neckline (this is normal and a good place to position), but if the pattern is good, the retracement really shouldn’t go much further.
Incorrect
When the pattern is complete, it should act correctly. These patterns are fairly reliable and do not often deviate from their true purpose, unless, of course, they are false. How can you tell if a pattern is false? One good indication is that your margin account will start to show a loss. Don’t freeze when it’s not acting properly; when in doubt, get out. Be suspicious if the pattern occurs at a low volume. Remember that the market can retrace to the neckline (this is normal and a good place to position), but if the pattern is good, the retracement really shouldn’t go much further.