CMT LEVEL II Sample Question

CMT OFFICIAL SAMPLE PAPER
Question 1
SEL2_0001
Which of the following is not a component of the Code of Ethics? CFA Institute members shall
a. use particular care in determining applicable fiduciary duty.
b. use reasonable care and exercise independent professional judgment.
c. maintain and improve the competence of other investment professionals.
d. practice and encourage others to practice in a professional and ethical manner.
You Answered Incorrectly.
Incorrect. Reference: CFA Institute Code of Ethics and Standards of Professional Conduct
Question 2
SEL2_0002
Allen Johnson, CMT, is working in the Singapore office of German Investment Corporation.
From an informal conversation, Johnson learns that the company's most recent annual report
contains misappropriated information. No one at the Singapore office expresses concern,
however, because there has been no breach of Singapore's law. Johnson should
a. do nothing because the branch is outside of German jurisdiction.
b. seek advice from the company counsel to determine appropriate action.
c. do nothing because the branch is outside of Singapore's jurisdiction.
d. disassociate himself from the case with a written report to his supervisor.
Question 3
SEL2_0003
Which one of the following most accurately describes the CFA Institute Standard about using
material nonpublic information?
a. An analyst may use material nonpublic information in a report if it is disclosed
as such.
b. An analyst may use material nonpublic information as long as it is for his
personal use.
c. An analyst may use material nonpublic information if it is legal in his country
to do so.
d. Members who possess material nonpublic information that could affect the
value of an investment must not act or cause others to act on the information.
Question 4
SEL2_0004
Adam Green, a portfolio manager, is making a presentation to a prospective client. Green says
that as a new portfolio manager, he made an average annual rate of return of 40% in the last two
years at his previous firm and that based on this, he can guarantee a 40% return to the client.
Which of the following statements is in accordance with Standard III(D), Performance
Presentation?
a. Implying that he can guarantee a return.
b. Stating his past performance as long as it is fact.
c. Imputing his past performance to future performance.
d. Implying that he can guarantee a return based on just 2 years of performance.
Question 5
SEL2_0005
Kai Wong, CFA, is concerned about the activities of several of his coworkers and feels legal
violations are routinely overlooked. According to the Code and Standards, a recommended first
step would least likely be to
a. take legal counsel.
b. contact industry regulators.
c. provide her supervisor with a copy of the Code and Standards.
d. review the company's policies and procedures for reporting ethical violations.
You Answered Correctly!
Correct. Reference: CFA Institute Code of Ethics and Standards of Professional Conduct
Question 6
SEL2_0006
An analyst has several groups of clients who are categorized according to their specific needs.
Compared to research reports distributed to all the clients, reports for a specific group
a. will definitely include more basic facts.
b. may generally exclude more basic facts.
c. cannot be selectively distributed.
d. will not be allowed because it violates the Standard III(B), Fair Dealing.
Question 7
SEL2_0007
Steve Smith, CFA, is an equity research analyst for a long-term investment fund. His annual
bonus is linked to annual trading profits. Under a new policy, the assessment period is switched
to a monthly assessment period. According to the Code and Standards, best practices dictate
a. keeping the policy change within the firm.
b. keeping the policy change within the firm and existing clients.
c. updating disclosures when the policy change is implemented.
d. requiring Smith to obtain permission from each client prior to implementation
of the new policy.
Question 8
SEL2_0008
Which of the following actions would be a violation of Standard II (B), Market Manipulation?
a. Exaggerating the performance of a trading system.
b. Employing a trading algorithm that places and cancels orders quickly to draw
interest to a market.
c. Becoming an exchange member so as to pay lower trading fees.
d. Using the maximum leverage available for a particular market or financial
instrument.
Question 9
SEL2_0009
Pat Jones is a chemical industry research analyst for a large brokerage company. That industry is
currently seeing an increase in mergers and acquisitions. While flying through Chicago, Jones
sees several senior officers who she knows are from the largest and fourth largest chemical
companies walk into a conference room. She concludes that negotiations for an acquisition might
be taking place. Jones
a. may not act or cause others to act on this information.
b. may not act but advise others to act on this information.
c. may use this information to support an investment recommendation.
d. should inform her compliance officer that she has material nonpublic
information on firms she covers.
Question 10
SEL2_0010
A representative of a money manager suspects that there is an error in the performance report she
uses in sales presentations. Because these reports have been prepared for her, she assumes she
has no responsibility when showing them to prospects. Standard III (E) Performance
Presentation states
a. she is correct.
b. she must make a reasonable effort to ensure accuracy.
c. she must request the source files and verify the results independently.
d. that if the error is nonmaterial it may be ignored.
Question 11
SEL2_0011
Which is not one of the Dow Theory principles?
a. Trends are classified as primary, secondary and counter cyclical.
b. The averages discount everything.
c. Volume goes with the trend.
d. The trends persist.
Incorrect. Reference: CMT Level II Curriculum (2018), Chapter 1
Question 12
SEL2_0012
Beta measures
a. the amount of excess returns in a portfolio over the risk-free rate of return.
b. the amount of volatility in a portfolio attributable to macroeconomic news.
c. the amount of volatility in a portfolio compared to the market volatility.
d. the amount of risk in a portfolio compared to the expected returns of any
given equal-weighted index.
Correct. Reference: CMT Level II Curriculum (2018), Chapter 22
Question 13
SEL2_0013
When using the RSI as an overbought/oversold indicator, a sell signal is generated when
a. RSI declines below its lower reference line and then rallies above it.
b. RSI rises above its upper reference line and then crosses below it.
c. RSI crosses beneath the midpoint (50 level).
d. RSI crosses above the midpoint (50 level).
Question 14
SEL2_0014
When analyzing price action and volume, low activity (or a drop in volume) is normally
associated with
a. a weak price trend.
b. a strengthening price trend.
c. greater fluctuations in price.
d. lack of conviction on the part of traders.
Question 15
SEL2_0015
A correlation coefficient of 0.75 between two variables suggests a/an _____ relationship.
a. extremely strong
b. strong
c. low
d. non-existent
Question 16
SEL2_0016
Near the end of a recession
a. bonds turn up before stocks and commodities.
b. stocks turn up before bonds and commodities.
c. commodities turn up before bonds and stocks.
d. all the asset classes turn up simultaneously.
Question 17
SEL2_0017
Which of the following asset classes is a leading indicator for the stock market?
a. bonds
b. bullion
c. precious metal
d. energy
Question 18
SEL2_0018
Identify which of the following is NOT an assumption under the correlation coefficient.
a. linearity
b. normality
c. outliers
d. elasticity
Question 19
SEL2_0019
_______moving average uses reverse linear weights.
a. The pivot-point
b. The simple
c. The weighted
d. The exponential
Question 20
SEL2_0020
Interpret the relationship between the S&P 500 and the NASDAQ 100 indexes based on the chart
shown below, if the Pearson's coefficient of correlation is 0.45.
a. Linear relationship, as the best fit line is curvilinear.

b. Linear relationship, as points fall generally along a straight line.
c. Non-linear relationship, as points fall generally along a straight line.
d. Non-linear relationship, as the best fit line is curvilinear.
Question 21
SEL2_0021
The strength and direction of the relationship between two markets is measured by
a. spread.
b. regression.
c. moving average.
d. correlation coefficient.
Question 22
SEL2_0022
The only effective method of diversifying a portfolio is by including asset classes with ________
correlation to stocks such as cash, foreign exchange or commodities.
a. positive
b. meaningful
c. low/negative
d. moderately positive
Question 23
SEL2_0023
Which of the following indicator combines price, volume and open interest?
a. TRIX
b. Money Flow Index
c. True Strength Index
d. Herrick Payoff Index
Question 24
SEL2_0025
Which of the following points represents a valid island reversal in the chart below?
a. A
b. B
c. C
d. None of the above
Incorrect. Reference: CMT Level II Curriculum (2018), Chapters 1, 9
Question 25
SEL2_0024
What trading decision must a trader make based purely on the trend lines in the chart below?
a. Hold long positions.
b. Close out long positions.
c. Close out short positions.
d. Trading decisions cannot be made by using trend lines.
Question 26
SEL2_0026
Which of the following patterns describe the price action highlighted within the green rectangles
marked A & B?
a. piercing line and hammer
b. piercing line and evening star
c. bullish engulfing and shooting star
d. bullish engulfing and hanging man
Correct. Reference: CMT Level II Curriculum (2018), Chapters 1, 9, 11
Question 27
SEL2_0027
_______uses the distribution of the daily trading range to create a new indicator.
a. TRIX
b. Money Flow Index
c. True Strength Index
d. Intraday Intensity
Question 28
SEL2_0028
Tick volume refers to
a. the number of contracts traded at each price tick.
b. the number of contracts traded at each time interval.
c. the change in open interest during a particular time interval.
d. the number of recorded price changes during a particular time interval.
Question 29
SEL2_0029
When using a system with two moving averages, which of the following rules can be utilized to
generate a buy signal?
a. Buy when the faster moving average crosses the slower moving average from
above.
b. Buy when the faster moving average hooks the slower moving average from
above.
c. Buy when the faster moving average hooks the slower moving average from
below.
d. Buy when the current price crosses above both moving averages.
Question 30
SEL2_0030
Which of the following rules can be utilized as an entry strategy for a long trade based on a
MACD histogram?
a. Go long when the MACD fast line turns higher.
b. Go long when the MACD slow line turns higher.
c. Go long when the histogram crosses through 0 from below.
d. Go long when the MACD line crosses above the signal line for the second
time, confirming the divergence.
Question 31
SEL2_0031
In regard to cycle analysis, translation is
a. the distance between troughs.
b. the distance between peaks.
c. not useful in checking where the trend direction is headed or if it is changing.
d. to the right when the peak is beyond the halfway point.
Question 32
SEL2_0032
Which would be the MOST useful aspect of a cycle in studying the relationship between cycles
with different start times?
a. phase
b. period
c. amplitude
d. none of the above
Question 33
SEL2_0033
Which of the following would normally be considered a sentiment indicator that is most useful to
traders?
a. corporate buy backs
b. price/earnings ratio
c. insider buying
d. the VIX
Question 34
SEL2_0034
When using out-of-sample testing, the “out-of-sample” refers to
a. a small subset of data that was used to optimize the system.
b. the unexpected set of parameters that gives the best system results.
c. a set of data not used in the system-building process.
d. none of the above.
Question 35
SEL2_0035
The payoff ratio is
a. one of the least important statistics used in system design.
b. the ratio of profit to loss.
c. the ratio of the profitable standard deviation value to the loss standard
deviation value.
d. the ratio of the average winning trade to the average losing trade.
Question 36
SEL2_0036
_____________ captures an increasing part of the profits as price moves in a favorable direction.
a. An initial stop
b. A trailing stop
c. A sell stop
d. A standard deviation stop
Question 37
SEL2_0037
The bias under which an event which has not occurred recently is perceived as having zero or
negligible probability of occurring in the future is categorized as
a. saliency bias.
b. framing bias.
c. sunk-cost bias.
d. anchoring bias.
Question 38
SEL2_0038
__________ is a perception bias that arises when you are attempting to take a guess at something
about which you have limited information.
a. Saliency
b. Framing
c. Sunk-cost
d. Anchoring
Question 39
SEL2_0039
The “maximum drawdown” (MDD) is a measure of
a. the largest single loss in a trading system or portfolio.
b. the largest number of losses in a trading system or portfolio.
c. the total number of losses in a trading system or portfolio.
d. the largest loss in a trading system or portfolio from an equity peak.
Question 40
SEL2_0040
The _______________ tracks the breadth of participation in rallies and declines.
a. MACD line
b. RSI
c. relative strength line
d. advance/decline ratio
Incorrect. Reference: CMT Level II Curriculum (2018), Chapters 7, 20, 31
Question 41
SEL2_0041
_______________ as a risk measure results in an estimation of a price move in either direction.
a. Put/Call parity
b. Plurality index
c. Implied volatility
d. Standard deviation
Question 42
SEL2_0042
A simple way to identify ______________ cycles is to use ________ prices and find the
dominant half-cycle.
a. long-term, weekly
b. intermediate-term, weekly
c. long-term, monthly
d. short-term, monthly
Question 43
SEL2_0043
Because relative strength is so________ it is used as the primary ________ Random Walk and
EMH.
a. successful, defense of
b. successful, argument against
c. weak, defense of
d. weak, argument against
Question 44
SEL2_0044
Open interest __________ when a long sells her position to a short who wants to cover.
a. rises
b. falls
c. remains unchanged
Question 45
SEL2_0045
When open interest goes flat during a rally, it suggests that
a. bottom fishers are active.
b. new shorts are getting created.
c. old shorts are getting squeezed.
d. the trend is aging and the best gains are probably behind.
Question 46
SEL2_0046
The measurement that tells the system designer how far a trade was in loss before it came back to
close in profit is called
a. maximum favorable excursion.
b. maximum adverse excursion.
c. return retracement ratio.
d. none of the above.
Question 47
SEL2_0047
Based on the 2-day EMA of the Force Index, which point on the chart represents a valid shorting
opportunity, if the trend has turned lower?
a. A
b. B
c. C
d. D
Question 48
SEL2_0048
During an uptrend, the simplest way to detect a trend change (from up to down) is to
a. draw trendlines along the peaks.
b. draw trendlines along the troughs.
c. draw a best-fit line through the downtrend.
d. use the slope of a long-term moving average.
Question 49
SEL2_0049
According to Schabacker's rules, which of the following does NOT help identify the end of a bull
market?
a. Stocks become a popular topic of conversation.
b. Popular stocks advance while some other companies collapse.
c. Interest rates are high.
d. Trading volume is low.
Question 50
SEL2_0050
High values observed in the VIX usually means
a. a new bull market phase is about to begin.
b. traders are buying fewer options.
c. investors are anxious.
d. investors are complacent.
Question 51
SEL2_0051
The biggest drawback of a relative strength system is that
a. high transaction costs are involved in regular rebalancing.
b. rebalancing and matching benchmark returns is a painful exercise.
c. the starting point of a system test has a massive influence on final results.
d. the portfolio is long only and fully invested; hence it is exposed to risks of that
particular asset beta.
Question 52
SEL2_0052
An analysis of On-Balance Volume (OBV) in the shares of Marathon Petroleum Corp (MPC)
shown below suggests that
a. any near-term strength should be considered as an opportunity to reduce

positions, given the divergence between OBV and price action.
b. any near-term dips should be considered as buying opportunities, given the
confirmation between OBV and price action.
c. should immediately exit long positions and initiate short positions.
d. we are likely to see pullback towards $42.50 (previous support) and then price
will start moving higher.
Question 53
SEL2_0053
In the chart shown below, the On-Balance Volume (OBV) indicator is

a. confirming bearish price action.
b. confirming bullish price action.
c. diverging negatively from price action.
d. diverging positively from price action.
Question 54
SEL2_0054
Which of the following only considers the downside volatility in a system or portfolio?
a. Sharpe ratio
b. Sterling ratio
c. Sortino ratio
d. Return Retracement ratio
Question 55
SEL2_0055
A reduction in the speed of either the %K-slow or %D-slow lines indicates
a. a reversal on the next day.
b. a selling opportunity on the next rally.
c. to wait for a pullback as an excellent entry point.
d. the current trend will continue to dominate on next day.
Question 56
SEL2_0056
Although the line chart shows higher and higher lows, if the %D-slow line has lower lows, then
it indicates
a. a buying opportunity on the next rally.
b. a selling opportunity on the next rally.
c. a fresh selling opportunity as trend is going to reverse on the next day.
d. to hold on to current positions and wait for confirmation on weekly chart.
Question 57
SEL2_0057
When RSI rises above its upper reference zone, it shows that bulls are strong but the market is
a. oversold and entering its buy zone.
b. oversold and entering its sell zone.
c. overbought and entering its buy zone.
d. overbought and entering its sell zone.
Question 58
SEL2_0058
Divergences between RSI and prices tend to occur
a. at important tops and bottoms.
b. when prices are in a trading range.
c. when prices violate down in a trading range.
d. when important news flow is expected in markets/stocks.
Question 59
SEL2_0059
____________ is an indicator/oscillator which measures any security's strength by monitoring
upward and downward changes in its closing prices.
a. On-Balance Volume
b. Relative Strength Index
c. Accumulation Distribution
d. Moving Average Convergence/Divergence (MACD)
Question 60
SEL2_0060
An underwater curve measures
a. the drawdown from each successively higher peak in equity.
b. the final loss in equity.
c. how profitable each trade in a system is.
d. the loss, in dollars, of the maximum drawdown (MDD).
Question 61
SEL2_0061
A declining ADX indicates
a. the market is declining.
b. the market is trending higher.
c. the market is consolidating.
d. the market is becoming less directional.
Question 62
SEL2_0062
Open interest can be defined as the
a. total number of calls and puts.
b. total contracts traded in a month.
c. total number of contracts traded each day.
d. total number of outstanding contracts.
Question 63
SEL2_0063
A buy signal is generated using a 2-period RSI oscillator which
a. crosses into an overbought territory.
b. crosses into an oversold territory.
c. crosses the threshold of 10 moving higher.
d. crosses the threshold of 10 moving lower.
Question 64
SEL2_0064
Wilder's directional movement concept uses what inputs in the calculations?
a. market breadth
b. exponential moving average of volume
c. closing prices
d. high and low prices
Incorrect. Reference: MTA, CMT Level II Curriculum (2018), Chapter 2
Question 65
SEL2_0065
Which of the following methods measures the speed of any surge and shows when its
momentum is starting to break?
a. SAR
b. oscillators
c. parabolic systems
d. trend-following systems
Correct. Reference: MTA, CMT Level II Curriculum (2018), Chapter 6
Question 66
SEL2_0066
The price of a stock near its previous low, accompanied by a higher low in RSI, would be an
example of
a. positive confirmation.
b. positive divergence.
c. negative divergence.
d. negative confirmation.
Question 67
SEL2_0067
When price direction is sideways and On-Balance Volume (OBV) direction is up it suggests
a. a moderate downtrend.
b. no determination.
c. a distribution period.
d. an accumulation period.
Question 68
SEL2_0068
The VIX is a measure of the implied volatility being projected through
a. fear in the market.
b. the prices of Dow Jones index options.
c. the prices of all equity options.
d. the prices of S&P 500 index options.
Question 69
SEL2_0069
The most profitable _____________ are long-term.
a. investments
b. option strategies
c. mean reversion trades
d. trend-following systems
Question 70
SEL2_0070
Given the following daily values for Open, High, Low, and Close, what change would you
expect in Chaikin's Accumulation Distribution indicator?
 Open = 12
 Close = 10
 High = 13
 Low = 9

a. All the day's volume would be added to the previous index value.
b. All the day's volume would be subtracted from the previous index value.
c. Half the day's volume would be added to the previous index value.
d. Half the day's volume would be subtracted from the previous index value.
Question 71
SEL2_0071
Volume is usually ______ in a trading range but ________ dramatically after a breakout.
a. rising, decreases
b. low, increases
c. high, increases
d. low, shrinks
Question 72
SEL2_0072
Bullish divergences are observed when prices________ to a new ________ but RSI makes a
___________ than its previous decline/rally.
a. rally, peak, lower top
b. fall, low, lower top
c. fall, low, higher bottom
d. rally, peak, higher bottom
Question 73
SEL2_0073
_________is/are valuable information when analyzing patterns.
a. Breadth
b. Volume
c. Moving averages
d. Indicators/oscillators
Question 74
SEL2_0074
A sell signal using a MACD indicator is generated when
a. the fast MACD line turns positive.
b. the slow MACD line turns negative.
c. the fast MACD line crosses above the slow signal line.
d. the fast MACD line crosses below the slow signal line.
Question 75
SEL2_0075
MACD signals can be improved by thresholds equal to previous ______________ in the
indicator and taking the signals only after the MACD line ___________ the threshold.
a. average values, crosses
b. divergences, confirms
c. highs and lows, enters
d. signal values, exits
Question 76
SEL2_0076
Which of the following statements is a true notion about market efficiency according to efficient
market hypothesis?
a. Market efficiency implies that no one can beat the market.
b. Pricing errors in an efficient market is a non-random variable.
c. Market efficiency requires the market price to be equal to rational value at all
times.
d. Market efficiency requires that prices deviate from rational value in an
unbiased fashion.
Question 77
SEL2_0077
Which of the following statements is a false prediction about price reaction, according to EMH?
a. Prices should neither overreact nor underreact to news.
b. Prices should change only when news arrives.
c. Stale information, information already in the public domain has no predictive
power.
d. Linear function between current and past returns can be used to predict future
returns.
Question 78
SEL2_0078
Travelers buying airplane accident insurance after a recent airplane crash is an example of which
of the following biases?
a. framing bias
b. saliency bias
c. anchoring bias
d. sunk-cost bias
Question 79
SEL2_0079
____________is the tendency to stick with the default option when presented with a choice.
a. Endowment effect
b. Saliency bias
c. Status quo effect
d. Sunk-cost bias
Question 80
SEL2_0080
An investor liquidating stocks that hold paper gains before liquidating stocks that, at current
prices, have lost money, is known as the
a. framing effect.
b. endowment effect.
c. status quo effect.
d. disposition effect.
Question 81
SEL2_0081
The writer of a call option makes money
a. by selling the option.
b. when the price of the underlying security rises above the strike price.
c. as the time value decreases and the intrinsic value increases.
d. All of the above.
Question 82
SEL2_0082
European options are different than American options because
a. American options have an earlier exercise date.
b. European options have an earlier exercise date.
c. European options cannot be exercised early.
d. American options cannot be exercised early.
Question 83
SEL2_0083
_______ is likely to signal exhaustion of the current trend.
a. Rising volume
b. Falling volume
c. A volume spike
d. Unchanged volume
Question 84
SEL2_0084
A ___________ warning is an extreme turn in one of the indicator plots. This usually indicates at
most two days remaining in the old trend.
a. stochastic
b. Force Index
c. average true range
d. Moving Average Convergence/Divergence
Question 85
SEL2_0085
When is a buy signal given while using a MACD histogram?
a. When it breaks the centerline from above.
b. When it breaks the centerline from below.
c. When the MACD-histogram stops rising and ticks down.
d. When the MACD-histogram stops falling and ticks up.
Question 86
SEL2_0086
Falling open interest and volume are indicative of
a. new buyers are entering the market.
b. new short selling.
c. the market working through a congestion phase.
d. accumulation.
Question 87
SEL2_0087
What would be the implied volatility if you were told the one day expected movement was 2%?
a. 0.317%
b. 31.7%
c. 6.93%
d. 5.04%
Question 88
SEL2_0088
When doing regression analysis, _________ measures the excess returns and is found on the
regression chart by calculating the ________.
a. beta, slope
b. alpha, slope
c. beta, y-intercept
d. alpha, y-intercept
Question 89
SEL2_0089
The top-down fundamental analysis process begins with an analysis of
a. sectors.
b. industry groups.
c. the economy.
d. individual stocks.
Question 90
SEL2_0090
___________ is an oscillator which combines volume with prices to discover the force of bulls
or bears behind every rally or decline.
a. stochastic
b. Force Index
c. Williams %R
d. MACD histogram
Question 91
SEL2_0091
A burst of extremely high volume reflects that
a. professionals are adding fresh long positions.
b. confirmation and the trend is likely to continue.
c. amateurs are buying on a positive brokerage report.
d. a trend is nearing its end and suggests an imminent reversal.
Question 92
SEL2_0092
Which is not an indicator used in the Zweig Bond Model?
a. Short-term slope of the Dow Jones 20 Bond Average.
b. Longer term slope of the Dow Jones 20 Bond Average.
c. The trend of the S&P 500 Index.
d. The yield curve.
Question 93
SEL2_0093
___________ systems are better because they are _________ and they avoid _______.
a. Nondiscretionary, fast, losing trades
b. Nondiscretionary, mechanical, emotion
c. Manual, discretionary, mistakes
d. Manual, careful, biases
Question 94
SEL2_0094
Put options will expire worthless if
a. volatility increases.
b. the underlying stock falls in value beyond the strike price.
c. the underlying stock rises in value beyond the strike price.
d. volatility decreases.
Question 95
SEL2_0095
A breakaway gap occurs
a. at the start of a new trend.
b. in the middle of the trend.
c. together with a volume spike.
d. only in stock indices.
Question 96
SEL2_0096
Stocks with superior fundamentals tend to decline in value much less than
a. low-beta stocks.
b. high-beta stocks.
c. high-priced stocks.
d. poorly managed stocks.
Question 97
SEL2_0097
_________________errors occur when investors place too much weight on information that
agrees with their prior opinions, but underweight or completely disregard evidence that
contradicts their prior opinions.
a. Extrapolation
b. Confirmation
c. Hindsight
d. Calculation
Incorrect. Reference: CMT Level II Curriculum (2018), Chapters 22, 29, 30
Question 98
SEL2_0098
When hard assets rise in value, _________ will decline.
a. commodities
b. soft assets
c. international stocks
d. precious metals
Question 99
SEL2_0099
When ADX rallies above both directional lines, it identifies
a. less directional market.
b. flat and sleepy market.
c. a trending market.
d. lull market.
Question 100
SEL2_0100
The implied volatility of an option is the projection of an annualized move of how many standard
deviations in the underlying stock over the life of the option?
a. one
b. two
c. three
d. four
Question 101
SEL2_0101
______ is known for emphasizing a high level of rationality in investor behavior and aggregate
market outcome.
a. Dow Theory
b. Behavioral finance
c. Adaptive Market Hypothesis (AMH)
d. Efficient Market Hypothesis (EMH)
Question 102
SEL2_0102
Phase refers to
a. the height of the wave from its horizontal midpoint (the X-axis).
b. the number of time units necessary to complete one wavelength.
c. the number of wavelengths that repeat every 360°, calculated as ω = 1/T.
d. a measurement of the starting point or offset of the cycle relative to a
benchmark wave.
Question 103
SEL2_0103
__________ and ___________ have seasonal patterns.
a. Volume, volatility
b. VIX, put/call ratio
c. Open interest, interest rates
d. Open interest, market breadth
Question 104
SEL2_0104
Rising prices, falling volume and falling open interest can be interpreted as
a. the uptrend is in the last stage.
b. new buyers entering the market.
c. short sellers covering their positions causing a rally.
d. buyers liquidating their long positions in futures and investing in the cash
market.
Question 105
SEL2_0105
______________ can be used to predict the future price trend of a market based on its correlation
with multiple related markets.
a. Sortino ratio
b. Harmonic mean
c. Bayes‟ theorem
d. Linear regression
Question 106
SEL2_0106
___________________ explains the relationship between the number of advancing and declining
stocks, and the up and down volume.
a. Arms Index
b. Thrust Oscillator
c. McClellan Oscillator
d. High-Low Index (HLX)
Question 107
SEL2_0107
All the following statements about the end of a bull market are true except
a. interest rates have declined.
b. trading volume increases sharply.
c. warning about an overheated stock market appear on the news.
d. popular stocks advance significantly while some other companies collapse.
Question 108
SEL2_0108
The study of momentum and oscillators is the analysis of
a. price changes.
b. price levels.
c. market breadth.
d. sentiment.
Question 109
SEL2_0109
A V-top or V-bottom is always accompanied by ______ and usually ______.
a. high volatility, low volume
b. low volatility, low volume
c. low volatility, high volume
d. high volatility, high volume
Question 110
SEL2_0110
When the VIX is 34.6, the expected 30-day market movement is
a. 1%.
b. 3.46%.
c. 10%.
d. 34.6%.
Question 111
SEL2_0111
According to Schabacker's Rules, which of the following indicates the end of a bear market?
a. Interest rates are high.
b. Interest rates have declined.
c. Trading volume increases sharply.
d. Stocks become a popular topic of conversation.
Question 112
SEL2_0112
Which of the following patterns are highlighted within the green rectangles marked A and B?
a. piercing line and hammer
b. piercing line and evening star
c. bullish engulfing and shooting star
d. bullish engulfing and hanging man
Incorrect. Reference: CMT Level II Curriculum (2018), Chapters 1, 9, 10, 11, 12
Question 113
SEL2_0113
The simplest and easiest method of intermarket analysis is
a. momentum analysis.
b. correlation analysis.
c. creating autoregressive analysis models.
d. a visual inspection of a comparison chart.
Question 114
SEL2_0114
When constructing a portfolio, it is important to select securities that have a ________ degree of
_______ between investment returns.
a. low, volatility
b. low, correlation
c. high, volatility
d. high, correlation
Question 115
SEL2_0115
In the following chart, where is a negative divergence in RSI observed?
a. A
b. B
c. C
d. D
Question 116
SEL2_0116
In a trading system that uses three moving averages, a long trade is typically signaled when the
shortest (fastest) moving average is used
a. as a filter by requiring that it be falling as the signal is triggered.
b. as a filter by requiring that it be rising as the signal is triggered.
c. to trigger a trade when the other two moving averages are diverging.
d. to trigger a trade when the other two moving averages are converging.
Question 117
SEL2_0117
Identify the chart pattern highlighted below.

a. triple bottom
b. double bottom
c. cup and handle formation
d. head and shoulders bottom
Correct. Reference: CMT Level II Curriculum (2018), Chapters 1, 8
Question 118
SEL2_0118
A/An__________________ gap occurs at the end of a sustained and volatile price move and
confirms the reversal.
a. exhaustion
b. runaway
c. breakaway
d. common
Question 119
SEL2_0119
In an ideal situation, the stock prices of gold mining companies and the U.S Dollar index are
a. positively correlated.
b. negatively correlated.
c. no correlation is observed.
d. positively correlated in an inflationary environment.
Question 120
SEL2_0120
Portfolio diversification is achieved by
a. investing equally in bonds and equity.
b. investing in mutual funds.
c. investing in asset classes which have low correlation.
d. investing in asset classes which have high correlation.
Question 121
SEL2_0121
Using a 13 period EMA of the Force Index, which point on the chart would be a valid sell
signal?
a. A
b. B
c. C
d. D
Question 122
SEL2_0122
Which usually turns down first as an economic expansion comes to an end?
a. commodities
b. stocks
c. hedge funds
d. bonds
Question 123
SEL2_0123
Portfolio diversification is best achieved by including assets that are ___________.
a. positively correlated.
b. traded on different exchanges.
c. denominated in different currencies.
d. noncorrelated or negatively correlated.
Question 124
SEL2_0124
Identify the candlestick pattern highlighted by the circle in the chart below.
a. harami
b. bullish engulfing
c. hammer
d. marubozu
Correct. Reference: CMT Level II Curriculum (2018), Chapters 1, 9, 11, 12
Question 125
SEL2_0125
What chart pattern do you see highlighted in this chart?

a. Flags.
b. Pennants.
c. Ascending triangles.
d. Symmetric triangles.
Question 126
SEL2_0126
During the last leg of an economic expansion, how do different asset classes perform?
a. All the asset classes turn down simultaneously.
b. Bonds turn down, followed by stocks and then commodities.
c. Stocks turn down, followed by bonds and commodities.
d. Commodities turn down, but bond and stocks continue to trend higher.
Question 127
SEL2_0127
In the following chart of the Dow Jones Industrial Average, interpret the RSI indicator in
between the highlighted vertical lines.
a. Negative divergence is observed between price and indicator.

b. Positive divergence is observed between price and indicator.
c. Bearish confirmation is observed between price and indicator.
d. Bullish confirmation is observed between price and indicator.
Question 128
SEL2_0128
Crude oil prices have declined from $100 to $50 per barrel. Will the fall in crude prices have any
impact on stock prices of oil exploration companies?
a. Since they have a positive correlation, stock prices of oil exploration
companies are likely to decline.
b. Since they have a negative correlation, stock prices of oil exploration
companies are likely to rise.
c. Since they have no correlation, it cannot be determined from this information.
d. This will depend on the open interest in crude oil futures.
Question 129
SEL2_0129
Interpret the reading of the stochastic indicator in the following chart of Cheniere Energy
Partners LP.
a. Stochastic is confirming the price action.
b. Positive divergence as stochastic made a higher high, and prices a new low.
c. Negative divergence as stochastic made a higher high and price a new low.
d. Stochastic is in overbought zone which indicates prices are losing momentum
and are going to fall again.
Question 130
SEL2_0130
In the following chart of Exxon Mobil, calculate the downside target from the flag.
a. $78.60
b. $80.40
c. $80.00
d. $81.90
Correct. Reference: CMT Level II Curriculum (2018), Chapters 1, 8, 9
Question 131
SEL2_0131
Based on the chart given below, identify the chart pattern and the best course of action.
a. Head and shoulders top; go long and use current pullback as shares are
retesting an important support level at point B.
b. Double top; go short at point A as shares have violated an uptrend support
line.
c. Triple top; wait for a close below point C and execute shorts when prices are
2% below the neckline.
d. Head and shoulders top; wait for a close below point B to execute below the
neckline.
Question 132
SEL2_0132
A “triple witching day” occurs when
a. the S&P 500 futures, options on futures and options on individual stocks all
reach expiration.
b. a breakout to 52 week new highs by the DJIA, SPX and RUT indices.
c. a breakout to all-time new highs by the DJIA, SPX & RUT indices.
d. all three of the DJIA, SPX500 & RUT are registering 52 week lows.
Question 133
SEL2_0133
Based on the chart given below, when was a valid long exit signal generated on the chart using
the basic rules for using bands (note the arrows)?
a. A
b. B
c. C
d. No signal was generated during the trend.
Question 134
SEL2_0134
Which of the following is not an EMH assumption?
a. Investors are rational.
b. Volatility is a function of information arbitrage.
c. Arbitrage forces prices to rational levels.
d. Investor errors are uncorrelated.
Question 135
SEL2_0135
Falling volume while price is rising means
a. volume confirms the price rise.
b. volume confirms the price drop.
c. volume indicates a weak rally.
d. volume indicates a weak pullback.
Question 136
SEL2_0136
Which of the following strategies of trading with Bollinger bands constitutes the greatest risk?
a. Buy (go long) when the prices close above the upper band; close out longs
when the prices close below the lower band.
b. Sell short when the prices close below the moving average; close out short
positions when prices recapture the moving average.
c. Buy (go long) when prices close above the upper band; close out longs when
prices reverse and close below the moving average value (the center of the
band).
d. Sell short when prices close below the lower band; cover your shorts when
prices close above the moving average value.
Question 137
SEL2_0137
Based on the chart given below, what pattern is shown in the box?
a. Diamond top
b. Ascending triangle
c. Double top
d. “M” pattern
Question 138
SEL2_0138
Which of the following characteristics is the first that should be considered when choosing or
building systems to trade?
a. A longer time to recovery than short-term drawdowns.
b. Time in markets: choose the one that trades more frequently.
c. Gradual increases in equity line instead of downward surges.
d. Which markets the system will be traded on.
Question 139
SEL2_0139
The critical price inputs for stochastics are
a. a series of recent closing prices.
b. current price and a single historical price point.
c. volume traded at each price level.
d. recent high and low prices and current price.
Question 140
SEL2_0140
Based on the chart given below, identify the best course of action.
a. Shares are losing momentum which can be confirmed by negative divergence

between price and ROC; trader should be cautious and be quick to reduce
position on a violation of trendline.
b. Shares are making a series of higher highs and higher lows; ROC has turned
negative which is confirming the price action; should use current pullback to add
to position.
c. ROC has turned negative which is a sell signal; should initiate a short
position.
d. Negative divergence observed between price and ROC should be ignored as
prices are near lifetime highs.
Incorrect. Reference: CMT Level II Curriculum (2018), Chapters 1, 2, 6, 31
Question 141
SEL2_0141
Extrapolation errors occur when investors
a. assume that current and recent conditions will prevail well into the future, also
causing them to ignore the evidence of changing circumstances.
b. tend to be overconfident regarding their abilities and make major mistakes
like too little diversification and over trading.
c. are tricked into thinking that they can foretell the future because they can
easily observe the past.
d. try to identify patterns in financial markets that do not exist.
Question 142
SEL2_0142
The low in price at point B in the chart of Boeing is ___________ by the on-balance volume
indicator at point B.
a. confirmed
b. not confirmed
c. accumulated
d. distributed
Question 143
SEL2_0143
Stocks with superior fundamentals will normally decouple and start outperforming on a relative
basis during
a. a rampant bull market.
b. a market consolidation.
c. the last legs of an uptrend.
d. a market correction (bear market).
Question 144
SEL2_0144
Which of the following statements about diamond tops is false?
a. Breakouts tend to be fast-moving price runs.
b. The price objective is usually equal to the width of the complete pattern.
c. A steep entry is usually followed by a steep exit.
d. Diamond tops are a combination of a broadening pattern and a symmetrical
triangle.
Question 145
SEL2_0145
Interpret price action in the chart below, combined with takeaways from the SPX New High-
New Low index.
a. Confirmation between price action and indicator; the ongoing pullback can be
bought.
b. Divergence between price action and indicator; suggests exiting of long
positions.
c. Divergence between price action and indicator; can initiate shorts at current
levels.
d. Can initiate long positions at current price level; breadth bottomed out at the
same level as the pullback in October 2014.
Question 146
SEL2_0146
The McClellan Oscillator is what type of indicator?
a. momentum
b. correlation
c. breadth
d. none of the above
Question 147
SEL2_0147
How can one identify the existence of a cycle?
a. switch time frames
b. remove price trend
c. remove volume trend
d. use n period extremes
Question 148
SEL2_0148
Which of the following instances marks a valid buy signal using a 20-bar simple moving average
(blue) and a 50-bar simple moving average (green)?
a. A
b. B
c. C
d. D
Question 149
SEL2_0149
Which crossover in the MACD histogram is the strongest buy signal generated in the following
chart of Alphabet Inc.?
a. A
b. B
c. C
d. D
Question 150
SEL2_0150
When an RSI makes a lower top (peak) above 50, a sell order should be executed when
a. the RSI crosses below 50.
b. the RSI crosses below 30.
c. the last peak is retested.
d. the trough between the peaks has been crossed from above.
A B D B B B C B C B
A C B D B A A D A D
D C D D A B D D D C
D A D C D B A D D D
C A B B D B A B D C
D A B C A B D A B A
D D D D B B D D D D
B C B D C D D B C D
A C C A B C B D C B
D C B C A B B B C A
D D D C D A A A D C
B C D B D B B A B C
D D D B D B B A B B
D A C B C A C D D A
A D D B B C B C C D
SAMPLE CMT LEVEL II EXAM
1. Which of the following is a component of the Code of Ethics? CFA Institute members shall: a) use
particular care in determining applicable fiduciary duty.
b) use reasonable care and exercise independent professional judgment.
c) maintain and improve the competence of other investment professionals.
d) practice and encourage others to practice in a professional and an ethical manner.
2. Allen Johnson, CMT, is working in the Singapore office of German Investment Corporation. From
an informal conversation, Allen learns that the company's most recent annual report contains
misappropriated information. No one at the Singapore office expresses concern, however, because
there has been no breach of Singapore's law. Johnson should: a) do nothing because the branch is
outside of German jurisdiction.
b) seek advice from the company counsel to determine appropriate action.
c) do nothing because the branch is outside of Singapore‟s jurisdiction.
d) disassociate himself from the case with a written report to his supervisor.
3. Which one of the following most accurately describes the CFA Institute Standard about using
material nonpublic information?
a) An analyst cannot use nonmaterial nonpublic information.
b) An analyst may use material nonpublic information as long as it is for his personal use.
c) An analyst may use material nonpublic information if it is legal in his country to do so.
d) An analyst may use nonmaterial nonpublic information as long as it has been developed under the
Mosaic Theory.
4. Adam Green, a portfolio manager, is making a presentation to a prospective client. Green says that
as a new portfolio manager, he made an average annual rate of return of 40% in the last two years at
his previous firm and that based on this, he can guarantee a 40% return to the client. Which of the
following statements is in accordance with Standard III(D), Performance Presentation?
a) Implying that he can guarantee a return.
b) Stating his past performance as long as it is fact.
c) Imputing his past performance to future performance.
d) Implying that he can guarantee a return based on just 2 years of performance.
5. Kai Wong, CFA, is concerned about the activities of several of his coworkers and feels legal
violations are routinely overlooked. According to the Code and Standards, a recommended first step
would least likely be to:
a) take legal counsel
b) contact industry regulators
c) provide her supervisor with a copy of the Code and Standards.
d) review the company's policies and procedures for reporting ethical violations.
6. An analyst has several groups of clients who are categorized according to their specific needs.
Compared to research reports distributed to all of the clients, reports for a specific group:
a) will definitely include more basic facts.
b) may generally exclude more basic facts.
c) cannot be selectively distributed.
d) will not be allowed because it violates the Standard III(B), Fair Dealing.
7. Steve Smith, CFA, is an equity research analyst for a long-term investment fund. His annual bonus
is linked to annual trading profits. Under a new policy, the assessment period is switched to a
monthly assessment period. According to the Code and Standards, best practices dictate:
a) keeping the policy change within the firm.
b) keeping the policy change within the firm and existing clients.
c) updating disclosures when the policy change is implemented.
d) requiring Smith to obtain permission from each client prior to implementation of the new policy.
8. Which of the following actions would be a violation of the Standard VII(A) Conduct as
Participants in CFA Institute Programs?
a) Exaggerating the implications of holding the CFA designation.
b) Misrepresenting information on the Professional Conduct Statement.
c) Participating in a civil disobedience movement to oppose a government action.
d) Using the CFA designation without submitting a Professional Conduct Statement and paying
annual dues.
9. Paul Jones is a chemical industry research analyst for a large brokerage company. That industry is
currently seeing an increase in mergers and acquisitions. While flying through Chicago, Jones sees
several senior officers who she knows are from the largest and fourth largest chemical companies
walk into a conference room. She concludes that negotiations for an acquisition might be taking
place. Jones:
a) may not act or cause others to act on this information.
b) may not act but advise others to act on this information.
c) may use this information to support an investment recommendation.
d) should inform her compliance officer that she has material nonpublic information on firms she
covers.
10. In a meeting with his firm's senior research analyst, George Powel, a proponent of the CFA
Institute Research Objectivity Standards (ROS), stated that the key objective of the ROS is to create
voluntary reporting of research practices that promote independent and objective research to CFA
Institute on an annual basis. With regard to his statements about the objectives of the ROS.
a) he is correct.
b) he is incorrect.
c) He is correct about the voluntary reporting aspect.
d) He is correct about the independent and objective research aspect.
11.Which is not one of the Dow Theory principles?
a) Trends are classified as Primary, Secondary and Counter Cyclical. b) The averages discount
everything. c) Volume goes with the trend. d) The trends persist.
12. Beta measures:
a) the amount of excess returns in a portfolio over the risk-free rate of return. b) the amount of
volatility in a portfolio attributable to macroeconomic news. c) the amount of volatility in a portfolio
compared to the market volatility. d) the amount of risk in a portfolio compared to the expected
returns of any given equal-weighted index.
13.When using the RSI as an overbought/oversold indicator, a sell signal is generated when:
a) RSI declines below its lower reference line and then rallies above it.
b) RSI rises above its upper reference line and then crosses below it.
c) RSI crosses beneath the midpoint (50 level).
d) RSI crosses above the midpoint (50 level).
14.When analyzing price action and volume, low activity (or a drop in volume) is normally
associated with:
a) a weak price trend.
b) a strengthening price trend.
c) greater fluctuations in price.
d) lack of conviction on the part of traders.
15. A correlation coefficient of 0.75 between two variables suggests a/an _____ relationship:
a) extremely strong
b) strong
c) low
d) non-existent
16. Near the end of a recession:

a) bonds turn up before stocks and commodities.
b) stocks turn up before bonds and commodities.
c) commodities turn up before bonds and stocks.
d) all the asset classes turn up simultaneously.
17. Which of the following asset classes is a leading indicator for the stock market?
a) Bonds
b) Bullion
c) Precious metal
d) Energy
18. Identify the following assumption under the correlation coefficient:

a) Linearity
b) Normality
c) Outliers and homoscedasticity
d) All of the above
19. _______moving average uses reverse linear weights:

a) The pivot-point
b) The simple
c) The weighted
d) The exponential
20. Interpret the relationship between the S&P 500 and the NASDAQ 100 indexes based on the chart
shown below, if the Pearson‟s coefficient of correlation is 0.45:
a) Linear relationship, as the Best Fit line is curvilinear.

b) Linear relationship, as points fall generally along a straight line.
c) Non-linear relationship, as points fall generally along a straight line.
d) Non-linear relationship, as the Best Fit line is curvilinear.
21. The strength and direction of the relationship between two markets is measured by:
a) spread.
b) regression.
c) moving average.
d) correlation coefficient.
22. The only effective method of diversifying a portfolio is by including asset classes with ________
correlation to stocks such as cash, foreign exchange or commodities.
a) positive
b) meaningful
c) low/negative
d) moderately positive
23. Which of the following indicator combines price, volume and open interest?
a) TRIX
b) Moneyflow Index
c) True Strength Index
d) Herrick Payoff Index
24.What trading decision must a trader make based purely on the trend lines in the chart below?
a) Hold long positions

b) Close out long positions
c) Close out short positions
d) Trading decisions cannot be made by using trend lines.
25. Which of the following points represents a valid island reversal in the chart below?
a) A
b) B
c) C
d) None of the above
26. Which of the following patterns resonate with the price action highlighted within the green
rectangles marked „A‟ & „B‟?
a) Piercing Line & Hammer

b) Piercing Line & Evening Star
c) Bullish Engulfing & Shooting Star
d) Bullish Engulfing & Hanging Man
27. _______uses the distribution of the daily trading range to create a new indicator.
a) TRIX
b) Money Flow Index
c) True Strength Index
d) Intraday Intensity
28. Tick volume refers to:

a) the number of contracts traded at each price tick.
b) the number of contracts traded at each time interval.
c) the change in open interest during a particular time interval.
d) the number of recorded price changes during a particular time interval.
29. When using a two moving averages (MA) system, which of the following rules can be utilized to
generate a buy signal?
a) Buy when the faster moving average crosses the slower moving average from above.
b) Buy when the faster moving average hooks the slower moving average from above.
c) Buy when the faster moving average hooks the slower moving average from below.
d) Buy when the current price crosses above both moving averages.
30. Which of the following rules can be utilized as an entry strategy for a long trade based on a
MACD histogram?
a) Go long when the MACD fast line turns higher.
b) Go long when the MACD slow line turns higher.
c) Go long when the histogram crosses through 0 from below.
d) Go long when the MACD line crosses above the signal line for the second time, confirming the
divergence.
31. In regard to cycle analysis, translation is:

a) Distance between troughs
b) Distance between peaks
c) Useful in checking where the trend direction is headed or if it is changing
d) To the right when the peak is beyond the halfway point
32.Which would be the MOST useful aspect of a cycle in studying the relationship between cycles
with different start times?
a) Phase
b) Period
c) Amplitude
33. Which of the following would normally be considered a sentiment indicator that is most useful to
traders?
a) Corporate buy backs
b) Price/earnings ratio
c) Insider buying
d) The VIX
34. When using Out of Sample testing, the “out of sample” refers to?
a) A small subset of data that was used to optimize the system.
b) The unexpected set of parameters that gives the best system results.
c) A set of data not used in the system building process.
d) None of the above.
35. The payoff ratio is:

a) One of the least important statistics used in system design.
b) The ratio of profit to loss.
c) The ratio of the profitable standard deviation value to the loss standard deviation value.
d) The ratio of the average winning trade to the average losing trade.
36. _____________ captures an increasing part of the profits as price moves in a favorable direction.
a) Initial Stop
b) Trailing stop
c) Sell stop
d) Standard deviation stop
37. The bias under which, when an event has not occurred recently, the event is perceived as having
zero or negligible probability of occurring in future, is categorized as:
a) Saliency bias
b) Framing bias
c) Sunk-cost bias
d) Anchoring bias
38. __________ is a perception bias that arises when you are attempting to take a guess at something
about which you have limited information.
a) Saliency
b) Framing
c) Sunk-cost
d) Anchoring
39. The “maximum cumulative drawdown” is a measure of:

a) The largest single loss in a trading system or portfolio.
b) The largest number of losses in a trading system or portfolio.
c) The total number of losses in a trading system or portfolio.
d) The largest loss in a trading system or portfolio from an equity peak.
40. The _______________ tracks the degree of mass participation in rallies and decline.
a) MACD line
b) RSI
c) Relative strength
d) Advance/Decline Ratio
41. _______________ as a risk measure results in an estimation of a price move in either direction.
a) Put/Call parity
b) Plurality index
c) Implied volatility
d) Standard deviation
42. A simple way to identify ______________ cycles is to use ________ prices and find the
dominant half-cycle.
a) Long-term, weekly
b) Intermediate-term, weekly
c) Long-term, monthly
d) Short-term, monthly
43. Because Relative Strength is so________ it is used as the primary ________ Random Walk and
EMH.
a) Successful, defense of
b) Successful, argument against
c) Weak, defense of
d) Weak, argument against
44. Open interest ______________when a bull sells his long position to bear who wants to cover his
short position:
a) rises
b) falls
c) remains unchanged
45. When open interest goes flat during a rally, it suggests that:
a) bottom fishers are active.
b) new shorts are getting created.
c) old shorts are getting squeezed.
d) the trend is aging and the best gains are probably behind.
46. The measurement that tells the system designer how far a trade was in loss before it came back to
close in profit is called?
a) Maximum favorable excursion
b) Maximum adverse excursion
c) Return retracement ratio
47. Based on the 2-day EMA of the Force index, which point on the chart represents a valid shorting
opportunity, if the trend has turned lower?
a) A
b) B
c) C
d) D
48. During an uptrend, the simplest way to detect a trend change (from up to down) is to:
a) draw trendlines along the peaks
b) draw trendlines along the troughs
c) draw a best-fit line through the downtrend
d) use the slope of a long-term moving average
e)
49. According to Schabacker‟s rules, which of the following does not help identify the end of a bull
market?
a) Stocks become a popular topic of conversation
b) Popular stocks advance while some other companies collapse
c) Interest rates are high
d) Trading volume is low
50. High values observed in the VIX usually means:
a) a new bull market phase is about to begin.
b) traders are buying less options.
c) investors are anxious.
d) investors are complacent.
51. The biggest drawback of a relative strength system is that:

a) High transaction costs are involved in regular rebalancing
b) Rebalancing and matching benchmark returns is a painful exercise
c) The starting point of a system test has a massive influence on final results
d) The portfolio is long only and fully invested, hence it is exposed to risks of that particular asset
beta
52. An analysis of On-balance volume in the shares of Marathon Petroleum Corp (MPC) shown
below suggest that:
a) any near-term strength should be considered as an opportunity to reduce positions, given the
divergence between OBV and price action.
b) any near-term dips should be considered as buying opportunities, given the confirmation between
OBV and price action.
c) should immediately exit long positions and initiate short positions.
d) we are likely to see pullback towards $42.5 (previous support) and then price will start moving
higher.
53. In the chart shown below, the OBV indicator is:
a) confirming bearish price action.

b) confirming bullish price action.
c) diverging negatively from price action.
d) diverging positively from price action.
54.Which of the following only considers the downside volatility in a system or portfolio?
a) Sharpe Ratio.
b) Sterling Ratio.
c) Sortino Ratio.
d) Return Retracement Ratio.
55. A reduction in the speed of either %K-slow or %D-slow lines indicates:
a) a reversal on the next day.
b) selling opportunity on the next rally.
c) wait for a pullback as an excellent entry point.
d) current trend will continue to dominate on next day.
56. Although the line chart shows higher and higher lows, if the %D-slow line has lower lows, then it
indicates:
a) buying opportunity on the next rally.
b) selling opportunity on the next rally.
c) fresh selling opportunity as trend is going to reverse on the next day.
d) hold on to current positions and wait for confirmation on weekly chart.
e)
57.When RSI rises above its upper reference zone, it shows that bulls are strong but the market:
a) oversold and entering its buy zone.
b) oversold and entering its sell zone.
c) overbought and entering its buy zone.
d) overbought and entering its sell zone.
58. Divergences between RSI and prices tend to occur at:

a) at important tops and bottoms.
b) when prices are in a trading range.
c) when prices violate down in a trading range.
d) when important news flow is expected in market/stocks.
59. ____________ is an indicator/oscillator which measures any security‟s strength by monitoring

upward and downward changes in its closing prices.
a) On-balance volume
b) Relative Strength Index
c) Accumulation/distribution line
d) Moving Average Convergence and Divergence (MACD)
60. An Underwater curve measures?
a) The drawdown from each successively higher peak in equity.
b) The final loss in equity.
c) How profitable each trade in a system is.
d) The loss, in dollars, of the maximum drawdown (MDD).
61. Decline in ADX indicates:

a) the market is declining.
b) the market is trending higher.
c) the market is consolidating.
d) the market is becoming less directional.
62. Open interest can be defined as:

a) total number of calls and puts.
b) total contracts traded in a month.
c) the total number of contracts traded each day.
d) the total number of outstanding contracts.
e)
63. A buy signal is generated using a 2 period RSI oscillator which:
a) crosses into an overbought territory.
b) crosses into an oversold territory.
c) crosses the threshold of 10 moving higher.
d) crosses the threshold of 10 moving lower.
64. When ADX falls below both Directional lines, it identifies:

a) a flat and dull market.
b) the dominant group is getting stronger.
c) the trend is becoming less directional.
d) the market is in oversold territory.
65.Which of the following methods measures the speed of any surge and shows when its momentum
is starting to break?
a) SAR
b) Oscillators
c) Parabolic systems
d) Trend-following system
66. The price of a stock near its previous low, accompanied by a higher low in RSI, would be a
situation of:
a) positive confirmation.
b) positive divergence.
c) negative divergence.
d) negative confirmation.
67. When price direction is sideways and OBV direction is up it suggests:

a) moderate downtrend.
b) no determination.
c) distribution period.
d) accumulation period (bottom).
68. The VIX is a measure of the Implied Volatility being projected through:
a) Fear in the market.
b) The prices of Dow Jones index options.
c) The prices of all equity options.
d) The prices of S&P 500 index options.
69. The most profitable _____________ are long-term.

a) investments.
b) option strategies.
c) mean reversion trades.
d) trend following systems.
70. Given the following daily values for Open, High, Low & Close, what change would you expect
in Chaiken's Accumulation Distribution Index?
Open = 12
Close = 10
High = 13
Low = 9
a) All the day‟s volume would be added to the previous index value
b) All the day‟s volume would be subtracted from the previous index value
c) Half the day‟s volume would be added to the previous index value
d) Half the day‟s volume would be subtracted from the previous index value
71. Volume is usually ______ in trading range but ________ dramatically after a breakout.
a) rising, decreases
b) low, increases
c) high, increases
d) low, shrinks
72. Bullish divergences are observed when prices________ to a new ________ but RSI makes a
___________ than its previous decline/rally.
a) rally, peak, lower top
b) fall, low, lower top
c) fall, low, higher bottom
d) rally, peak, higher bottom
73. _________is a valuable piece of information when analyzing patterns.

a) Breadth
b) Volume
c) Moving averages
d) Indicators/oscillators
74. A sell signal using a MACD indicator is generated when:

a) the Fast MACD line turns positive.
b) the Slow MACD line turns negative.
c) the fast MACD line crosses above the slow signal line.
d) the fast MACD line crosses below the slow signal line.
e)
75. MACD Signals can be improved by thresholds equal to previous ______________ in the
indicator and taking the signals only after the MACD line ___________ the threshold.
a) average values, crosses.
b) divergences, confirms.
c) highs and lows, enters.
d) signal values, exits.
76. Which of the following statements is a true notion about market efficiency according to efficient
market hypothesis?
a) Market efficiency implies that no one can beat the market.
b) Pricing errors in an efficient market is a non-random variable.
c) Market efficiency requires the market price to be equal to rational value at all times.
d) Market efficiency requires that prices deviate from rational value in an unbiased fashion.
77. Which of the following statements is a false prediction about price reaction, according to EMH?
a) Prices should neither overreact nor underreact to news.
b) Prices should change only when news arrives.
c) Stale information, information already in the public domain has no predictive power.
d) Linear function between current and past returns can be used to predict future returns.
78. Travelers buying airplane accident insurance after a recent airplane crash, is an example of which
of the following biases?
a) Framing bias
b) Saliency bias
c) Anchoring bias
d) Sunk-cost bias
79. ____________is a perception bias that arises when you are attempting to make a guess at
something about which you have limited information.
a) Framing bias
b) Saliency bias
c) Anchoring bias
d) Sunk-cost bias
80. An investor liquidating stocks that hold paper gains before liquidating stocks that, at current
prices, have lost money, is known as:
a) framing effect.
b) endowment effect.
c) status quo effect.
d) disposition effect.
81. A Call Option writer makes money

a) By selling the option
b) When the price of the underlying security rises above the strike price
c) As the time value decreases and the intrinsic value increases
d) All of the above
82. European Options are different than American Options because?

a) American Options have an earlier exercise date
b) European Options have an earlier exercise date
c) European Options cannot be exercised early
d) American Options cannot be exercised early
83. _______ is/are more likely to signal exhaustion of the current trend.
a) Rising volume
b) Falling volume
c) Volume spikes
d) Unchanged volume
84. A ___________ warning is an extreme turn in one of the indicator plots. This usually indicates at
most two days remaining in the old trend.
a) Stochastic
b) Force Index
c) Average True Range
d) Moving Average Convergence Divergence
85. When is a buy signal given while using MACD-histogram?

a) When it breaks the centerline from above.
b) When it breaks the centerline from below.
c) When the MACD-histogram stops rising and ticks down.
d) When the MACD-histogram stops falling and ticks up.
86. When open interest falls while prices are in a trading range, this implies:
a) New buyers are entering the market.
b) New short selling.
c) The market is in a congestion phase.
d) Position liquidation.
87. What would the Implied Volatility be if you were told the one day expected movement was 2%?
a) 0.317
b) 31.7
c) 6.93
d) 5.04
88.When doing Regression Analysis, _________ measures the excess returns and is found on the
regression chart by calculating the ________.
e) beta, slope
f) alpha, slope
g) beta, y-intercept
h) alpha, y-intercept
89. The Top-Down fundamental analysis process begins with an analysis of:
a) Sectors
b) Industry Groups
c) The economy
d) Individual stocks
90. ___________ is an oscillator which combines volume with prices to discover the force of bulls or
bears behind every rally or decline.
a) Stochastic
b) Force Index
c) Williams %R
d) MACD-Histogram
91. A burst of extremely high volume reflects:

a) professionals are adding fresh long positions.
b) confirmation and the trend is likely to continue.
c) amateurs are buying on a positive brokerage report.
d) a trend is nearing its end and suggests an imminent reversal.
92. Which is not an indicator used in the Zweig Bond Model?

a) Short-term slope of the Dow Jones 20 Bond Average.
b) Longer term slope of the Dow Jones 20 Bond Average.
c) The trend of the S&P 500 Index.
d) The yield curve.
93. ___________ systems are better because they are _________ and they avoid _______.
a) Nondiscretionary, fast, losing trades.
b) Nondiscretionary, mechanical, emotion.
c) Manual, discretionary, mistakes.
d) Manual, careful, biases.
94. Put options will expire worthless if:

a) volatility increases
b) the underlying stock falls in value beyond the strike price
c) the underlying stock rises in value beyond the strike price
d) volatility decreases
95. A breakaway gap usually occurs:
a) at the start of a new trend.
b) In the middle of the trend.
c) together with a volume spike.
d) only in stock indices.
96. Stocks with superior fundamentals tend to decline in value much less than.
a) Low-Beta stocks.
b) High-Beta stocks.
c) High priced stocks.
d) Poorly managed stocks.
e)
97. _________________errors occur when investors place too much weight on information that
confirms their prior opinions, but underweight or completely disregard evidence that contradicts their
prior opinions.
a) Extrapolation
b) Confirmation
c) Hindsight
d) Cognitive
98.When hard assets rise in value, _________ will decline.

a) commodities
b) soft assets
c) international stocks
d) precious metals
99. When ADX rallies above both directional lines, it identifies:

a) less directional market
b) flat and sleepy market
c) a trending market
d) lull market
100. The implied volatility of an option is the projection of an annualized _______standard deviation
move in the underlying stock over the life of the option.
a) one
b) two
c) three
d) four
101. ______ is known for emphasizing a high level of rationality in investor behavior and aggregate
market outcome.
a) The Dow theory
b) Behavioral finance
c) Adaptive market hypothesis (AMH)
d) Efficient market hypothesis (EMH)
102. Phase refers to:

a) The height of the wave from its horizontal midpoint (the X-axis).
b) the number of time units necessary to complete one wavelength.
c) the number of wavelengths that repeat every 360°, calculated as ω =1/T.
d) a measurement of the starting point or offset of the cycle relative to a benchmark wave.
103. __________ and ___________ have seasonal patterns.

a) Volume, volatility
b) VIX, put/call ratio
c) Open interest, interest rates
d) Open interest, market breadth
104. Rising prices, falling volume and falling open interest can be interpreted as:
a) the uptrend is in the last stage
b) new buyers entering the market
c) short sellers covering their positions causing a rally.
d) buyers covering their long positions in futures and investing in cash market
105. ______________ can be used to predict the future price trend of a market based on its
correlation with multiple related markets.
a) Sortino ratio
b) Harmonic mean
c) Bayes‟ theorem
d) Linear regression
106. ___________________ explains the relationship between the number of advancing and
declining stocks, and the up and down volume.
a) Arms Index
b) Thrust oscillator
c) McClellan oscillator
d) High-low Index (HLX)
107. All the following statements about end of bull markets are true except:
a) interest rates have declined
b) trading volume increases sharply
c) warning about an overheated stock market appear on the news
d) popular stocks advance significantly while some other companies collapse
108. When using the RSI as an overbought/oversold indicator, a buy signal is generated when:
a) RSI crosses above the midpoint (50 level).
b) RSI crosses beneath the midpoint (50 level).
c) RSI rises above its upper reference line and then crosses below it.
d) RSI declines below its lower reference line and then rallies above it.
109. A V-top or V-bottom is always accompanied by ______ and usually ______.

a) high volatility, low volume
b) low volatility, low volume
c) low volatility, high volume
d) high volatility, high volume
110. When the VIX is 34.6, the expected 30-day market movement is:
a) 1%.
b) 3.46%.
c) 10%.
d) 34.6%.
111. According to Schabacker's Rules, which of the following indicates an end of a Bear Market:
a) Interest rates are high.
b) Interest rates have declined.
c) Trading volume increases sharply.
d) Stocks become a popular topic of conversation.
112. Which of the following patterns resonate with price action highlighted within the green
rectangles marked „A‟ & „B‟?
a) Piercing Line & hammer

b) Piercing Line & Evening Star
c) Bullish Engulfing & Shooting Star
d) Bullish Engulfing & Hanging Man
113. The simplest and easiest method of intermarket analysis is:

a) momentum indicators.
b) correlation analysis.
c) creating autoregressive analysis models.
d) a visual inspection of a comparison chart.
114. When constructing a portfolio, it is important to select securities that have a ________ degree of
_______ between investment returns.
a) low, volatility.
b) low, correlation.
c) high, volatility.
d) high, correlation.
115. In the following chart, where is a negative divergence in RSI observed?
a) A
b) B
c) C
d) D
116. In a trading system that uses three moving averages a long trade is typically signaled when the
shortest (fastest) moving average is used to: a) act as a filter by requiring that it be falling as the
signal is triggered.
b) act as a filter by requiring that it be rising as the signal is triggered.
c) trigger a trade when the other two moving averages are diverging.
d) trigger a trade when the other two moving averages are converging.
117. Identify the highlighted chart pattern below:
a) Triple bottom
b) Double bottom
c) Cup and handle formation
d) Head and Shoulders bottom
118. A/An__________________ gap occurs at the end of a sustained and volatile price move and
confirms the reversal. a) exhaustion
b) runaway
c) breakaway
d) common
119. In an ideal situation, stock price of Gold mining companies and U.S Dollar index are: a)
positively correlated.
b) negatively correlated.
c) no correlation is observed.
d) positively correlated in an inflationary environment.
120. Diversification of portfolio is achieved by: a) investing equally in bonds and equity.
b) investing in mutual funds.
c) investing in asset classes which have low correlation.
d) investing in asset classes which have high correlation.
121. Using a 13 period EMA of the Force Index, which point on the chart would be a valid sell
signal?
a) A
b) B
c) C
d) D
122. Brazilian equity index (indiceBovespa) has topped out and is trading lower, from an intermarket
perspective what can be a reason for a decline in equity markets? a) Commodity cycle has topped out
a few months earlier, and commodity prices have started declining which in turn lead to fall in equity
index.
b) Commodity prices are increasing which lead to a shift from equities to commodities.
c) Brazil‟s central banks have increased interest rates in last couple of months which lead to flight of
capital.
d) Foreign institutional investors are withdrawing funds from emerging markets and investing into
developed markets.
123. What is the impact of falling commodity prices on the currency of a country which is heavily
dependent on commodity export? a) Currency will appreciate.
b) Currency will depreciate.
c) Has no impact on currency as there is no correlation between them.
d) Currency is mostly managed by the central bank. Therefore, it has no impact on currency.
124. Identify the candlestick pattern highlighted below within the circle:
a) Harami.
b) Bullish Engulfing.
c) Hammer.
d) Marubozu.
125. What chart pattern do you see in the box on this chart?
a) Flag.
b) Pennant.
c) Ascending Triangle.
d) Broadening Triangle.
126. During the last leg of an economic expansion, how do different asset classes perform? a) All the
asset classes turn down simultaneously.
b) Bonds turn down, followed by stocks and then commodities.
c) Stocks turn down, followed by bonds and commodities.
d) Commodities turn down, but bond and stocks continue to trend higher.
127. In the following chart of Dow Jones Industrial Average, interpret the RSI indicator in between
the highlighted vertical lines:
a) Negative divergence is observed between price and indicator.

b) Positive divergence is observed between price and indicator.
c) Bearish confirmation is observed between price and indicator.
d) Bullish confirmation is observed between price and indicator.
128. WTIC crude prices have declined from $100 to $50. Will the fall in crude have any impact on
stock prices of oil exploration companies? a) Since they have a positive correlation, stock prices of
oil exploration companies will decline because of reduced margins.
b) Since they have a negative correlation, stock prices of oil exploration companies will rise because
of increased margins.
c) Since they have no-correlation, prices are decided while awarding the contract.
d) Since they have no-correlation, most of the companies hedge their risk.
129. In the following chart of Cheniere Energy Partners LP, interpret the reading of the stochastic
indicator:
a) Stochastic is confirming the price action; should use current strength in price to initiate short
position.
b) Positive divergence as stochastic made a higher high, and prices a new low; should have gone long
immediately at $20 and placed a protective stop below the latest low.
c) Negative divergence as stochastic made a higher high and price a new low; should wait for a
breakout for a close above $25.
d) Stochastic is in overbought zone which indicates prices are losing momentum and are going to fall
again.
130. In the following chart of Exxon Mobile, calculate the downside target from the flag:
a) $78.60
b) $80.40
c) $80.00
d) $81.90
131. Based on the chart given below, identify the chart pattern and the best course of action:
a) Head and shoulder top; go long and use current pullback as shares are retesting an important
support level at point B.
b) Double top; go short at point A as shares have violated an uptrend support line.
c) Triple top; wait for a close below point C and execute shorts when prices are 2% below the
neckline.
d) Head and shoulder top; wait for a close below point B to execute below the neckline.
132. A “triple witching day” occurs when we witness: a) the S&P 500 futures, options on futures and
options on individual stocks all expiring at the same time.
b) a breakout to 52 week new highs by the DJIA, SPX and RUT indices.
c) a breakout to all-time new highs by the DJIA, SPX & RUT indices.
d) all three of the DJIA, SPX500 & RUT registering 52 week lows.
133. Based on the chart given below, when was a valid long exit signal generated on the chart using
the basic rules for using bands (note the arrows)?
a) A
b) B
c) C
d) No signal was generated during the trend
134. Which of the following is not an EMH assumption? a) Investors are rational.
b) Volatility is a function of information arbitrage.
c) Arbitrage forces prices to rational levels.
d) Investor errors are uncorrelated.
e)
135. Falling volume while price is rising means? a) Volume confirms the price rise.
b) Volume confirms the price drop.
c) Volume indicates a weak rally
d) Volume indicates a weak pullback
136. Which of the following strategies of trading the Bollinger Bands constitutes the highest risk? a)
Buy (close out shorts and go long) when the prices close above the upper band; close out longs when
the prices close below the lower band.
b) Sell short when the prices close below the moving average; close out short positions when prices
recapture the moving average.
c) Buy (go long) when prices close above the upper band. Close out longs when prices reverse and
close below the moving average value (the center of the band).
d) Sell short when prices close below the lower band. Cover your shorts when prices close above the
moving average value.
137. Based on the chart given below, what pattern is shown in the box?
a) Diamond Top.
b) Ascending Triangle.
c) Double Top.
d) “M” pattern.
138. Which of the following characteristics is the first that should be considered when choosing or
building systems to trade? a) A longer time to recovery than short-term drawdowns.
b) Time in markets: Choose the one that trades more frequently.
c) Gradual increases in equity line instead of downward surges.
d) Which markets the system will be traded on.
139. The MACD Histogram is a/an: a) trend-following indicator.
b) momentum indicator.
c) breadth indicator.
d) oscillator.
140. Based on the chart given below; identify the best course of action:
a) Shares are losing momentum which can be confirmed by negative divergence between price and
ROC; trader should be cautious and be quick to reduce position on a violation of trendline.
b) Shares are making a series of higher highs and higher lows; ROC has turned negative which is
confirming the price action; should use current pullback to add to position.
c) ROC has turned negative which is a sell signal; should initiate a short position.
d) Negative divergence observed between price and ROC should be ignored as prices are near life
time highs.
141. Extrapolation errors occur when investors: a) assume that current and recent conditions will
prevail well into the future, also causing them to ignore the evidence of changing circumstances.
b) tend to be overconfident regarding their abilities and make major mistakes like too little
diversification and over trading.
c) are tricked into thinking that they can foretell the future because they can easily observe the past.
d) try to identify patterns in financial markets that do not exist.
142. Based on the chart below, interpret the on balance volume (OBV) indicator with respect to price
action over the last 12 weeks:
a) Clear uptrend.
b) Weak uptrend near reversal.
c) Distribution.
d) No determination.
143. Stocks with superior fundamentals will normally decouple and start outperforming on a relative
basis during: a) a rampant bull market.
b) a market consolidation.
c) the last legs of an uptrend.
d) a market correction (bear market).
144. Which of the following statements about diamond tops is false? a) Breakouts tend to be fast-
moving price runs.
b) The price objective is usually equal to the width of the complete pattern.
c) A steep entry is usually followed by a steep exit.
d) Diamond tops are a combination of a broadening pattern and a symmetrical triangle.
145. Interpret price action in the chart below, combined with takeaways from the SPX New High-
New Low index:
a) Confirmation between price action and indicator; the ongoing pullback can be bought.
b) Divergence between price action and indicator; suggests exiting of long positions.
c) Divergence between price action and indicator; can initiate shorts at current levels.
d) Can initiate long positions at current price level; breadth bottomed out at the same level as the
pullback in October 2014.
146. The McClellan Oscillator is what type of indicator? a) Momentum

b) Oscillator
c) Breadth
147. How can one identify the existence of a cycle? a) Switch time frames
b) Remove price trend
c) Remove volume trend
d) Use n period extremes
148. Which of the following instances marks a single best valid buy signal with respect to the
direction system for the next new trend?
a) A
b) B
c) C
d) D
149. Which crossover in MACD-Histogram is the strongest buy signal generated in the following
chart of Alphabet Inc.
a) A
b) B
c) C
d) D
150. When an RSI makes a lower top (peak) above 50, a sell order should be executed when: a) The
RSI crosses below 50.
b) the RSI crosses below 30.
c) the last peak is retested.
d) the trough between the peaks has been crossed from above.
1D B D B B B C B C B
11 A C B D B A A D A D
21D C d A D b D D D C
31D a d C D b A D d D
41C A b b D b A b D C
51 D A B C A B D A B A
61d D D a b B d D D D
71b C B D c D D B C D
81a C C a b C b d c B
91D C B C A B B B C A
101 D D D C D A A D D C
111B C D B D B B A B C
121D C B B D B B A B B
131D A C B C A C D D A
141A D D B B C B D C D
Chapter wise Questions
Question 1
TB.LII.chtg.252
In a bull market, secondary trends are caused by:
Prudent investors taking profits
A major upward move over an extended period of time
A major downward move over an extended period of time
Minor trends that are under six days in duration
This is the incorrect answer because it describes a primary trend.
Question 2
TB.LII.mom.osc.084
When the RSI moves above its upper reference line and the weekly trend is up, it shows that:
The market is oversold and entering its buy zone.
The market is oversold and entering its sell zone.
The market is overbought and entering its buy zone.
The market is overbought and entering its sell zone.
Incorrect. When the RSI moves above its upper reference line and the weekly trend is up, the
market is not oversold and entering its sell zone.
Question 3
tb.LII.sing.can.line.001_4_18
High wave candles indicate market:
euphoria.
confusion.
indecision.
optimism.
This is the correct answer. High wave candles have small bodies and extremely long upper and
lower shadows. The long upper and lower shadows coupled with the small bodies suggest
confusion. Neither the bulls not the bears can decide on direction.
Question 4
TB.LII.und.impl.vol.254
Increased buying of options creates _________ implied volatility indicated by option prices.
Higher
Lower
No change in
Significantly lower
This is the incorrect answer because it increases the option price and the result is higher implied
volatility.
Question 5
TB.LII.chtg.065
XYZ stock has been in a sideways pattern for some time. You draw channel lines enclosing the
price move. The purpose of the channel lines is to:
Define the volatility of the price move.
Define the direction of the price move.
Isolate the trend from noise.
Uncover hidden patterns.
Incorrect. Price had been moving sideways so the reason for drawing the channel would not have
been to define the direction of price.
Question 6
TB.LII.mom.osc.353
What is the most likely conclusion when the momentum value penetrates the lower bound?
The market is oversold.
The market is overbought.
The current trend will continue.
Minor confirmation has been provided.
This is the incorrect answer because the market is overbought when the upper bound is
penetrated.
Question 7
TB.LII.trend.syst.1.269
Which of the following is not a reason why trend systems work?
Long-term trends capture price moves caused by technical factors.
Long-term trends capture price moves caused by fundamental factors.
Prices don't follow the normal distribution but have a fat tail.
Trends are supported by the flow of investor funds.
This is the incorrect answer because it is one of the three reasons why trend systems work.
Question 8
TB.LII.short.trm.pat.016
A single price bar, or group of bars sitting at the top of a price move and isolated by a gap on
both sides, before and after is known as:
A key reversal day
A pivot point reversal
An Island reversal
A spike
Incorrect. A pivot point reversal is a trading day or a price bar that is higher or lower than the
bars that come before or after. A pivot day can be an island reversal depending on the formation
of the pivot but it does not have to be an island reversal to be a pivot point reversal.
Question 9
TB.LII.bar.cht.pat.162
A consolidation in a larger uptrend has an entry from _________ and an exit ___________.
Above, upward
Below, upward
Above, downward
Below, downward
Correct. Price action moves into the consolidation or sideways price action from below. It exits
the pattern from above if the trend remains up.
Question 10
TB.LII.chtg.072
Which of the following long-term patterns is often preceded by a critical shortage in demand,
and magnified by constant news shortage?
A V-top
A rounded top
A double top
A triple top
Incorrect. A double top is a price peak, followed weeks or months later by another peak. Both
peaks usually stop at the same level or close to it. The tops will stop at the same level because
traders believe that the same reason that caused prices to fail to go higher the first time will cause
them to fail a second time. This will cause selling at around the level of the previous top. Selling
in anticipation of the first top may cause the second top to be lower than the first. Double tops
are rarely perfect.
Question 11
TB.LII.chtg.181
Referring to the chart of CBS Corp. above, the price formation at A is known as:
A throwback
A failed breakout
Dead cat bounce
Island reversal
Incorrect. A throwback occurs when price retraces quickly back to the breakout zone from an
upward breakout.
Question 12
A trader is using Toby Crabel's strategy for entering trades using the inside bar as a setup. Using
the chart of Aecom Technology Corp., when does an action signal occur?
A
B
C
D
Incorrect.
Question 13
XYZ stock is in a downtrend. You read its chart and see a rising wedge formation in progress.
You should:
Act immediately and short the stock.
Act immediately and buy the stock.
Wait for breakout and short the stock.
Wait for breakout and buy the stock.
Correct. A rising wedge is likely to be a continuation pattern. But as with any chart pattern, the
danger of acting prematurely is great. Until the breakout from the pattern occurs, the formation is
not complete. Wait for breakout and if breakout is to the downside, short the stock.
Question 14
Which of the following statements about flags and pennants is correct?
The trend lines converge in a pennant.
The trend lines converge in a flag.
The flag is a short triangle that slopes in the opposite direction from the trend.
The pennant is a short channel that that slopes in the opposite direction from the trend.
This is the incorrect answer because the flag is a short channel that slopes in the opposite
direction from the trend
Question 15
TB.LII.mov.av.134
The falling ADX line is telling you that price action in DDD is:
About to fall
About to rise
Not trending
About to trend
Incorrect. A falling ADX line will not tell us whether prices are about to fall.
Question 16
TB.LII.vol.oi.breadth.111
The assumption underlying a volume spike is that:
More traders are entering the market, there is more excitement for the stock, and so the
trend has some way to go before reversing.
Volume spikes confirm the direction of prices.
When everyone has entered the market, there is no one left to buy or sell and prices
must reverse.
Volume spikes are less dependable for indicating future price direction.
This is incorrect. A volume spike is not less dependable for indicating future price direction.
Question 17
What does an inside day represent?
A day when volatility is high
A day when volatility is low
A likely imminent reversal
An imminent breakout.
Incorrect. An inside day does not represent an imminent reversal. It is more likely to represent
consolidation.
Question 18
TB.LII.chtg.063
When trading using horizontal support and resistance lines what could qualify as a swing high?
Every reversal that halts the advance of the trend
A reversal that meets a set threshold either in points or percentages
A reversal that is equal in time or length to the distance between the initial support and
resistance lines
Any reversal higher than the previous one in the current trend
This option is incorrect. There is no such rule and, if there were, it would likely be too rigid to
apply successfully.
Question 19
The Force Index is constructed using:
Price and volume
Price only
Volume only
Two Exponential Moving Averages of price and volume
This option is incorrect. The 13-day Force Index does use a 13-day EMA for longer term
analysis. But it does not use two EMAs of price and volume.
Question 20
TB.LII.chtg.246
The three black crows pattern is a:
Bearish reversal
Bullish reversal
Bullish continuation
Bearish continuation
This is the incorrect answer because it occurs at market tops and is a top reversal formation.
Question 21
A pipe formation is also known as a:
Two-bar reversal
One-bar reversal
Horn pattern
Inside bar
This is the incorrect answer because a pipe formation is also known as a two-bar reversal pattern.
Similar to the one-bar reversal, the pipe formation occurs at the end of a trend, upward or
downward, but extends the reversal over two bars.
Question 22
When the outer edge of an upper band around a moving average is broken, the trader should look
to:
Enter in the direction of the breakout.
Enter countertrend.
Wait for a reversion to the mean.
Exit the trade.
Incorrect. A breakout of the outer edge of an upper band around a moving average does not give
a reversal signal.
Question 23
TB.LII.mov.av.050
Which of the following indicators measures volatility?
Average Directional Index (ADX)
Average True Range (ATR)
Advance/Decline Line
Divergence
Incorrect. The advance/decline line tracks the degree of mass participation of securities in rallies
and declines.
Question 24
Which types of gaps are best ignored?
Opening gaps
Breakaway gaps
Suspension gaps
Exhaustion gaps
Correct. Suspension gaps often occur in 24-hour futures trading when one market closes and
another opens. This is especially true if one market is electronic and the other is open outcry.
Suspension gaps are meaningless unless they occur as part of another type of gap with more
significance.
Question 25
TB.LII.mov.av.080
When a moving average changes direction from up to down it means:
Price today is > price N periods ago.
Price today is < price N periods ago.
Momentum is increasing.
Momentum is decreasing.
Incorrect. The change of the moving average from up to down is not the best indicator of
momentum change.
Question 26
tb.LII.candle.pat.trade.001_4_18
Which statement best describes the convergence concept in technical analysis?
The more candle patterns converge at a similar level, the greater the likelihood of a
reversal.
The more technical signals converge at a similar level, the greater the likelihood of a
reversal.
Candlestick patterns often converge to their mean.
Candlestick and Western technical patterns often converge to their mean.
This option is incorrect. This statement does not explain the convergence concept.
Question 27
Which of the following formations is usually a continuation pattern?
Three black crows
Upside Tasuki gap
Shooting star
Dark cloud cover
Incorrect. A shooting star is a bearish signal occurring at the top of a swing. It has a long upper
shadow and a small body at the lower end of the candle. Its real body can be black or white.
Question 28
Which of the following is not a triangle formation?
Megaphone
Diamond top
Wedge
Flag
Incorrect. A diamond top is another name for a combination pattern or two triangles. It consists
of a broadening pattern and a symmetrical triangle.
Question 29
In financial markets, liquidity is:
Related to the consistent size of the bid and ask and the spread between the bid and the
ask
The ability to transact a meaningful number of shares or contracts easily without
bringing about a large price change
The ability to trade an issue and to close all positions by the end of the day
The difference between the quote price and the execution price
Correct. Liquidity is the ability to buy or sell an asset quickly without causing a drastic change in
the asset's price.
Question 30
TB.LII.about.vix.091
What is the formula for calculating the anticipated 30-day movement of the stock market based
on the VIX?
VIX/square root of 12
VIX/square root of 30
VIX × square root of 12
VIX × square root of 30
Incorrect.
Question 31
A trader following the 10-day moving average rule should:
Buy when the upper band is penetrated.
Sell when the upper band is penetrated.
Buy when the lower band is penetrated.
Do nothing when the lower band is penetrated.
This is the incorrect answer because a sell signal occurs when the lower bound is penetrated.
Question 32
A failed head-and-shoulders top is similar to which one of the following?
Ascending triangle
Descending triangle
Broadening triangle
Diamond top
Incorrect. A broadening triangle has diverging trendlines; it is therefore not similar to a failed
head-and-shoulders top.
Question 33
TB.LII.chtg.248
The inverted hammer pattern is a:
Bullish reversal
Bearish reversal
This is the incorrect answer because the inverted hammer is a bearish continuation pattern.
Question 34
TB.LII.chtg.180
According to Dow Theory, elation about the stock market generally happens during the:
Accumulation stage of a bull market
Second stage of a bull market
Final stage of a bear market
Final stage of a bull market
Incorrect. Pessimism, not elation, marks the final stage of a bear market.
Question 35
Initial breakout stop for a head-and-shoulders top should be placed:
Above the neckline
Above the right shoulder peak
Above the highest peak
Above the pullback peak
Incorrect. The highest peak in a head-and-shoulders pattern is the head. Placing a stop so far
away from entry exposes the trade to increased risk.
Question 36
TB.LII.mom.osc.291
Which of the following about the MACD is correct?
The fast line represents the difference between the 12-day EMA and 26-day EMA.
The slow signal line represents the difference between the 26-day EMA and 12-day
EMA.
The slow signal line is based on the 12-day EMA of the fast line.
The fast line represents the 9-day EMA of the fast line.
This is the incorrect answer because it should be the difference between the 26-day EMA and 12-
day EMA.
Question 37
After an upward breakout, price returns to the breakout price or chart pattern boundary within 30
days. This is a:
Throwback
Pullback
False breakout
Dead cat bounce
Incorrect. A false breakout is one that breaks out in the direction opposite from the direction of
the final breakout.
Question 38
Which of the following price patterns is not a continuation pattern?
Scallop
Wedge
Cup and handle
Pennants
Correct. This is a type of rounded-bottom formation. Traditionally this pattern is considered to be
a bottoming reversal pattern.
Question 39
When prices are rising, volume is falling, and open interest is falling, the traditional
interpretation is that:
Short sellers are covering their positions, causing a rally. Money is leaving the market.
New buyers are entering the market.
Longs are being forced out. The downtrend will end when all sellers have liquidated
their positions.
There is new short selling. Bearish money is entering the market.
This is incorrect. Prices should be falling, volume falling, and open interest falling.
Question 40
Which of the following patterns is likely to occur as a result of a price shock?
Inside day
Outside day
Wide-ranging day
Key reversal day
Incorrect. An outside day can be a wide-ranging day if the volatility is high, but it does not need
high volatility to occur. An outside day is one in which the entire range of the current day has
enclosed the range of the prior day.
Question 41
Which of the following statements about the diamond top pattern is correct?
It is rare at price bottoms.
It is rare at price tops.
It consists of a combination of a broadening pattern and an ascending triangle.
It consists of a combination of a broadening pattern and a descending triangle.
This is the incorrect answer because it usually occurs at the top of a sharp upward rise in prices.
Question 42
TB.LII.mov.av.001
When using a moving average crossover signal to enter trades, which of the following should
help reduce false signals?
Optimization
ADX line
Exponential moving average
Keltner bands
Incorrect. The exponential moving average is a type of moving average which weighs more
strongly more recent prices.
Question 43
TB.LII.mov.av.003
ADX peaks are useful as trading signals to:
Open trend positions.
Close trend positions.
Short the security.
Open a long position.
Incorrect. The ADX line cannot be used as a trend direction signal.
Question 44
Previous open > previous close and today's open < previous close and today's close > previous
open. Which candlestick pattern is this?
Bearish engulfing
Bullish engulfing
Bullish morning star
Bearish evening star
Incorrect. A bullish morning star is a three-day pattern that would have the following formation:
Day I close < open, day 2 gap down, close < prior day's close, day 3, gap up, close > prior day's
close.
Question 45
On day one price moves sharply up, opening near the lows and closing near the highs. On day
two price opens near the close of day one, trades slightly higher, and then falls sharply to give
back all of the previous day's gains. This pattern is:
An outside day
An inside day
A 2-day reversal
A key reversal day
Correct. This pattern consists of two days that are essentially a mirror image of one another. In a
downside 2-day reversal, the first bar represents the strong bullish feeling of the buyers. The
bears dominate the second day, reversing the gains of the previous day to the complete
discouragement of the bulls.
Question 46
An inside bar signal that fails and becomes a signal itself is known as a:
Naked bar upward reversal
Hikkake
Harami
Oops!
Correct. Hikkake is a Japanese term meaning to trap, trick, or ensnare so it is a rather appropriate
name for this pattern. The pattern, which is not a candlestick pattern, starts with an inside bar.
Prices break one way after the completion of the inside bar formation. The conventional wisdom
is that price will continue in the breakout direction, but this is not the case. The breakout fails to
continue and price returns to break in the opposite direction through the previous inside bar
extreme.
Question 47
TB.LII.mov.av.132
The largest potential problem of a reversion to the mean trading system is:
Markets often trend, so range-bound systems are often unprofitable.
The possibility of a trend developing that creates the risk of unlimited losses.
Countertrend signals can cause whiplashes.
These systems respond poorly to oscillators such as the stochastic, relative strength
index, and the moving average convergence divergence (MACD).
Correct. When prices do begin to trend, a range-bound system will no longer work.
Question 48
When trading a dead cat bounce, you should:
Wait for the initial sell-off volume to decline and then look for a rally on lesser
volume. Short the stock on the bounce.
Enter the trade in the direction of the rally for a long trade and look for the completion
of a break below a price pattern to exit.
Trade the initial downward movement because this is likely to be the most profitable
part of the pattern and then exit on the dead cat bounce.
Dead cat bounces are dangerous; it is not wise to trade them.
Incorrect. The initial downward movement will usually occur suddenly because it will often be
as a result of unexpected bad news about a company or commodity. Because the initial
downward move will only last for a few days (no more than seven), it will be difficult to enter
early enough to profit from the initial decline and not get caught in the ensuing rally, which is the
dead cat bounce.
Question 49
An investor that shifts stocks in a portfolio from small caps to the S&P 500 and then to Dow
stocks is:
Looking for liquidity
Looking to increase position size
Looking for safety
Looking to increase risk
Correct. Small-cap stocks are generally considered riskier than stocks in the S&P 500, which is
made up of stocks issued by 500 of the largest capitalized companies traded on American stock
exchanges. The stocks in the Dow Jones Industrial Average are 30 of the largest companies
trading on American stock exchanges.
Question 50
Which of the following is the best description of tick volume?
The number of recorded price changes that is recorded during any time interval
The number of recorded price changes, regardless of volume or size of the price
change that occurs during any time interval
The number of positive price changes that occur during any time interval
The path that price travels to reach its final high or point during the day
This is the correct option. Tick volume is related directly to actual volume because as the market
becomes more active, prices move from bid to asked and from asked to bid more often. Tick
volume shows the level of liquidity and can be used as a substitute for volume.
Question 51
The VIX is quoted at 30. What is the most likely conclusion?
The market expects movement of about 8.67% over the next 30 days.
The market expects movement of about 8.67% over the next 12 months.
The market expects movement of about 2.5% over the next 30 days.
The market expects movement of about 2.5% over the next year.
This is the incorrect answer because it is calculated as 30/3.46 = 8.67%. The market expects
movement of about 8.67% over the next 30 days.
Question 52
What is the profit objective of a triangle formation?
Equal in size to the amount of time it took for the formation of the triangle
Equal in size to the initial reaction which formed the largest end of the triangle
Below the identifiable major resistance level
The width of the pattern added to the support level
Correct. The profit objective for a triangle formation is based on the volatility of the chart
formation. Therefore, the objective of a triangle formation will be equal in size to the initial
reaction which formed the largest end of the triangle.
Question 53
TB.LII.tm.bas.trd.054
Which technique could you use for evaluating the direction or tendency of prices within prior
ranges or at new levels?
Phasing
McClellan Oscillator
Autoregressive functions
Average Maximum Retracement
Incorrect. The McClellan Oscillator is a breadth indicator.
Question 54
When trading a breakaway gap, a pivot low is:
The low of a bar that occurs just before the breakaway gap
The low of a bar that is surrounded on both sides by a bar with a higher high
The low of a bar that is surrounded on both sides by a bar with a higher low
The high of the bar before breakout
Incorrect. The low of a bar that is surrounded on both sides by a bar with a higher high will not
necessarily create a pivot low because the lows of the bars on either side with higher highs may
also have lower lows.
Question 55
The implied volatility of an option contract is dictated by:
The strike price of the option contract
Days to expiration of the option contract
Buying and selling of the option contract
The price of the underlying security
Correct. The implied volatility of an option is dictated by market forces. When buying pressure
pushes option prices higher or selling pressure pushes option prices lower, implied volatility also
changes even if all of the other factors which influence the option price stay the same. Of all the
prices which determine the price of an option, only implied volatility will fluctuate based on
market buying and selling pressure.
Question 56
Double bottoms are:
Less orderly than tops
More orderly than tops
Less common than double tops
Riskier to trade than tops
Correct. Double bottoms are more orderly than double tops. They are less volatile because
double bottoms often represent prices reaching a level which is low enough for the average
investor to realize that there is little additional downside potential.
Question 57
TB.LII.mom.osc.242
Momentum is characterized by:
Buying winners and selling losers
Buying losers and selling winners
Buying losers and winners
Selling losers and winners
This is the incorrect answer because relative price strength or momentum is characterized by
buying winning stocks and selling losing stocks.
Question 58
In an inverse head-and-shoulders pattern, the tops between the peaks is the:
Neckline
Shoulders
Support
Head
This is the incorrect answer because the tops represent the neckline, which is also the resistance
in a bottom formation.
Question 59
High volume usually means:
High volatility
High risk
High-range days
High momentum
This is the correct answer. High volume days means high risk even on those days when the risk
does not materialize and price closes unchanged. A high-volume day which closes with price
unchanged is a day of potential volatility. If on the following day there is an imbalance of buyers
and sellers and the volume is still high, price could break out in either direction.
Question 60
The price objective when trading a diamond top is usually:
The distance from the base to the apex of the pattern
The distance that the price traveled to reach the diamond
Adding the vertical distance between the initial upper and lower reversal point prices
to the price where the breakout occurred
The width of the price patterns
This is the correct answer.
Question 61
Which of the following statements is correct?
A hammer has a black real body while a hanging man has a white real body.
A hammer has a long lower tail while a hanging man has a long upper tail.
A hammer will appear near or at the bottom of a decline; a hanging man will appear
near or at the top of an uptrend.
A hammer will appear near or at the bottom of a decline except for circumstances
where it will mimic a hanging man.
This option is incorrect. Both the hammer and hanging man have long lower tails.
Question 62
TB.LII.mov.av.185
The purpose of a moving average like MAMA and FAMA is to:
Minimize the influence of the drop-off effect.
Adjust the weighting based on the volatility of the price data.
Use percentage changes rather than points.
Calculate the most recent number more heavily.
Incorrect. The geometric moving average uses percentage changes between the previous bar and
the current bar over some past predetermined period. It is mostly used in indexes.
Question 63
Which of the following is a general rule for interpreting volume data?
Watch volume during reactions against the trend.
Trends confirms high volume.
If the market falls to a new low and the volume reaches a new high, that bottom will
likely not be retested.
If volume expands while a trend continues, that trend is ripe for a reversal.
This is the incorrect answer because high volume confirms trends.
Question 64
Using the chart of American Eagle Outfitters, Inc., reproduced below, what is the chart pattern at
A?
Runaway gap
Measuring gap
Breakaway gap
Exhaustion gap
Incorrect. A measuring gap is another term for a runaway gap
Question 65
Which of the following statements about candlestick patterns is correct?
Candlestick patterns are short-term patterns.
Candlestick patterns are long-term patterns.
Candlestick patterns are generally formed by three or more bars.
Candlestick patterns are similar to bar charts in that they both place emphasis on the
opening and close.
This is the incorrect answer because candlestick patterns are short-term patterns. Most
candlestick patterns are formed by only one or two bars.
Question 66
TB.LII.chtg.012
Which of the following is not a tenet of Dow Theory?
The averages do not discount Acts of God, though they discount everything else.
The averages must confirm.
Only closing prices are used.
Volume precedes price.
Incorrect. Dow Theory initially applied the principle of confirmation to the Dow Industrials and
Dow Transportation. Much has changed but the principle of confirmation still remains an
important concept derived from Dow Theory.
Question 67
Which pattern occurs when a bar has a high that is higher than the high of the previous bar and
the low is lower than the low of the previous bar?
Outside bar
Inside bar
Hikkake
Hook reversal day
This is the incorrect answer because an inside bar is a bar with a range that is smaller than and
within the previous bar's range.
Question 68
Which of the following is not used in the A/D calculation?
10-day moving average
Opening price
Closing price
Low price
This is the incorrect answer because open, close, high, low, and volume are all used in the
calculation. The formula is as follows:
Question 69
TB.LII.mom.osc.082
Which of the following is not a momentum indicator?
Relative Strength Indicator
Moving Average Convergence/Divergence
Stochastic indicator
Autoregressive Integrated Moving Average
Incorrect. The MACD is a momentum oscillator. The MACD uses the momentum calculated as
the difference between two trendlines. The trendlines are constructed using exponential moving
averages.
Question 70
TB.LII.mov.av.046
Today price forms an inside day chart pattern. When calculating the directional movement for
today it will be:
0
1
Positive
Negative
Incorrect. We will only be able to get a positive directional movement (+DM) if today's range
extends above yesterday's range.
Question 71
A trader who uses Bollinger bands observes that the stock price closed below the lower band.
The trader should now:
Go short.
Close out shorts.
Go long.
Stay out of the market.
This is the incorrect answer because when the price closes above the upper band, the trader
should close out shorts and go long.
Question 72
TB.LII.mov.av.135
A moving average that emphasizes the weight of the middle of the price series is known as a:
Geometric moving average
Triangular moving average
Linearly weighted moving average
Correct. The triangular moving average begins with a simple moving average of a number of
bars. Using these results, it then takes a moving average of a length of half the number of the
original number of bars. This effectively emphasizes the weight of the middle of the price series.
Question 73
TB.LII.chtg.011
A failed downside breakout is also called a:
Bull trap
Bear trap
Throwback
Death cross
Correct. A bear trap occurs when prices fall below a clear support line, generating sell signals.
Then after a few days, prices move back up through support, often accelerating upwards.
Question 74
In the chart of Tesla Motors Inc. reproduced below, what candlestick pattern is at A?
Dark cloud cover

Morning star
Evening star
Three inside up
Incorrect. The morning star is a bottom reversal three-day pattern. The first candle is a black real
body. The second candle is a star. Ideally the star should gap down from the black candle. The
third day is a white real body candle which intrudes deeply into the real body of the first day's
candle.
Question 75
In the chart of US Steel, the crossover of the moving averages at the point indicated by the arrow
is known as:
The death cross

The golden cross
A pivot point
Donchian breakout
Incorrect. The death cross is when the 50-day moving average crosses below the 200-day
moving average. It is bearish.
Question 76
TB.LII.mom.osc.117
In the chart shown below, the MACD indicator is:
Diverging positively from price action

Diverging negatively from price action
Showing technical weakness
Confirming bearish price action
Incorrect. A negative divergence occurs when price makes a new high, but the oscillator refuses
to confirm by making a lower high.
Question 77
If the VIX is quoted at 35, what is the anticipated 30-day movement of the stock market?
2.91%
6.39%
10.11%
21%
Correct.
Question 78
You recognize a reversal signal on the daily chart and are considering entering a trade. How
could you improve your market timing?
By switching to a higher time frame chart
By switching to a lower time frame chart
By using both a higher time frame chart and a lower time frame chart
By using both a weekly and monthly time frame chart
This option is incorrect. Switching to a higher time frame chart will not help to improve timing
for trade entries.
Question 79
How would you distinguish a high wave candle from a spinning top?
A high wave candle appears in an uptrend while a spinning top appears in a
downtrend.
A high wave candle has a long lower tail while a spinning top has a long upper tail.
A high wave candle is a bullish candle while a spinning top is a bearish candle.
A high wave candle has a small real body with a long upper and lower tail; a spinning
top has a diminutive real body, but may not have shorter upper and short lower
shadows or none at all.
This option is incorrect. The tails of the high wave candle need not be the same length, but must
be present and extremely long. Spinning tops may or may not have tails.
Question 80
According to put–call parity, put and call prices are linked to each other through the:
Underlying stock price
Interest rate
Implied volatility
Strike price
This is the incorrect answer because put and call prices are linked together through the
underlying stock price.
Question 81
TB.LII.mom.osc.352
Which of the following statements about momentum is correct?
It is often used in mean-reversion strategies.
The change in momentum is also called the first difference.
As the time period for the momentum calculation shortens, the indicator becomes less
sensitive to small changes in price.
It is a lagging indicator of price direction.
This is the incorrect answer because it is also called the second difference.
Question 82
During the formation of an upward-sloping channel, if sellers become increasingly more anxious,
the pattern is likely to morph into a:
Declining wedge
Rising wedge
Rounding top
Descending triangle
Correct. If the rallies in an upward-sloping channel fail to meet the upper trendline, then the new
line which can be drawn above connecting the downward reversal points will have a lesser slope
than the underlying trendline. If this upper sloping line is projected into the future, it will
eventually meet the trendline and form a rising wedge. The upper trendline which slopes
downwards instead of parallel as it previously had suggests that sellers are now selling earlier;
they are becoming more anxious.
Question 83
An inside bar occurs when:
The high of the second bar is higher than the high of the previous bar and the low of
the second bar is lower than the low of the previous bar.
The high of the second bar is lower than the high of the previous bar and the low is
higher than the low of the previous bar.
The bar closes below a previous low and is a down bar.
The high is greater than the previous bar high and the close is down from the previous
bar close.
This option is correct. An inside bar's range is completely within the range of the previous bar.
Question 84
A true double-top formation is valid when:
The second top has formed.
The intervening reaction reversal point has been penetrated.
Price is on the second reaction after the second top has formed.
Three reversal points have formed.
Correct. A double-top formation is only complete when it has penetrated the breakout level. That
breakout level is the intervening reaction reversal point.
Question 85
TB.LII.mom.osc.081
A key advantage of using momentum indicators over moving averages is that:
There is more noise in the moving average line than in the equivalent momentum line.
The momentum line does not have the lag that exists in the moving average.
Even though both indicators lag price, the momentum line has less of a lag than the
moving average line.
Momentum indicators track changes in price levels more efficiently than moving
averages.
This statement is incorrect. While the moving average is a lagging indicator, the momentum line
is not.
Question 86
TB.LII.chtg.179
According to Dow Theory, the public sees an urgency to liquidate stocks during the:
Distribution phase of a bull market
Distribution phase of a bear market
Second stage of a bear market
Final phase of a bear market
Correct. The second stage of a bear market is known as the panic stage. This is when prices
decline faster than at any time during the bull market. Prices also fail to rally. The news
constantly talks about how the bull market has ended. This causes the public to rush to liquidate
stocks, which forces increased downward pressure on stock prices. As prices continue to drop, a
sense of panic sets in, resulting in more selling.
Question 87
A trader notices that the outer edge of a Bollinger band is broken. What is the most likely
conclusion?
An entry should be placed in the direction of the breakout.
An entry should be placed in the opposite direction of the breakout.
A sideways trend is now likely.
The existing trend will stay intact.
This is the incorrect answer because when the outer edge of a band is broken, empirical evidence
suggests that the entry should be in the direction of the breakout, not unlike the breakout of a
trend line or support or resistance level.
Question 88
When trading a common gap in an uptrend, an active trader would:
Place a buy order just under the resistance level in order to benefit from the jump in
prices.
Place a buy order just after the gap since the gap confirms the move and offers
additional potential profits.
Sell as the gap is being filled, placing a stop above the previous high.
Take a position counter to the direction of the gap, expecting the move to reverse and
fill the gap. Liquidate the trade if the gap is not filled in a few days.
Incorrect. This rule describes an exhaustion gap trading strategy. It is a highly risky trade to take
because the pattern could fail and the trend could explode to make new highs in the direction of
the original trend.
Question 89
TB.LII.mov.av.206
Which of the following statements about the Wilder moving average is correct?
It weights the most recent number more heavily.
It weights the oldest numbers more heavily.
It is a complex method to calculate a moving average.
The Wilder moving average should be used in the EMA.
This is the incorrect answer because it is a simple method.
Question 90
TB.LII.mom.osc.131
XYZ stock closes on day 1 at $40, on day 2 at $42. On day 3, the stock shoots up and closes at
$49. The stock continues to rise so that on day 4 it closes at $55. However, because of
unexpected bad news on day 5 the stock gaps down on the open and closes at $40. The 5-day
momentum is:
0
10
15
40
This option is incorrect.
Question 91
TB.LII.mov.av.047
The directional system tracks:
Significant price levels by comparing the positive and negative directional lines and
calculating price objectives
The direction of trend change by comparing the relationship of the positive and
negative smoothed lines through construction of the Average Directional Indicator
Changes in mass bullishness and bearishness by measuring the capacity of bulls and
bears to move prices outside of the previous day's range
Changes in mass bullishness and bearishness by measuring the capacity of bulls and
bears to move prices outside of the current day's range
This is correct. If today's high is above yesterday's high, it shows that the crowd is more bullish.
If today's low is below yesterday's low, it shows that the crowd is more bearish.
Question 92
A false breakout breaks out ______________ the direction of the final breakout, while a
premature breakout breaks out __________________ direction as the eventual exit breakout.
In the same, opposite from
Opposite from, in the same
In the same, in the same
Opposite from, opposite from
Correct. These false and premature breakouts are not exits from a formation but are minor
breakouts above or below breakout levels; they will quickly return to the price pattern. Often a
false breakout will trigger stops by breaking out opposite to the direction of the final breakout,
before returning to the price pattern. They are very common and so should be protected against.
Question 93
A trader uses 10-day and 26- day moving averages. If the current price crosses above both
moving averages, the trader should:
Buy.
Sell short.
Exit the trade.
Close out long positions.
This is the incorrect answer because she should sell short when the current price crosses below
both moving averages.
Question 94
TB.LII.mov.av.215
A 30-day SMA of daily closes smoothed in a 15-day SMA is an example of a:
Triangular moving average
This is the incorrect answer because the triangular moving average takes a moving average of a
moving average, which gives a doubly smoothed moving average. It begins with a simple
moving average with a predetermined number of bars and then takes a moving average of a
length of half the number of original bars. The GMA is a simple moving average of the percent
changes between the previous bar and the current bar over some past predetermined period.
Question 95
Which of the following statements is correct?
Candle patterns can help confirm price targets and Western technical signals can help
confirm reversals.
Candle patterns can help confirm price targets and Western technical signals can help
support this confirmation.
Candle patterns can help confirm reversals and Western technical signals can help
confirm price targets.
Candle patterns can help confirm reversals and price targets and Western technical
signals can help confirm reversals and price targets.
This option is incorrect. A limitation of candle patterns is that they do not provide price targets.
Question 96
Because triangle patterns suffer from many _____________________ breakouts, a strict
breakout rule should be used in trading them.
Imperfect and sluggish
False and premature
Fast and irregular
Unprofitable and irregular
Correct. Triangle patterns are plentiful, but they often suffer from many false and premature
breakouts, which is why when trading them a strict breakout rule should be used.
Question 97
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The Golden Cross describes the point when:
The 50-day moving average crosses below the 200-day moving average.
The 50-day moving average crosses above the 200-day moving average.
Current price crosses above both moving averages.
Current price crosses below both moving averages.
Correct. The Golden Cross is a very popular stock market trending method. It often signals the
beginning of a bullish move in the market.
Question 98
Volume is always _______________ at the beginning of the day and ________________ at the
end of the day.
Lower, higher
Lower, lower
Higher, lower
Higher, higher
This option is incorrect.
Question 99
TB.LII.mov.av.286
Trendlines form patterns because of:
Human emotions, such as greed and fear, that are constant through time
The active role of hedge funds
The tenets of the efficient market hypothesis
Day traders
This is the incorrect answer because patterns repeat themselves due to human emotions that are
constant through time.
Question 100
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A trader's dominant market cycle is 34 days. According to Bulkowski, what is the preferred
length for the exponential moving average?
17 days
200 days
7 days
11 days
This is the incorrect answer because the EMA should be half the length of the dominant market
cycle.
Question 101
TB.LII.mov.av.202
Which of the following statements about a 39-day SMA and a 39-day EMA are correct?
The EMA will change direction more quickly because of the additional weighting that
is placed on the most recent data.
The EMA will change direction more slowly because of the additional weighting that
The SMA will change direction more slowly because of the additional weighting that
The SMA will change direction more quickly because of the additional weighting that
This is the incorrect answer because the EMA will generally change direction more quickly
because of the additional weighting that is placed on the most recent data. The SMA does not
place additional weighting on the most recent data.
Question 102
During which of the following periods can volume be expected to decline?
On the last day of the week
On the first day of the week
During triple witching day
During quadruple witching day
Correct. Along with the day before a holiday and during the summer, volume can be expected to
decline during these periods.
Question 103
Which of the following statements about narrow range bars is correct?
Low volatility is expected to eventually switch to high volatility.
A sell entry stop should be placed at the high of the qualified NR4 or inside day.
Wide range bars indicate low volatility.
Narrow range bars indicate high volatility.
This is the incorrect answer because the sell entry stop should be placed at the low of the
qualified NR4.
Question 104
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On day 1, the high is 50, low is 43, open is 45, and close is 49. On day 2, the high is 53, low is
45, open is 47, and close is 51. What is the amount of positive directional movement?
3
2
4
0
This is the incorrect answer because the amount of positive directional movement is the day's
high minus the previous day's high or $53 – $50 = $3.
Question 105
TB.LII.chtg.161
A prudent way to identify the end of a trend is to:
Use multiple signals.
Use breaks of support and resistance levels.
Use candlestick or bar chart reversal signals.
Look out for a change in the character of the move.
Incorrect. A break of support or resistance may not spell the end of a trend. Once broken, support
lines can become new resistance lines and resistance lines can become new resistance lines,
meaning that the trend can continue after breaking old support or resistance lines.
Question 106
Which of the following short-term patterns is most similar to a spike?
One-bar reversal
Gap
Horn pattern
Shark
Correct. Spikes are similar to gaps except that instead of an empty space, a spike has a solid line
(in a bar chart).
Question 107
Why is the CBOE Volatility Index, more popularly known as the VIX, generally regarded as a
gauge of fear and greed in the stock market?
Because high option prices usually indicate a trend reversal is near.
Because high S&P 500 index options usually mean high volatility.
Because implied volatility is a measure of risk projected by option pricing.
Because high option prices indicate high prices for the underlying securities.
Incorrect.
Question 108
In a head-and-shoulders pattern, breakout occurs when prices break below the neckline after
completing the:
Right shoulder
Left shoulder
Head
Neckline
This is the incorrect answer because breakout occurs when prices break below the neckline after
completing the right shoulder. The breakout is a requirement of the formation.
Question 109
When an outside bar closes near a high or low extreme, what is likely to happen next?
Increasing momentum
Decreasing momentum
Further action into the direction of the close in the following bar
Run-day bars into the direction of the close in the following few days
Correct. Research done by Bulkowski suggests that if the close of an outside bar happens within
the upper or lower 25% of the range, it tends to predict the future breakout upward about 66% of
the time and downward about 62% of the time.
Question 110
In the chart of PSA above, the price pattern at C is:
An inside bar
An outside bar
A two-bar breakout
A horn pattern
Incorrect. An inside bar is a bar whose range is completely within the range of the previous bar.
Question 111
Two standard deviations represent a clustering of _________________ of stock prices:
95.5%
87%
80%
78%
Correct. Because stock market prices are not normally distributed; there is a distortion from a
symmetrical distribution because prices tend to spend more time at higher or lower levels than
they would in a normal distribution, two standard deviations would include about 87% of the
data.
Question 112
According to put-call parity, combining a stock and put position results in the same payoff as a
position in a:
Call option
Cash instrument
Bond
Put option
This is the incorrect answer because it results in a call option with the same strike price as the put
option.
Question 113
Assuming there are 252 trading days in a year, annualized implied volatility of 185 percent for
an option with a single day left to expiration translates to a one-day move of:
9.85%
11.65%
14.65%
29.31%
Correct. The formula is 1-day movement = implied volatility/square root of 252
Question 114
When the VIX is 10% above its 10-day simple moving average and the market is below its 200-
day moving average, the trader should look for a signal to:
Go short.
Go long.
Exit the market.
Wait for confirmation.
This is the correct answer. The VIX is often used as a sentiment indicator, measuring the
complacency or fear of investors. Larry Connors developed the following market timing
indicator to trade market extremes. When the market is below its 200-day moving average and
the VIX is higher than it has been in last 10 days, this would indicate that the market which has
been selling off has reached an extreme and will be likely to reverse to the upside. High VIX
readings will usually occur after a market selloff.
Question 115
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A trader wants to calculate a 20-day Wilder moving average. The previous day's 20-day moving
average was 85. Today's closing price is 93. What is the 20-day Wilder moving average today?
85.4
89.9
89.7
92.6
This is the incorrect answer because 89.9 is incorrectly calculated as follows:
Question 116
The difference between a wedge and a pennant is that:
A pennant is a continuation pattern while a wedge is a reversal pattern.
A wedge usually leans in the direction of the trend while a pennant usually leans
against the trend.
The trendlines in a pennant formation converge to a point while the trendlines in a
wedge formation converge but do not come to a point.
Pennants are large triangular formations while wedges are smaller triangular
formations.
Incorrect. Both a pennant and wedge formation usually lean toward the trend. With a pennant,
however, it is not a requirement that the pattern should lean in the direction of the trend, though
it usually does.
Question 117
In the chart of Tesla Motors Inc., what candlestick pattern is at B?
Piercing line
Bullish engulfing
Harami
Bearish engulfing
Incorrect. A piercing line is a two-day pattern which usually indicates a market bottom.
Question 118
TB.LII.chtg.039
Most breakouts are false and fail to identify a new direction because:
Markets move sideways about 60% of the time.
Correct. Sustained directional breakouts do not occur often because markets move sideways
about 80% of the time. Many breakouts are therefore false and will fail to identify a new trend.
Question 119
TB.LII.chtg.247
The evening star pattern is a:
Bearish reversal
Bullish reversal
This is the incorrect answer because it occurs at market tops and is a top reversal formation.
Question 120
tb.LII.multi.can.pat.002_4_18
Which candlestick pattern does an outside day pattern most closely resemble?
Counterattack pattern
Engulfing pattern
Dark cloud cover
Piercing pattern
This option is incorrect. Dark cloud cover is a two-candle reversal pattern. The pattern on the
second day penetrates the candle of the prior day but does not engulf it.
Question 121
Because breakaway gaps can be false, before entering a position it is best to ensure that:
You have a tight stop on entering the position at breakout.
The breakaway gap has established a new high for at least the past 20 days and that the
subsequent retracement does not fill the gap.
You do not enter the position until the gap has been filled since the overwhelming
majority of gaps are eventually filled.
You wait until the breakaway gap has formed and enter the position on the next day if
the close is higher than the open.
In the long run it might well be true that the majority of gaps will eventually be filled, but these
are short-term patterns, so this is the incorrect answer.
Question 122
Implied volatility is determined by:
The market price of options on a stock
Historical volatility
Put buying
Put–call parity
This is the incorrect answer because implied volatility is forward-looking volatility and results
from the market price of option contracts.
Question 123
Why do trend-following systems work?
Prices are normally distributed.
Prices have fat tails.
Homoscedasticity.
There is reversion to the mean.
Correct. A fat tail is a statistical phenomenon with the net effect that prices move in one direction
much longer than can be explained by a random distribution. These long runs can translate into
very large trading profits.
Question 124
TB.LII.chtg.145
In a primary trend, when is a bull market signal given?
At a point where prices move up from a final low confirmed by rising volume
At a point where prices confirm the previous rally by moving above the high of the
previous rally
On a break below the low of the previous decline
At a point when prices have retested a previous low
Incorrect. This is known as the bear market signal.
Question 125
In selecting a trend technique, the most important decision is:
The optimization of the system
The selection of the calculation period
Ensuring that the system has a high number of profitable trades
Ensuring that trading rules are clear
Incorrect. A system with a high number of profitable trades can also be a losing system if the
losing trades are greater than the winning trades, or if the gross profit is less than the gross loss.
Question 126
The VIX is trading at 50 and the Dow Jones Industrials Average is at 15,000 points. The option
market expects this average to trade in a __________ on a daily basis.
469-point range
234-point range
50-point range
350-point range
This is the incorrect answer because it is calculated as 50/16 = 3.125%. 3.125% * 15,000 = 469.
The market expects the Dow to trade in a 469-point range on a daily basis.
Question 127
TB.LII.chtg.075
Prices trend _____ % of the time.
20
40
60
80
Incorrect.
Question 128
You are watching for a trading opportunity to take a long trade in a security which is currently
forming a flag pattern. Price breaks out to the upside and the next day you enter a long position.
You watch as price returns to the breakout zone a few days later. This is a:
Throwback
Pullback
Failed pattern
Normal move for this type of pattern
Incorrect. A pullback is when price retraces quickly back to the breakout zone from a downward
breakout.
Question 129
In order to determine whether a market shows a tendency toward a fat tail distribution, we could:
Use the Sharpe ratio.
Use Pearson's formula.
Use a simple moving average crossover system and plot the results as a histogram.
Use normality in plotting returns.
Incorrect. Pearson's formula is a method of calculating the correlation coefficient to measure the
strength and direction or correlation between two variables.
Question 130
Bollinger bands standard calculation uses the:
20-period exponential moving average and 2 standard deviations
20-period exponential moving average and 1 standard deviation
20-period simple moving average and 2 standard deviations
20-period simple moving average and 1 standard deviation
Incorrect.
Question 131
Which gaps are often the most profitable to trade?
Opening gaps
Breakaway gaps
Runaway gaps
Exhaustion gaps
Incorrect. Runaway gaps often occur during a trend. They can occur when a trend in progress is
strong. Runaway gaps are also called measuring gaps because they often occur in the middle of a
price run.
Question 132
TB.LII.mom.osc.288
Momentum and the RSI are examples of:
Oscillators
Trend-following indicators
Moving averages
Miscellaneous indicators
This is the incorrect answer because it is one form of trend-following indicators.
Question 133
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On day 1, the high is 50, low is 43, open is 45, and close is 49. On day 2, the high is 52, low is
40, open is 44, and close is 51. What is the amount of negative directional movement?
3
2
4
0
This is the correct answer because the amount of negative directional movement is the previous
day's low minus the low for the current day or $43 – $40 = $3.
Question 134
TB.LII.chtg.251
Which of the following concepts is not a basic tenet of Dow theory?
Volume goes against the trend.
The principle of confirmation.
Only closing prices are used.
The trend persists.
This is the incorrect answer because it is one of the six basic tenets of Dow theory.
Question 135
Breakout in a head-and-shoulders pattern usually occurs on:
Increased volume
Decreased volume
No change in volume
A pullback
This is the incorrect answer because breakout usually occurs on increased volume.
Question 136
TB.LII.mov.av.002
When the –DI crosses above the +DI what does this tell you about price?
The trend has reversed upwards.
The trend has reversed downwards.
Price is about to trend.
Prices are about to diverge.
This option is correct. The –DI is the negative directional movement indicator. The +DI is the
positive directional indicator. The +DM is the ratio between the smoothed +DM and the average
true range (ATR). The –DM is the ratio between the smoothed –DM and the ATR. When the –
DM crosses above the +DM, it tells us that that trend has reversed downwards.
Question 137
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Which of the following is not a primary way for technical analysts to use moving averages?
Moving averages act as support but not resistance.
Moving averages are indicators of price extremes.
Moving averages provide specific trading signals.
Moving averages are used as a measure of trend.
This is the incorrect answer because moving averages determine trend, determine levels of
support and resistance, spot price extremes, and provide specific trading signals.
Question 138
Flags and pennants are both preceded by a:
Steep, sharp upward price trend
Steep, sharp downward price trend
Mild upward price trend
Mild downward price trend
This is the incorrect answer because both flags and pennants are preceded by a steep, sharp
upward price trend.
Question 139
In a head-and-shoulders pattern, volume is usually highest on the rise into and at the peak of the:
Left shoulder
Right shoulder
Head
Right and left shoulders
This is the incorrect answer because the volume is usually highest on the rise into and at the peak
of the left shoulder.
Question 140
TB.LII.chtg.064
When using a break above a horizontal resistance line as a signal to enter a long trade, if price
crosses back below the original resistance line, you should:
Close the trade to keep losses to a minimum.
Record the bottom of the new pullback as the new support level.
Exit the long trade and open a short position.
Do nothing until price reaches original support and then close the trade.
Correct. Once the trade is entered, the original resistance line no longer holds the importance it
had before it was broken. It is a common occurrence for prices to pull back, crossing below the
original resistance line. If this happens, it is important to record the bottom of the new pullback
as the support level for the trade.
Question 141
What is the significance of a belt-hold candle near support or resistance?
It foretells a potential reversal.
It foretells a potential downtrend.
It foretells a potential uptrend.
It foretells indecision between buyers and sellers.
This option is incorrect. A belt-hold candle can be either bullish or bearish.
Question 142
Which of the following statements correctly reflects the behavior of ACI Worldwide Inc.'s price
chart below and the Accumulation/Distribution line which is plotted below the price chart?
Strong market participants are buying the security.

Strong market participants are selling the security.
Retail investors are buying the security.
Retail investors are selling the security.
Correct. The accumulation/distribution line is rising while prices are falling. It means that strong
hands are selling the security.
Question 143
When trading an extended rectangle bottom formation, it is best to enter long on:
A test of its major support level with declining volatility
A test of its major support level with increasing volatility
A test of its major resistance level and pullback into the consolidation area
A test of earlier support after initial breakout
Incorrect. If, after initial breakout, price returns to test earlier support, you should close all
positions and wait to enter the trade again.
Question 144
Which of the following statements about bands is correct?
Bands adjust for price volatility around the moving average.
Bands are fixed in size.
Bands shrink when prices become volatile and expand when prices are calm.
The most widely used band is the Keltner band.
This is the incorrect answer because bands are also envelopes around a moving average but,
rather than being fixed in size, are calculated to adjust for the price volatility around the moving
average.
Question 145
TB.LII.mov.av.287
Which of the following is not one of the three groups of trend indicators?
Adaptive market hypothesis
Trend-following indicators
Oscillators
Miscellaneous indicators
This is the incorrect answer because it is one of the three groups of indicators. They are
coincident or lagging indicators.
Question 146
What is triple witching day?
When futures on individual stocks, futures on the S&P, and options on futures all
expire at the same time
When futures on individual stocks, options on futures, and options on individual stocks
all expire at the same time
When futures on the S&P, futures on individual stocks, and options on individual
stocks all expire at the same time
When futures on the S&P, options on futures, and options on individual stocks all
expire at the same time
Incorrect. Futures on individual stocks is not one of the classes that makes up triple witching day.
Question 147
A trader who has entered XYZ stock for a long trade on a break upwards from a runaway gap
closes his position when the gap is filled. He then reenters the position as a short trade. Why
might he have done this?
A runaway gap which is filled often gives a measured move target in the opposite
direction.
The filling of what is thought of as a runaway gap often means that it is an exhaustion
gap.
A gap that retraces its move is always a good candidate for a counter-trade.
This method is called stop and reverse and is a popular method to trade using gaps.
Correct. An exhaustion gap, which is often recognized only in retrospect, signals a trend reversal.
Question 148
What does the VIX measure?
Annualized implied volatility as indicated by the pricing of S&P index options
Annualized historical volatility as indicated by the pricing of S&P index options
30-day implied volatility as indicated by the pricing of S&P index options
30-day implied volatility as indicated by the pricing of S&P index put options
Correct. The VIX is the 30-day implied volatility of the S&P 500, but it is also expressed as an
annual figure.
Question 149
A rising wedge suggests:
Buyers have become less anxious.
Sellers have become less anxious.
The trend will end soon.
The trendline will be broken soon.
Incorrect. If the pattern is a rising wedge, then the implication is that sellers are more, not less,
anxious.
Question 150
TB.LII.mov.av.285
Which of the following is not a guideline for trendlines?
Draw trendlines along the troughs in a declining stock.
Steep trendlines outperform shallow ones.
Price need not touch a trendline but it should come close.
Trendlines should connect at least two peaks or troughs.
This is the incorrect answer because it is one of the guidelines.
Question 151
TB.LII.chtg.062
When a failed upside breakout penetrates a resistance line, you should:
Redraw the trend line.
Ignore it.
Short the stock.
Buy the stock.
Incorrect. This is not the best answer. A failed penetration of resistance by a bar which closes
lower is only confirming the sideways pattern.
Question 152
TB.LII.chtg.017
Another name given to a pivot point reversal is a:
Cup with handle
Cup
Two-bar reversal
Run day
Incorrect. The two-bar reversal pattern consists of two days that are essentially mirror images of
one another. This pattern usually precedes a strong directional change.
Question 153
Open interest is equal to the:
Total long or the total short positions
Actual number of shares or contracts traded
Number of trades that took place
Tick volume
This is the incorrect answer because it is one way to calculate volume.
Question 154
TB.LII.chtg.061
A run day is often confirmation:
That a trend is ending
That a trend is in effect
That price is about to break out of a trading range
That volatility is decreasing
This option is incorrect. Run days do not point to decreasing volatility.
Question 155
Looking at the price chart of Diamond Offshore Drilling, Inc. what does the rising bandwidth
line tell you about price action?
That prices have reached a trough and are likely to reverse soon
That prices have become range bound
That volatility has increased
That volatility has decreased
This option is incorrect. Low volatility is generally associated with a sideways to slightly slanted
bandwidth line.
Question 156
The VIX is quoted at 15. The expected 30-day market movement is closest to:
4.34%
1.25%
15%
7.5%
This is the incorrect answer because it should be calculated as follows:
Question 157
Counterattack candle patterns are formed when:
opposite colored candles have the same close.
opposite colored candles have the same open.
same colored candles have the same close.
same colored candles have the same open.
This option is incorrect. Counterattack lines do not have the same open.
Question 158
Which of the following statements about the On Balance Volume is correct?
It is a running total of volume.
It is a lagging indicator.
It is a coincident indicator.
If prices close unchanged, the OBV increases.
This is the correct answer because it is a running total of volume.
Question 159
TB.LII.mov.av.040
You are looking to short XYZ because its price chart is showing signs of peaking. XYZ is at
long-term resistance and has been moving sideways. You look at the ADX line and see that it has
been in a trough but is now beginning to rise. What is the ADX telling you about the stock price?
It is about to decline.
It is about to rise.
It is about to trend.
It is confirming the sideways move.
Incorrect. The ADX line cannot tell you whether price is about to rise.
Question 160
TB.LII.opt.prc.bsc.159
An American call with the same expiration date and same exercise price as a European call:
Cannot be worth more than the European call
Cannot be worth less than the European call
Will be worth the same as the European call
Will depend on the value of the underlying security
Correct. Basically, an American call is a European call with the added opportunity to exercise
the option before expiration; therefore it cannot be worth less than an equivalent European call.
Question 161
Which of the following is not a method used by traders to select a moving average?
Most recent price retracement
Taking ¼ of the swing period
Dominant seasonal factors
Computer testing
This is the incorrect answer because dominant seasonal factors are an important influence on the
calculation period of the trend.
Question 162
Which of the following markets is most suitable for bands?
Oil market
Stock market
Bond market
Commercial paper market
This is the incorrect answer because bands are more successful in trending markets and are,
therefore, more suitable for commodities markets than the stock market or other traditional
markets.
Question 163
In an inverse head-and-shoulders pattern, breakout occurs when prices break above the neckline
after completing the:
Right shoulder
Left shoulder
Head
Neckline
This is the incorrect answer because breakout occurs when prices break above the neckline after
completing the right shoulder. The breakout is a requirement of the formation.
Question 164
In the cup-and-handle formation, the cup is created from the entry point to the:
Lip
Handle
Breakout
Throwback
This is the incorrect answer because the cup or bowl is formed from the entry price to the lip.
The lip is created after a rise from the bottom.
Question 165
XYZ company is going to announce earnings tomorrow. How do you determine if its options are
expensive or cheap?
Compare its implied volatility to its historical norm.
Compare its implied volatility to its implied volatility behavior around previous
earnings announcements.
Compare its historical volatility to its implied volatility.
Compare its historical volatility to its historical volatility behavior around previous
earnings announcements.
Correct. The earnings announcement would cause the implied volatility to be high relative to
other periods of time, so to determine whether the options are cheap or expensive, a comparison
to the implied volatility behavior around past earnings announcements would be best.
Question 166
When a warrant is exercised:
The number of shares of the firm that are outstanding goes up by the number of shares
that are exercised.
The number of shares of the firm that are outstanding goes down by the number of
shares that are exercised.
The number of warrants that are still outstanding goes up.
The company pays for the exercise of the warrant.
This option is incorrect. When a warrant is exercised the number of the firm's outstanding shares
are not reduced by the number of shared that are exercised.
Question 167
Where are you most likely to find a symmetrical triangle?
At the end of a trend
At the beginning of a trend
Halfway through a trend
Below the level of previous support
This is the correct option. A symmetrical triangle is most likely to occur at the beginning of a
trend when there is greater uncertainty about direction. The breakout from the symmetrical
triangle will often mark the beginning of a longer-term trend.
Question 168
TB.LII.mom.osc.200
Relative Strength Index (RSI) is often a:
Leading indicator
Lagging indicator
Coincident indicator
None of the above
Incorrect. RSI is not a lagging indicator of price.
Question 169
In the chart of PSA above, the price pattern at B is:
An inside bar
An outside bar
A hikkake pattern
A shark pattern
A horn pattern
Correct. An inside bar is a bar whose range is completely within the range of the previous bar.
Question 170
TB.LII.mov.av.004
To confirm a price breakout, you should look to see if there is:
Falling volume
Rising volume
Falling volatility
Rising volatility
Incorrect. Though increased volume will often occur with a breakout, in some cases, volume can
decline even though the breakout is still valid.
Question 171
Why does the put–call parity exist?
Because of the ability to create synthetic positions combining a stock and the call
option.
Because of the ability to create synthetic positions combining a stock and the put
option.
Because the price of a call and a put should equal the price of the stock.
Because when the price of a call rises the price of the corresponding put falls.
Correct. The put–call parity exists because combining a stock and a put position can result in the
same payoff as a position in a call option with the same strike price as the put. If this relationship
gets out of line, an arbitrage opportunity exists. Market activity, taking advantage of this
mispricing, will push the put and call prices back in line with each other.
Question 172
TB.LII.chtg.253
Which of the following statements about trendlines is correct?
In a bear market, a downwards trendline is drawn across the peaks.
In a bear market, a downward trendline is drawn across the troughs.
In a bull market, an upward trendline is drawn across the peaks.
In bull and bear markets, an upward trendline is drawn across the peaks.
This is the incorrect answer because it is drawn across the highest prices.
Question 173
Using the chart of American Eagle Outfitters, Inc., what is the name of the chart pattern at B?
Dead cat bounce

Island reversal
Hook day reversal
Flag
Incorrect. A dead cat bounce is a failed rally after a sharp decline.
Question 174
In the chart of Tesla Motors Inc., what candlestick pattern is at C?
Bearish engulfing
Bullish engulfing
Morning star
Evening star
Correct. The bearish reversal pattern is a major reversal signal. The market trends higher, a white
real body forms, and it is engulfed the next day by a black real body.
Question 175
After breakout of a triple-top formation, a pullback would:
Diminish breakout performance.
Increase breakout performance.
Increase the possibility that the pattern will fail.
Decrease the possibility that the pattern will fail.
Incorrect. Pullbacks from triple-top formations are common, but they do not increase the
possibility that the pattern will fail.
Question 176
What are the distinguishing characteristics of a runaway gap?
High volume and large gap up or down
High volume and strong price move closing near high
Light volume and strong price move with close near high
Light volume and large gap up or down
Correct. This is the defining characteristic of a runaway gap.
Question 177
In a rounding bottom pattern, the handle represents a:
Small congestion area that reverses downward from the lip
Rise from the bottom to the resistance level
Small congestion area that reverses upward from the lip
Decline from the top to the support level
This is the incorrect answer because the lip represents a rise from the bottom to the resistance
level.
Question 178
You enter a long position the day after the breakout to the upside from a pennant pattern. What
would your profit target be?
The distance from the breakout from the initial trend to the peak or breakout of the
pennant pattern
The distance from the breakout from the initial trend to the peak of the pennant
pattern, added to the breakout price
The distance from the breakout from the initial trend to the peak or breakout of the
pennant pattern, subtracted from the breakout price
The distance from the low of the pattern to the high of the pattern added to the
breakout price
Incorrect. Unlike regular triangle patterns where rules similar to this apply for profit objectives,
the pennant is also known as a half-mast pattern in which different profit projection rules apply.
Question 179
An event decline happens:
During a dead cat bounce
After a dead cat bounce
Preceding a dead cat bounce
Whenever there is bad news
Correct. An event decline is a sharp initial bad news announcement which usually starts a sudden
large downward movement in price. The downward movement can also be accompanied by a
downward breakaway gap or downward breakaway spike. The dead cat bounce is the rally which
happens after the event decline.
Question 180
In the accompanying chart, the pattern market B is a:
Wedge
Pennant
Ascending triangle
Isosceles triangle
Correct. A pennant is a short-term pattern like a flag, except that both its trendlines converge.
Question 181
TB.LII.mom.osc.140
In the chart of Cisco Systems, Inc. below, which option is the best answer to describe the
behavior of the Moving Average Convergence/Divergence (MACD) in relation to price action?
Confirming price action

Not confirming price action
Showing bullish divergence with price
Showing bearish divergence with price
Incorrect. The MACD is not confirming price action, but this is not the best answer.
Question 182
TB.LII.mov.av.203
The 20-day exponential moving average on Day 20 is 105.50. The closing price on Day 21 was
108.25.
The 20-day exponential moving average for Day 21 is closest to:
105.76
107.99
106.88
105.63
This is the incorrect answer because 107.99 is incorrectly calculated as follows:
Question 183
High volume for any given market is defined as:
At least 25% above its average for the past two weeks
At least 25% below its average for the past two weeks
At least 50% above its average for the past two weeks
At least 25% above its average for the past four weeks
This is the incorrect answer because high volume is at least 25% above its average for the past
two weeks.
Question 184
In the chart of Amazon below, the pattern marked A is a:
Pennant.
Wedge
Funnel
Flag
Incorrect. A wedge is a triangle pattern with both trendlines slanting in the same direction.
Question 185
Using the chart of Louisiana Pacific Corp. below, what chart pattern is forming in the box
marked A?
Rectangle
Ascending triangle
Descending triangle
Wedge
Correct. The descending triangle has a lower horizontal support line and a downward-sloping
upper trendline. Price should touch each line at least twice.
Question 186
How could candle charts help preserve capital?
By allowing us to calculate price targets.
By giving us early warning of potential reversals.
By helping to confirm early warning signals given by bar charts.
Candle charts do not help preserve capital.
This option is correct. Candle charting provides a visual representation of the behavior of market
participants, which can provide early signals of weakness or strength.
Question 187
Which of the following triangle patterns is it least profitable to trade?
Diamond top
Symmetrical triangle
Ascending triangle
Inverse triangle
Incorrect. Symmetrical triangles have a downward-sloping upper trendline and an upward-
sloping lower trendline. A symmetrical triangle is the epitome of confusion with bears taking
profits earlier and bulls buying sooner, tightening the price as it shrinks like a coil. Eventually
one side overcomes the other and the coil is released, springing either to the upside or downside.
Question 188
Which one of the following patterns can be recognized and traded immediately?
An upward spike
A downward pivot
Opening gap
Island reversal
Incorrect. A downward pivot requires that the bars coming before and after it are lower than the
high of the pivot day.
Question 189
Which of the following candlestick patterns is most similar to an inside day in Western technical
analysis?
Dark cloud cover
Engulfing pattern
Evening star
Harami
This option is incorrect. An engulfing pattern is more similar to an outside day in Western
technical analysis. It is a two-bar pattern in which the candle on the second day completely
engulfs the candle of the first day.
Question 190
Where there is a fat tail, there are:
An unusually large number of long runs and fewer short runs
An unusually large number of short runs negating the long runs
Fewer runs at either end of the curve
An equal number of short and long runs, with the long runs accounting for more data
points
This option is incorrect. Short runs refer to the amount of time price spends near the left of the x-
axis. This usually translates to runs of small gains.
Question 191
TB.LII.chtg.163
A special danger to avoid in price analysis is:
To find patterns that are a result of human behavior
To find patterns that are not a result of human behavior
To see price patterns where none exist
To put less weight on recent history than what is statistically warranted
Correct. The need of humans to have a stimulus can create the danger that we see price patterns
where none actually exist.
Question 192
A flag is a small___________________ price pattern, while a pennant is a small
__________________ price pattern.
Triangular, triangular
Rectangular, rectangular
Rectangular, triangular
Triangular, rectangular
This option is incorrect. While a flag does form a rectangular-shaped pattern, a pennant does not.
Question 193
Which one of the following gaps can be traded like a pennant?
Opening gap
Breakaway gap
Runaway gap
Exhaustion gap
Incorrect. Breakaway gaps often occur at the beginning of trends. They are not traded like
pennants.
Question 194
TB.LII.chtg.144
Which of the following is not considered to be a driver of the long-term direction of stock
prices?
Government policy
Supply and demand
International trade
Constant news coverage
Incorrect. When the U.S. imports goods it pays for it in dollars, which is the same as selling the
dollar. This weakens the currency. When the U.S. exports goods it strengthens its currency.
Question 195
A bullish piercing candle consists of:
a bearish candle and a bullish candle which closes above the body of the prior day's
candle.
a bullish candle and a bearish candle which closes above the body of the prior day's
candle.
a bearish candle and a bullish candle which closes within the body of the prior day's
candle.
a bullish candle and a bearish candle which closes within the body of the prior day's
candle.
This option is the correct answer. The first day of a bullish piercing candle is a black candle. The
second day, the bulls reassert themselves pushing price up into the body of the previous day's
candle.
Question 196
Which of the following leads to better performance when using a trending strategy?
Lower frequency data
Shorter calculation periods
Markets less closely linked to underlying fundamentals
Higher frequency data
This is the incorrect answer because lower frequency data, longer calculation periods, and
markets that are more closely linked to their underlying fundamentals all perform better.
Question 197
Patterns in widely traded securities tend to be:
More accurate than those in quiet trading securities
Less accurate than those in quiet trading securities
More complex than those in quiet trading securities
Less complex than those in quiet trading securities
This is the correct answer. Once a pattern is widely recognized and acted upon, its effectiveness
is also likely to diminish.
Question 198
When using Bollinger bands to create trading signals, you should sell short when:
Prices move outside the upper band.
Prices move below the moving average from above.
Prices close in the lower band.
Prices close below the lower band.
This option is incorrect. A close in the lower band is not a signal to sell short.
Question 199
TB.LII.mov.av.214
Which of the following statements about moving averages is correct?
Channels around the moving average can minimize the number of false breakouts.
Bands provide a smaller range of price movement before a signal is triggered.
A 12-day moving average provides late trend reversal recognition but more certainty
of trend reversal than a 26-day moving average.
Longer moving averages lead to more false signals.
This is the incorrect answer because there is a trade-off between early trend reversal recognition
and certainty of trend reversal. Using a shorter period leads to more false signals.
Question 200
TB.LII.mom.osc.083
How would you trade a bullish divergence between RSI and price?
Sell short as soon as RSI turns down from its second top.
Sell short as soon as RSI makes a second top.
Buy as soon as RSI turns up from its second bottom.
Buy as soon as RSI makes a second bottom.
Incorrect. This statement describes an early strategy for trading a bearish divergence.
Question 201
The best rule for generating an exit signal using moving averages is when:
The moving average trendline changes down.
The moving average trendline changes up.
Price declines below the moving average.
Price rises above the moving average.
This is the incorrect answer because the trendline should change down to generate an exit signal.
Question 202
You watch as a head-and-shoulders pattern forms. It breaks the neckline and then you enter for a
short trade. Price declines for a few days and then reverses to the upside, closing above the
neckline. What should you do?
Close the position and look for another position to trade.
Close the position and trade in the opposite direction.
Hold the position until there is more evidence to support a trend reversal to avoid
being whipsawed out of a good trade.
Hold the position till it hits your stop.
Incorrect. Once price has penetrated the neckline and reversed to the upside, the pattern has
failed. While there is no foolproof way to avoid being whipsawed, failure to establish clear rules
will guarantee loss of trading capital.
Question 203
TB.LII.chtg.249
The three white soldiers pattern is a:
Bullish reversal
Bearish reversal
This is the incorrect answer because three white soldiers occurs at market bottoms and is a
bottom-reversal pattern.
Question 204
When looking for areas of support and resistance, which of the following is likely to be most
helpful?
Inside day
Tweezers
Windows
Doji
This option is incorrect. An inside day is not a candle formation.
Question 205
TB.LII.mom.osc.290
Which of the following is a step in calculating the MACD?
Calculate a 12-day EMA of closing prices.
Calculate a 26-day SMA of closing prices.
Subtract the 26-day SMA from the 12-day EMA.
Calculate a 6-day EMA of the fast line.
This is the incorrect answer because it should be the 26-day EMA.
Question 206
Why is it important to be able to identify throwbacks and pullbacks?
Because they signal a strong trend.
Because the length of the pullback or throwback offers important information about
the duration of the eventual trend.
Because they happen about 50% of the time after the breakout from a chart pattern.
Because they always happen after the breakout from a chart pattern.
This option is correct. Because throwbacks and pullbacks happen so frequently, not knowing
about them means that when the stock returns to the breakout price, you will often be tempted to
sell out of the position early when faced with a loss, only to watch price recover and the position
turn profitable.
Question 207
In the price chart of PSA below, the price pattern at A is:
A two-bar reversal
Knockout pattern
A hikkake pattern
A shark pattern
Incorrect. This pattern is a trend correction method. During a strong and persistent trend, a
throwback or pullback occurs in which prior lows or highs will be touched or exceeded. The
trend then resumes.
Question 208
You are studying a 5-minute price chart of XYZ stock and notice the bearish bars beginning to
lengthen; it is 3.30 p.m. On the 15-minute chart price has formed a one-bar spike. To confirm
that this is possibly a buy signal, you could:
Look to see if volume is rising.
Look to see if volume is falling.
Look at the previous day's volume.
Look to see if support has been broken.
Correct. Volume is always higher at the end of the day. Therefore, to use volume to confirm a
buy signal, you must compare volume today against the normal volume for that time of the day.
Question 209
TB.LII.chtg.053
According to Schabacker's Rules, which of the following signals generally helps to identify the
end of a bear market?
Interest rates are high.
Popular stocks advance while some other companies collapse.
Trading volume increases significantly.
Corporate earnings are low.
Incorrect. During a bear market trading volume is likely to be low.
Question 210
TB.LII.chtg.073
For a horizontal consolidation pattern, the traditional profit target is:
Equal to the extreme volatility of the consolidation area
The width of the consolidation pattern added to the support level
The height of the consolidation area less any extremes
The height of the consolidation area multiplied by one standard deviation
Incorrect. This is the profit target used for extended rectangular formations. But this profit
objective, though well-known and popular, can be unrealistic when the extended formation is
very prolonged.
Question 211
When looking for strength in an opening gap you should watch for:
A breakout in the direction of the gap
A breakout counter to the direction of the gap
Wide range bars in the direction of breakout
Narrow range bars in the direction of breakout
Incorrect. A breakout that runs counter to the direction of the gap and that fills the gap will often
continue to fill the gap.
Question 212
TB.LII.tm.bas.trd.201
Which of the following moving averages addresses the issue of the “drop-off effect”?
Simple moving average
This is the incorrect answer because the simple moving average drops off the earliest trading
day's data; thus the moving average can be unduly influenced by the discarding of the older data.
Question 213
TB.LII.mov.av.208
Which of the following is a possible trading signal provided by moving averages?
12-day moving average crosses a 26-day moving average and a 50-day moving
average.
26-day moving average crosses a 12-day moving average.
26-day moving average crosses a 12-day moving average and a 50-day moving
average.
50-day moving average crosses prices.
This is the incorrect answer because trading signals can occur if a shorter moving average
crosses a longer moving average.
Question 214
TB.LII.mom.osc.292
The fast line just fell below the slow line in a MACD. What is the most likely conclusion?
The bears are dominating the market.
The bulls are dominating the market.
It pays to be long.
The fast MACD line reflects mass consensus over a longer period.
This is the incorrect answer because the bears are dominating the market.
Question 215
TB.LII.chtg.250
The morning star pattern is a:
Bullish reversal
Bearish reversal
This is the incorrect answer because the morning star pattern occurs at market bottoms and is a
bottom-reversal pattern.
Question 216
TB.LII.mom.osc.021
Momentum and oscillators are indicators of price:
Maturity
Strength
Change
Behavior
Incorrect. This is not the best answer. Momentum and oscillators are able to help identify both
price strength and price weakness.
Question 217
During the formation of a rectangle chart pattern, there is a shortfall. This is a:
Warning as to the eventual strength of the ensuing trend at breakout
Warning as to the duration of the remaining of the pattern
Warning as to the direction of the eventual breakout
Warning as to the speed of the eventual trend breakout
Incorrect. This is not what a shortfall in a rectangle pattern indicates.
Question 218
TB.LII.mom.osc.055
The MACD-histogram:
Reflects market consensus over the shorter term
Reflects market consensus over the longer term
Reflects the difference between the long-term and the short-term consensus of value
Reflects the difference between price and the MACD line
Incorrect. The slow signal line reflects market consensus over a longer period.
Question 219
What is the most likely conclusion if the VIX is below the SMA by 5% and the market is above
its 200-day moving average?
It is a good time to buy on throwbacks.
The odds favor a declining trend.
It is a good time to buy now.
It is a good time to sell.
This is the incorrect answer because the odds favor a continuing upward trend.
Question 220
The chart pattern outlined below is:
A head-and-shoulders top
A double top
A triple top
Rising channel
Incorrect. The head-and-shoulders top is a pattern with three well-defined price peaks. The
second peak must be higher than the peaks on either side of it.
Question 221
When an outside day closes below the previous day's low and the following day opens lower
than the outside day's close, the trader should:
Close the position.
Buy the following day's open.
Sell the following day's open.
Look for support.
This option is incorrect because it is not the best answer.
Question 222
When the 13-day Force Index crosses above zero it tells us that:
Prices are about to reverse direction.
Prices are about to rise.
Prices are trending.
Volume is rising.
Incorrect. By the time the 13-day Force Index has crossed above zero, prices would have begun
their rise.
Question 223
A combination of two puts and a call with the same exercise price and the same expiration date is
called a:
Straddle
Strap
Strip
Warrant
Incorrect. A strap is a combination of two calls and a put with the same exercise price and the
same expiration date.
Question 224
TB.LII.chtg.067
What is the identifying feature of a spike?
A day with above-average volatility
A day with above-average volume and a wide-ranging day
A price high or low much higher or much lower than recent prices
A very volatile trading day with prices trading lower over the next few days
This option is incorrect. A volatile trading day that trades down with prices over the next few
days also trading down will not produce a spike pattern. Also, if prices before the volatile trading
day are down, the spike trades down, and this is followed by prices trending lower, there will be
no spike pattern.
Question 225
To succeed using a trend-following system, you need to be able to capture:
Volatility
Fat tails
Price moves
Reactions
Correct. The fat tail is a statistical phenomenon which means that prices move in one direction
much longer than can be explained by a random distribution. Capturing fat tails will generate
exceptional trend profits.
1 A D B A A A A C B A
11 B B C A C C B B A A
21 A A B C B B B D B A
31 A B A D B A A C A C
41 A B B B C B B A C B
51 A B B C C B A A B B
61 C B A C A D A A D A
71 A B B C B A C B D A
81 A B B B B C A D A A
91 C B A A C B B D A A
101 A B A A D B C A C B
111 B A B B A C C C A B
121 B A B B B A A A C C
131 B A A A A B A A A B
141 A B A A A D B C D A
151 B B A B C A A A C B
161 A A A A B A B A A D
171 B A B A A B A B C B
181 D A A D C B D C D A
191 C C C D C A B D A C
201 A B A C A C C C D A
211 A A A A A C C C A C
221 B C C C B
Question 1
TB.LII.prosp.theor.315
An investor who feels a significantly larger pain from a $5,000 loss than the benefit from a
$5,000 gain is exhibiting:
Loss aversion
Mental accounting
Status quo bias
Recency bias
This is the incorrect answer because the investor above exhibits loss aversion.
Question 2
TB.LII.perc.bias.034
This perception bias means that we will often ignore something which we have not encountered
recently even if it is important to an upcoming decision. It is:
Framing
Anchoring
Disposition effect
Saliency
Incorrect. In investing, this bias is closely related to our tendency to sell winners and hold onto
losing positions.
Question 3
TB.LII.regr.an.267
If the ARIMA process forecasts an uptrend and prices fall below the forecast value, the market
should be ________.
Bought because of the lower risk
Sold because prices will keep declining
Sold because of less profit potential
Sold because of the higher risk
This is the incorrect answer because the decline in price creates lower risk and more profit by
buying at a price that is below estimated value. The market should be bought with added
confidence.
Question 4
TB.LII.interm.an.060
When hard assets rise in value, it usually means:
Bond prices rise.
Stock prices rise.
Interest rates rise.
The business cycle is contracting.
Incorrect. Stocks are soft assets which often move inversely to hard assets.
Question 5
TB.LII.persp.act.pass.243
A stock's market risk is defined by its:
Beta
Alpha
Standard deviation
Volatility
This is the incorrect answer because standard deviation represents total risk for a stock.
Question 6
TB.LII.inertial.eff.307
An investor who has sold all of his winning stocks but none of his losing stocks is exhibiting the:
Disposition effect
Status quo effect
Endowment effect
Recency bias
This is the incorrect answer because the status quo bias states that individuals have a tendency to
stick with the default option.
Question 7
Which of the following is not a stage in the top-down fundamental analysis process?
Technical Analysis Determines Stage of the Business Cycle.
Business Cycle Stage Determines Sector Under- and Overweights.
Fundamental Analysis Determines Active Weights of Individual Stocks within Each
Sector.
Performance Attribution Analysis Identifies Why a Portfolio Under- or Outperformed
the Benchmark.
This is the incorrect answer because it is one of the four stages.
Question 8
TB.LII.regr.an.093
When using a linear regression line to produce trading signals, why might you use confidence
bands?
To reduce the lag in price direction signals
To reduce the frequency of the signals
To increase the frequency of signals
To relax the assumption of linearity
Correct. Because the linear regression line passes through the center of price movement during a
steady period of rising or falling prices, a lot of buy and sell signals could occur. Therefore, to
reduce the frequency of signals, and also to avoid being whipsawed by changes in direction due
to market noise, confidence bands can be drawn on either side of the regression line.
Question 9
TB.LII.sel.mkts.iss.334
Which of the following is an advantage of long-term trading?
It may lead to spectacular gains.
It has fairly tight risk control.
There is no overnight risk.
It offers many great opportunities.
This is the incorrect answer because it relates to swing trading.
Question 10
If an individual's utility function for gains is concave, it means the individual is:
Risk seeking
Risk adverse
Risk neutral
Seeking a risk premium
Correct. Individuals are often risk adverse when facing potential gains. The utility function for
gains will therefore be concave.
Question 11
An anomaly that is not explained by the EMH is:
The January effect
The February effect
Price-to-sales ratio effect
Lack of correlation in security returns
This is the incorrect answer because it is not a recognized anomaly.
Question 12
TB.LII.syst.des.test.036
Which of the following calculations measures the maximum drawdown to returns?
Sharpe ratio
Calmar ratio
Treynor ratio
Annualized volatility
Incorrect. The Sharpe ratio calculates the expected return minus the risk-free rate divided by the
standard deviation.
Question 13
TB.LII.cycl.an.122
Which of the following cycles has been shown to be the most consistent in moving markets?
The business cycle
The Swiss franc cycle
The presidential election cycle
The Kondratieff wave
Correct. This cycle is the most consistent. The patterns stem from the motivation of the
incumbent party to provide good economic news to the voters prior to the election year, and as
far into the election year as possible. The two years following the election typically show below-
average returns in the stock market as the reality of politics reasserts itself and the new
administration tries to implement policies which turn out to be unpopular.
Question 14
Individual security returns are _______________ correlated on a daily basis, _______________
correlated over intermediate horizons, and _______________ correlated over long horizons.
Negatively, negatively, positively
Positively, negatively, positively
Negatively, positively, negatively
Positively, positively, negatively
Correct. These correlation patterns are consistent and should not exist if markets were highly
efficient.
Question 15
Most trading profit is made in markets with _____ volatility.
High
Low
No
Medium
This is the incorrect answer because the breakout from low volatility to high volatility is where
most of the profit is made. Low volatility is a difficult world in which to make profits.
Question 16
As the risk-free rate increases, the Sharpe ratio:
Decreases
Increases
Stays the same
Approaches 1.0
This is the incorrect answer because as the risk-free rate increases, the excess return decreases,
which reduces the Sharpe ratio.
Question 17
A stock's beta of 1.50 implies that:
The stock will move 50% more than the market.
The stock will move 50% less than the market.
The stock has outperformed the market by 50%.
The stock has underperformed the market by 50%.
This is the incorrect answer because beta represents how volatile the stock is relative to the
market.
Question 18
The risk metric used in the Sortino ratio is:
Downside deviation
Standard deviation
Maximum drawdown
Beta
This is the incorrect answer because the Sortino ratio uses the standard deviation of all negative
equity events as the risk metric. SD is used in the Sharpe ratio.
Question 19
TB.LII.sci.mthd.tech.324
Which form of the EMH asserts that excess returns cannot be earned even with private inside
information?
Strong form
Weak form
Semistrong form
Very weak form
This is the incorrect answer because the semistrong form assumes that market prices reflect all
publicly available information.
Question 20
An investor who contributes to a 401k because it is the default option is exhibiting the:
Status quo effect
Disposition effect
Endowment effect
Recency bias
This is the incorrect answer because it states that once you own something, you place a higher
value on it than others.
Question 21
An investor who passes up on an opportunity to purchase a stock because she missed buying it at
a cheaper price is exhibiting a bias which is known as:
Conservatism bias
Framing
Anchoring
Sunk-cost bias
Incorrect. Anchoring is a bias which occurs when you are attempting to make a guess about
something but your information is limited. You bias your guess in the direction of the anchor,
which may in fact be irrelevant information.
Question 22
The benefit of using nondiscretionary trading systems is:
They are reliable.
They will adjust to changing markets.
They are easy to use.
They provide risk control.
Incorrect. Using a nondiscretionary system is not easy. A nondiscretionary system that is not
followed precisely falls apart. There is a lot of work that goes into coming up with a system,
testing it, adjusting it, and trading with it correctly.
Question 23
TB.LII.regr.an.266
The ARIMA model can be considered an adaptive process because:
It recalculates the best fit each time new data appears.
Autocorrelation is present.
Moving averages are used.
Of its consistency since new data is ignored.
This is the incorrect answer because the ARIMA model is used to recalculate the best fit for each
time a new piece of data appears; thus it is an adaptive process.
Question 24
An absolute 30% loss requires a ______ gain to break even.
43%
30%
100%
35%
This is the incorrect answer because the required gain is calculated as follows: % gain necessary
= 30%/(1 – 30%) = 42.9%
Question 25
An investor who responds to a financial question differently based on how it is framed is
exhibiting:
Framing bias
Saliency bias
Anchoring
Sunk-cost bias
This is the incorrect answer because it states that an anchor biases your guess in the direction of
the anchor.
Question 26
The law of percentages states that:
In investing all relative losses must be kept to a minimum.
In investing all absolute losses must be kept to a minimum.
Relative losses are harder to make back than absolute losses.
Paper losses are real losses.
This option is incorrect. Percentagewise, relative losses are not harder to make back than
absolute losses.
Question 27
TB.LII.theor.nonr.pr.321
Which model explains how investors' biased interpretations of public information can predict the
occurrence of phenomena that are observed in actual market data?
BSV
DHS
HS
Efficient market hypothesis
This is the incorrect answer because it is founded upon investors' biased interpretations of private
research.
Question 28
A trader predicts that oil prices will rise significantly in the near future; thus he wants to start
buying energy stocks. This analysis is considered:
Top-down analysis
Bottom-up analysis
Ratio analysis
An intermarket relationship
This is the incorrect answer because bottom-up analysis is when stocks are selected based on
their price behavior, earnings, cash flow, and general business prospects.
Question 29
The portfolio return is 7%, T-bill rate is 2%, and standard deviation of negative returns is 4%.
What is the Sortino ratio?
1.25
2.25
1.50
2.00
This is the incorrect answer because the Sortino ratio is calculated as follows: (7% – 2%)/4% =
1.25
Question 30
TB.LII.regr.an.265
What is the most likely conclusion of the linearity assumption not being met in a regression
model?
The regression results may be unusable.
The regression results will be unaffected.
The results will still be usable if the normality assumption holds true.
Linearity is not an important assumption for regressions.
This is the incorrect answer because the results will be affected and may be unusable.
Question 31
TB.LII.regr.an.263
The regression equation is Y (dollar) = –0.250 * X(oil price) + 0.034, which predicts the dollar
index in terms of oil. What is the independent variable?
Oil price
Dollar index
–0.250
0.034
This is the incorrect answer because it is the dependent variable.
Question 32
TB.LII.stock.mkt.mod.190
According to Ned Davis, an environmental model is:
A model that tests the levels of greed and fear among investors
A model that can keep risk at arm's length without sacrificing too much on the long
side
This option is incorrect. An environmental model does not track the relationship
between the futures markets and the stock markets.
This option is incorrect. An environmental model does not track seasonal patterns.
Correct. The Fab Five is an environmental model whose job is to assemble the major internal and
external factors that affect the markets and combine them to produce a single objective verdict:
bearish, bullish, or neutral.
Question 33
TB.LII.rel.str.strat.298
If prices increase to a new peak but RSI makes a lower top than during its previous rally, this is
an example of:
Bearish divergence
Bullish divergence
Bearish convergence
Bullish convergence
This is the incorrect answer because it is bearish divergence.
Question 34
If prices fall to a new low but RSI makes a higher bottom than during its previous decline, this is
an example of:
Bullish divergence
Bearish divergence
Bearish convergence
Bullish convergence
This is the incorrect answer because it is bullish divergence.
Question 35
According to David Aronson, the benefits of adopting a scientific approach to technical analysis
is that:
It would improve the record of professional money managers.
It would remove erroneous knowledge.
It would increase respect for the discipline.
It would improve the results among practitioners.
Correct. According to David Aronson, the central problem with technical analysis is erroneous
knowledge. Aronson states that much of TA is dogma and myth because it is practiced without
discipline.
Question 36
Which of the following supports the efficient markets hypothesis?
Reversion to the mean
Volatility patterns
The January effect
Underperformance of active money managers
Incorrect. Returns are more volatile during bear markets. Also, market volatility is greater at the
open and the close than during the trading day. Overall market volatility is excessive relative to
changes in fundamentals.
Question 37
Which of the following is a key argument in the Cost of Information Paradox to the EMH?
Information cannot earn incremental returns for investors who incur these costs despite
the need to compensate investors.
Information can earn incremental returns for investors who incur these costs.
Arbitrageurs must have earned higher returns in the past despite the notion of market
efficiency.
Arbitrageurs must have earner lower returns in the past despite the notion of market
efficiency.
This is the incorrect answer because the EMH states that information cannot earn incremental
returns for investors who incur these costs.
Question 38
The major limitations of prospect theory are the failure to deal with disappointment and:
Regret
Greed
Fear
Sunk costs
This is the incorrect answer because disappointment and regret are limitations of prospect theory.
Question 39
An investor who does not think that a market downturn is possible because of a recent 10-year
bull market is exhibiting:
Saliency bias
Framing
Anchoring
Sunk-cost bias
This is the incorrect answer because it states that an anchor biases your guess in the direction of
the anchor.
Question 40
What is the primary reason for the inverse relationship between the value of hard assets and of
soft assets?
Higher prices of hard assets are associated with higher interest rates, which decreases
the value of soft assets.
Higher prices of soft assets are associated with higher inflation, which decreases the
value of hard assets.
Higher prices of soft assets are associated with higher interest rates, which decreases
the value of hard assets.
Higher prices of hard assets are associated with low interest rates, which decreases the
value of soft assets.
This is the incorrect answer because higher prices of hard assets are associated with higher
interest rates and higher inflation, which decreases the value of soft assets.
Question 41
TB.LII.correl.095
Risk exposure of a portfolio is reduced by:
Including negatively correlated asset classes
Including positively correlated asset classes
Having mostly low risk investments
Pearson's correlation
Incorrect. Positively correlated asset classes will increase risk. Positive correlated asset classes
are those assets which move at the same time, in the same direction, and for the same reason.
Question 42
An investor who has owned a security for 30 years values it significantly higher than what other
investors are willing to pay for it. This is an example of the:
Endowment effect
Status quo effect
Disposition effect
Recency bias
This is the incorrect answer because the status quo bias states that individuals have a tendency to
stick with the default option.
Question 43
Which of the following is not a component of Ned Davis's Fab Five model?
Monetary component
Fiscal component
Tape component
Sentiment component
Correct. This is not an individual component of the Fab Five model.
Question 44
Which of the following contradicts the semistrong form of the EMH?
Small capitalization effect
Momentum persistence
Momentum reversal
Nonreversing momentum
This is the incorrect answer because it is a contradiction to the weak form of the EMH.
Question 45
Which of the following statements about intermarket relationships is correct?
The bond market usually leads the stock market.
The stock market usually leads the bond market.
The dollar usually leads the bond market.
The industrial raw material market usually leads the dollar.
This is the incorrect answer because the dollar usually leads the industrial raw materials market,
which in turn leads the bond market.
Question 46
To make technical analysis more scientific, David Aronson argues that the use of
________________ is required.
Confirmatory evidence
Logical positivism
Falsification
Induction
Correct. Falsification is the use of disconfirming evidence to deduce the falsehood of a
hypothesis. Karl Popper's central contention was that scientific inquiry was unable to prove a
hypothesis to be true, but was limited to identifying which hypotheses were false by using
observed evidence together with the valid deductive form of falsification of the consequent.
Question 47
Which form of the EMH denies the utility of technical analysis?
All forms
Weak form only
Strong form only
Semistrong form only
This is the incorrect answer because all forms deny the utility of technical analysis.
Question 48
The benefit of optimization is that it:
Can help to eliminate useless rules and parameters when designing a trading system
Helps to avoid curve-fitting data to results when designing a trading system
Helps to discern what future data will look like when designing a trading system
Helps to evaluate a trading system through use of out-of-sample testing
This option is incorrect. We do not know what future data will look like. With optimization we
can only test historical data in the hope that we will come up with parameters and rules which
will to some extent approximate the future.
Question 49
The endowment effect refers to:
The effect of a donation of money or property to a nonprofit organization on members
of that organization
The hypothesis that people ascribe more value to things simply because they own them
The sentimental value that people place on the value of things they are given
The idea that how frequently one checks one's portfolio will lead to different levels of
utility and to different investment decisions
Correct. The endowment effect describes a bias by which people ascribe more or additional
value to items merely because they already own or possess them.
Question 50
Which of the following statements about reversion-to-the-mean systems is correct?
They are based on buy low/sell high philosophy.
They are based on sell low/buy high philosophy.
Protective stops are not necessary.
This type of system performs well.
This is the incorrect answer because it follows a buy low/sell high philosophy.
Question 51
TB.LII.regr.an.268
Which of the following components of a linear regression allows for ranking a set of markets?
Slope of the regression
Moving average trend
Actual prices
Intercept
This is the correct answer because the strongest and weakest stocks are determined by the slope
of the regression. The strategy should be to buy the strongest stocks and sell short the weakest, or
sell short the strongest and buy the weakest.
Question 52
A trader wants to calculate a Relative Strength Index over a 14-day period. The average of net up
closing changes is 0.75 and the average of net down closing changes is 0.25. The Relative
Strength Index is closest to:
75
67
3
25
This is incorrect. The Relative Strength Index is calculated as follows: RS (Relative
Strength)=0.75/0.25=3 RSI=100−(100/3)=67
Question 53
A problem with wealth-based utility theory is that it is:
Not path dependent
Path dependent
Dependent on phrasing
There is no such theory.
Incorrect. Utility theory is not dependent on phrasing. Phrasing is used in behavioral economics
to describe how answers to a question will often change depending on how that question is
phrased or framed.
Question 54
On a trading day, a trader notes that the opening price for a stock is $48 and the quoted price is
$50; however, he executes a trade at $50.15. The slippage is:
$0.15
$2.15
$2.00
$0
This is the incorrect answer because slippage is the difference between the quoted price ($50)
and the execution price ($50.15).
Question 55
A portfolio of $100 has sustained an absolute loss of 30%. What percentage gain would you have
to make to get back to breakeven?
23%
33%
43%
53%
Incorrect.
Question 56
Which of the following statements about intermarket relationships is true?
When the dollar declines, it makes commodities expensive in foreign currencies.
The dollar usually leads the industrial raw material market, which in turn generally
leads the bond market, which in turn leads the stock market.
The dollar usually lags the industrial raw material market, which in turn generally lags
the bond market, which in turn lags the stock market.
Intermarket signals cannot be used to time the stock market because they no longer
work.
Correct.
Question 57
To determine a market's relative attractiveness to another market, a technician would use:
Sortino ratio
Relative Strength Index
Ratio analysis
Recovery ratio
Incorrect. The name relative strength in this context is somewhat of a misnomer. The Relative
Strength Index (RSI) is a popular oscillator developed by J. Welles Wilder, Jr. It measures the
strength of a security relative to its own price history.
Question 58
TB.LII.regr.an.098
This happens when the variance is assumed to be the same at any point along a linear
relationship.
Normality
Linear regression
Homoscedasticity
Distribution of runs
Incorrect. This is the assumption that variables are normally distributed.
Question 59
TB.LII.regr.an.097
Auto-regression as used in Auto Regressive Integrated Moving Average means:
A set of random variables having the same variance.
To use the same data to self-predict.
When calculating the correlation coefficient between two variables there is an implicit
assumption that a linear relationship exists between them.
Predicting future values of one security in terms of another.
Correct. Auto-regression means the use of the same data to self-predict, for example, where a
gold price forecast is arrived at by using only gold prices.
Question 60
Which competing explanation of investor behavior views the interactions of markets,
institutions, and securities as an evolutionary process?
Efficient markets hypothesis
Adaptive markets hypothesis
Behavioral finance
Elliott Wave
Correct. The adaptive markets hypothesis attempts to look at markets from a biological
perspective. The hypothesis allows for economic agents to adapt to change.
Question 61
TB.LII.regr.an.264
The regression equation is SP = 0.250 * (FTSE) – 0.034 (VIX) + 0.245 (NASDAQ), which
predicts the weekly percentage change of the S&P 500 to changes in the FTSE, VIX, and
NASDAQ. The values are 1.9 for the FTSE, –0.08 for VIX, and 0.50 for NASDAQ. The
predicted S&P 500 weekly change is closest to:
0.60%
0.36%
1.20%
0.30%
This is the correct answer because 0.60% is calculated as follows:
Question 62
What does perception bias mean?
Where an individual perceives a problem where none exists
When an individual has difficulty choosing a reference point when making a decision
When an individual has difficulty figuring out what the problem is that needs to be
solved
Where an individual has difficulty making decisions when faced with uncertainty
This is the correct answer. There are many perception biases that have been observed and
extensively studied. Kahneman and Tversky have done seminal work in this field.
Question 63
Prospect theory explains:
How active money managers prospect for stocks
How people make decisions under conditions of uncertainty
Why cognitive biases interfere with decision making
Why individuals draw grand conclusions from small data samples
Correct. Daniel Kahneman and Amos Tversky came up with the idea of Prospect Theory in 1979
to describe how people, when faced with conditions of uncertainty, make decisions.
Question 64
The loss aversion ratio has been estimated at between_________ in practice:
–1.5 and –2.5
1.5 and 2.5
2.5 and 3.5
3.5 and 5.0
This ratio is incorrect.
Question 65
Which form of the EMH asserts that market prices reflect all past prices only?
Weak form
Semistrong form
Strong form
Very weak form
This is the incorrect answer because the strong form assumes that market prices reflect all
information.
Question 66
Which of the following is not a risk premium that may explain the existence of systematic price
movements?
Investment-grade bond-risk premium
Equity market risk premium
Liquidity premium
Price discovery premium
This is the incorrect answer because possible risk premiums are the equity risk premium,
commodity and currency hedge risk transfer premium, liquidity premium, and price discovery
premium.
Question 67
The tendency of people to accept evidence that is consistent with a prior belief and to reject or
discount evidence that contradicts it is called:
Conservatism bias
Anchoring
Overconfidence bias
Confirmation bias
This option is incorrect. Anchoring refers to the tendency of people to anchor the first piece of
information offered, even an irrelevant one, when making decisions.
Question 68
TB.LII.correl.094
Which of the following market pairs can be said to be positively correlated?
Gold and dollar
Crude oil futures/S&P Index
Bonds/stocks
Stocks/interest rates
Incorrect. Crude oil futures and the S&P Index are usually negatively correlated. When the price
of crude oil rises, it usually coincides with a fall in the index.
Question 69
Why is the power of arbitrage to push prices to rational levels limited?
Because arbitrageurs have unlimited tolerance for adverse price movement.
Because arbitrageurs have limited tolerance for adverse price movement.
Because of the lack of perfect substitute securities.
Because of limits to the number of securities traded.
Correct. An ideal arbitrage transaction involves the simultaneous purchase and sale of a pair of
securities with identical future cash flows and identical risk characteristics. This should make the
transaction riskless. But the absence of perfect substitute securities means that the arbitrageurs
have to take on more risk and reduces their power to push prices to rational levels.
Question 70
The theory that assumes that the market pricing mechanism includes evolution and irrational
circumstances is:
The adaptive markets hypothesis
Behavioral finance
The EMH
The January effect
This is the incorrect answer because it assumes that investors exhibit a high degree of rationality.
Question 71
A free reserve position usually indicates that:
The Federal Reserve's monetary policy is tight.
The Federal Reserve's monetary policy is easy.
The Federal Reserve's fiscal policy is tight.
The Federal Reserve's fiscal policy is easy.
Correct. Banks are required to keep on deposit with the Federal Reserve Bank a certain
percentage of their deposits. Banks have a free reserve position when they have excess reserves.
Excess reserves are the total reserves less required reserves. A free reserve position is when their
excess reserves are greater than borrowed reserves.
Question 72
Which price reflects the most important consensus of the day?
Closing price
Open price
Low price
High price
This is the incorrect answer because the closing price is most important because the settlement of
trader's accounts depends on it.
Question 73
In an inflationary environment utility stocks will generally ___________________ because they
are ____________________________________ stocks.
Rise, value stocks
Decline, growth stocks
Decline, interest related
Rise, interest related
This is the correct option. In an inflationary environment, anything to do with interest rates will
generally decline, including utility stocks.
Question 74
The maximum drawdown is the:
Maximum loss from an equity peak
Maximum gain from an equity trough
Maximum loss over the past 12 months
Maximum gain over the past 12 months
This is the incorrect answer because it is the maximum loss from an equity peak regardless of
time.
Question 75
The primary argument against the Random Walk and Efficient Markets Hypothesis is:
That stock market returns follow a Gaussian distribution
That the square root of the typical amplitude of return fluctuations increases in
proportion to time
That strength will continue
That any given time, security prices fully reflect all available information and that
prices are at equilibrium
Correct. Relative strength is the primary argument against Random Walk and Efficient Markets
Hypothesis. The idea behind the concept of relative strength is that strength will continue, similar
to how a trend once in effect is presumed to continue, so that by investing in strong trends until
they reverse, an investing edge can be obtained.
Question 76
Which of the following is not a type of technical trading system?
Endogenous signal systems
Trend following
Pattern recognition
Range trading
This is the incorrect answer because trend following, pattern recognition, range trading
(reversion to the mean), and exogenous signal systems are the four types.
Question 77
Which of the following is a disadvantage of day trading?
Transactions costs become a factor.
Drawdowns are severe.
It will miss major trends.
There aren't many trading opportunities.
Question 78
Which of the following is a pitfall of using a nondiscretionary, mechanical system?
Extrapolating will not have the same results as tests.
Profits will occur in many small amounts.
It requires daily updates.
The trader will incur losses in clumps.
This is the incorrect answer because profits will occur in clumps.
Question 79
A stock portfolio achieves a return of 12%, which is higher than the S&P 500 return of 9%. The
S&P 500 is the benchmark index. 3% is the:
Positive alpha
Negative alpha
Beta
Volatility
This the incorrect answer because negative alpha occurs when a stock portfolio underperforms
the benchmark index.
Question 80
TB.LII.correl.261
Which method of calculating the correlation coefficient works best when dealing with outliers?
Spearman's rank correlation coefficient
Pearson's correlation coefficient
Coefficient of determination
Covariance
This is the incorrect answer because it is the square of the Pearson's correlation coefficient; thus
it is sensitive to outliers.
Question 81
TB.LII.cycl.an.347
Which of the following methods is used to remove the price trend in a cycle?
Two trendlines are used.
The data is smoothed using three exponential moving averages.
Create an MACD indicator by adding the value of one exponential trend to the others.
The longer moving average is double the period of the dominant cycle.
This is the incorrect answer because two exponential moving averages are used.
Question 82
The statement “Gaps are always filled” is an example of:
Framing
Saliency
Market lore
Anchoring
Correct. Market lore are superstitions which are often plain wrong.
Question 83
Which of the following is an advantage of using a nondiscretionary, mechanical system?
Emotion is avoided.
It increases overtrading; thus profits are increased.
It can predict the future.
It increases constant decision making; thus profits are increased.
This is the incorrect answer because overtrading is reduced.
Question 84
A very profitable technology company offers its employees, through its retirement program, a
double match benefit program. Under this program, which employees could choose to opt into or
not, the company offers to match 2 to 1 every pre-tax dollar that an employee pays into its
retirement fund. A survey done in 2015 found that less than 40% of employees had taken
advantage of this very attractive retirement program. This was likely due to:
Loss aversion
Saliency
Status-quo effect
Anchoring
Incorrect. Saliency is a psychological bias in which people tend to underestimate the importance
of things they have not encountered recently while overestimating the importance of things they
have.
Question 85
Which of the following contradicts the weak form of the EMH?
Momentum persistence
Small-capitalization effect
P/E ratio effect
Price-to–book value effect
This is the incorrect answer because it is a contradiction to the semistrong form of the EMH.
Question 86
A potential homebuyer whose offer price on a house is skewed upward by the current
homeowner's selling price is exhibiting:
Anchoring
Saliency bias
Framing bias
Sunk-cost bias
This is the incorrect answer because it states that investors provide different responses based on
how a question is framed.
Question 87
A stock's alpha of 1.50 implies that:
The stock has outperformed the market by 1.50%.
The stock will move 50% less than the market.
The stock will move 50% more than the market.
The stock has underperformed the market by 1.50%.
This is the incorrect answer because beta represents how volatile the stock is relative to the
market, not alpha.
Question 88
Futures are considered to be more risky than stocks because:
Futures are usually traded with high leverage.
Stocks are usually traded with high leverage.
Futures require protective margin.
Stocks can be bought with a small amount of personal capital.
This is the incorrect answer because futures can be bought with a small amount of personal
capital.
Question 89
The portfolio return is 5%, T-bill rate is 2%, and standard deviation is 2%. What is the Sharpe
ratio?
1.50
0.67
3.50
1.00
This is the incorrect answer because the Sharpe ratio is calculated as follows: (5% – 2%)/2% =
1.50
Question 90
Rules for a good trading system include:
Small number of robust trading rules
Large number of robust trading rules
The ability to trade specific markets
Minimum risk with drawdown no more than 40%
This is the correct answer because less than ten each is best for entry and exit rules.
Question 91
Using a dynamic hedging technique to protect against volatility and drawdowns in a relative
strength long-only system would mean that:
There is always a hedge in place to protect the entire portfolio.
The portfolio pays for a form of insurance through the use of options to gain short
exposure.
Hedging is only done when conditions are more favorable to market declines.
Hedging is only done when conditions are more favorable to market rises.
Incorrect. Use of options to gain short exposure to the portfolio is a way of buying insurance to
protect the portfolio against volatility and drawdowns, but it is not a dynamic hedging technique.
Question 92
Business cycles usually last around:
4 to 5 years
9 to 10 years
1 to 2 years
15 years
This is the incorrect answer because business cycles are of varying length but usually average
around 4 to 5 years.
Question 93
Which of the following is the correct formula for calculating the RSI?
RSI = 100 – (100/1 + RS)
RSI = 100 + (100/1 + RS)
RSI = 100 / (100/1 + RS)
RSI = 100 – (100/1 – RS)
This is the incorrect answer because the RSI is calculated as follows:
Question 94
Which of the following is an advantage of swing trading?
It offers many great opportunities.
It requires little day-to-day attention.
There is no overnight risk.
It may lead to spectacular gains.
This is the incorrect answer because it relates to long-term trading.
Question 95
TB.LII.regr.an.020
Which process uses autocorrelation to determine to what extent past prices will forecast future
prices?
The Rule of Seven
Autoregressive Integrated Moving Average
Stochastic
Keltner bands
This option is incorrect. The stochastic indicator was created by George Lane and it measures the
relative position of the closing price of a security within a past high–low range.
Question 96
An individual buys a $300 theater ticket but then realizes that he is no longer interested in seeing
the performance. In order to avoid regret, he still decides to attend the performance. The bias
exhibited is:
Sunk-cost bias
Saliency bias
Framing bias
Anchoring
This is the incorrect answer because it states that investors provide different responses based on
how a question is framed.
Question 97
Which of the following statements about the RSI is correct?
It ranges from 0 to 100.
When it reaches a peak and turns down, it identifies a bottom.
When it reaches a bottom and turns up, it identifies resistance.
Trading signals are more visible with longer RSI.
This is the incorrect answer because it identifies a bottom.
Question 98
An investor has two stocks in his portfolio. Stock A is showing a 100% gain while stock B is
showing a 30% loss. The investor decides to sell Stock A to lock in the gains and to hold onto
Stock B until he has made back his losses. The investor is displaying:
The endowment effect
The disposition effect
The sunk-cost effect
Status-quo effect
Correct. This is the tendency investors have to close out winning positions before closing out
losers, even if the winning stocks have more potential for future gains than the losing ones.
Question 99
A rapidly expanding economy is _________________ for the stock market.
Good
Bad
Neutral
None of the above
This option is incorrect. A rapidly expanding economy will have an effect on the stock market.
Question 100
A large-capitalization U.S. stock that is part of the S&P 500 will be ______ liquid than a
privately traded technology stock.
More
Less
Equally
Significantly less
This is the incorrect answer because liquidity is the ability to transact a meaningful number of
shares without bringing about a large price change. S&P 500 stocks will be much more liquid
than a privately traded technology stock.
Question 101
The biggest single limitation of prospect theory is the inability to provide insight into:
General asset pricing theory
Loss aversion
Mental accounting
Human decision making
This is the incorrect answer because loss aversion is a key concept in prospect theory.
Question 102
Which form of the EMH asserts that market prices reflect all publicly available information?
Semistrong form
Weak form
Strong form
Very weak form
This is the incorrect answer because the weak form assumes that market prices incorporate only
past price data.
Question 103
Long-term trading has an expected duration of a position that is measured in:
Months, sometimes years
Days, sometimes weeks
Minutes, rarely hours
Decades
Question 104
Why do investors sometimes overreact and at other times underreact to new information?
Information cascade
Negative feedback
Herd behavior
Conservatism bias
Incorrect. Feedback refers to the channeling of a system's output back into the system as input.
There is positive and negative feedback. Negative feedback refers to the channeling of feedback
by a negative number. This has the effect of dampening behavior and driving the output back
toward equilibrium.
Question 105
TB.LII.cycl.an.121
How would you use the Ehrlich Cycle Finder to estimate cycle length?
Eliminate the noise so the cycle can be more clearly observed.
Look at the long-term chart and superpose a shorter term chart to isolate half cycles.
De-trend the data so that the cycles can be more easily observed.
Align the peaks and valleys to observe consistency in the cycle.
This is incorrect. This is not how the Ehrlich Cycle Finder is used to estimate cycle length.
Question 106
When plotting support and resistance levels that go back many years, which of the following
could provide misleading results?
Back testing
Back-adjusted data
Correlation coefficient
Linear regression
Correct. When data is back adjusted, the older data does not give the actual price at the time, but
is altered for some reason, such as when stocks have split. This means that the price you are
currently seeing on your screen is not the price that was traded at the time and so support and
resistance levels will be off.
Question 107
After a strong earnings announcement, the stock increases for several weeks. This is an example
of the ___________ anomaly.
Underreaction to news
Patterns in volatility
Correlation in security returns
Size effect
This is the incorrect answer because it shows, among other things, that individual security returns
are negatively correlated on a daily basis.
Question 108
Silver is an example of a:
Hard asset
Soft asset
Paper asset
Secular asset
This is the incorrect answer because paper assets are financial assets such as stocks and bonds.
Question 109
Which of the following is an example of an absolute return vehicle?
Long-short hedge fund
S&P 500
Equity mutual fund
Student investment fund
This is the incorrect answer because it is a relative return vehicle.
Question 110
TB.LII.correl.188
A scatterplot of two variables can help determine:
The linear relationship between two variables
The level of volatility between two variables
The homoscedasticity of two variables
The level of normality between two variables
Incorrect. A set of random variables having the same variance is called homoscedasticity. A
scatterplot cannot help determine the homoscedasticity of two variables.
Question 111
If the U.S. dollar depreciates, the dollar price of WTI crude oil will:
Increase
Decrease
Remain the same
Rise and then fall
This is the incorrect answer because when the dollar declines, it makes commodities cheap in
foreign currencies but expensive in dollar terms.
Question 112
According to Ned Davis, trend-sensitive indicators assert themselves at:
Market tops
Market bottoms
Market extremes
In the neutral zones
Correct. According to Ned Davis, trend-sensitive indicators, which are also known as
overbought-oversold indicators, have a tendency for picking tops and bottoms. They work well
in multi-indicator models and assert themselves only at potential extremes.
Question 113
Which of the following statements describes the paradox inherent in using fundamental analysis
to determine which stocks to under- or overweight in a portfolio?
Trying to determine the intrinsic value of a corporation from the corporation's share
price.
Identifying mispricing without also identifying the catalyst that will cause that
mispricing to cease in the future.
Since rational, wealth-maximizing analysts and investors cause markets to be efficient,
trying to come up with information which is not publicly known and can influence the
share price contradicts the idea of market efficiency.
Since market prices fully reflect both historical and current, publicly available
information, analyzing past and current information is not useful in consistently
outperforming the market.
Correct. This is step three of the top-down process. After determining the financial health and
stability of a company, a valuation analysis is next conducted to determine the intrinsic value of
the company. If an analyst finds that a stock's price is over- or undervalued, then the analyst is
actually saying that the market is making a mistake in the way that it is valuing the stock. If that
mispricing actually exists today, then why should this mispricing not persist into the future? It is
here that a logical inconsistency or paradox resides. Just identifying the mispricing will not
correct it; the analyst must also identify the catalyst that will cause the mispricing to cease in the
future, otherwise the over- or undervalued stock could stay over- or undervalued.
Question 114
Which of the following is not a type of trading signal given by the RSI?
Convergence
Divergence
Chart patterns
Level of RSI
This is the incorrect answer because it is one of the three types of trading signals. The trading
signals are divergence, charting patterns, and RSI levels.
Question 115
For a trading system to be considered robust, it is important that:
The MAR ratio is > 1.
The MAR ratio is < 1.
The MAR ratio = 1.
The MAR ratio = 0.
Incorrect. The MAR ratio is a measure of the annual percentage net gain of a system to the
maximum percentage drawdown. A ratio of less than 1 may mean that drawdowns are greater
than profits, which is undesirable.
Question 116
Which of the following is not a risk measure?
Efficiency factor
Maximum cumulative drawdown
Sterling ratio
Time to recovery
This is the incorrect answer because it is a risk measure and represents the gain-to-pain ratio.
Question 117
The primary argument against the Efficient Market Hypothesis is the concept of:
Relative strength
Beta
Intermarket relationships
Strong form of Efficient Market Hypothesis
This is the incorrect answer because relative strength presumes that strength will continue,
similar to the way trends will continue, and by recognizing the strongest trends, an edge can be
obtained by investing in them until their strength abates. It is the primary argument against the
EMH.
Question 118
Which of the following statements undermines the validity of the efficient market hypothesis?
Studies that show that strategies based on stale information can beat the market
Studies that show that pricing errors are random
Studies that show that knowledgeable investors are not able to earn higher returns than
less knowledgeable investors
Studies that show that the majority of mutual funds cannot beat the market
Incorrect. This statement, if true, would support the efficient market hypothesis. The premise
underlying EMH is that whatever information is known or knowable has already been reflected
in security prices; therefore, in an efficient market, there is no advantage to being smart or
disadvantage to being dumb.
Question 119
Two possible solutions to control for losses and drawdowns while using a relative strength
system are:
Hedging and adding non-correlated asset classes
Hedging and adding correlated asset classes
Increasing long positions and adding non-correlated asset classes
Increasing long positions and adding correlated asset classes
This is the incorrect answer because hedging and adding non-correlated assets helps to mitigate
the risk of the portfolio which is long only and fully invested.
Question 120
Which of the following criteria in the CANSLIM method should a technical analyst be
concerned with?
Leader or laggard
Annual earnings increases
Supply and demand of stock
Current quarterly earnings per share versus a year earlier
This is the incorrect answer because technical analysts should only be concerned with leader or
laggard and market direction.
Question 121
TB.LII.regr.an.189
One way of assessing the amount of normality in a data series is to:
Use a nonparametric regression.
Use ARIMA.
Use a histogram of frequencies.
Use multiple regression.
Correct. Normality can be visually assessed by looking at a histogram of the frequencies of the
data.
Question 122
Which of the following is a consequence of technical analysts adopting the scientific method?
Elimination of subjective TA
Elimination of objective TA
Elimination of all forecasts
Shift to evidence-based subjective approach
This is the incorrect answer because it is not one of the three consequences. These consequences
are the elimination of subjective TA, elimination of meaningless forecasts, and shift to an
evidence-based objective approach.
Question 123
The theory that assumes that the market pricing mechanism includes a high degree of rationality
is:
The Efficient Market Hypothesis
Behavioral finance
The adaptive markets hypothesis
January effect
This is the correct answer because the EMH assumes a high degree of rationality.
Question 124
TB.LII.correl.096
The best method for calculating the correlation coefficient of two variables is the use of:
Confidence bands
Pearson's correlation
Kalman filters
Triangular weighting
Correct. Pearson's correlation is the best known method for calculating the correlation coefficient
between two variables. It is obtained by dividing the covariance of the two variables by the
product of their standard deviations
Question 125
According to Murphy, why has the lead–lag relationship of the bond market and stock market
not been successful since 1998?
Deflation has become a threat and upset the relationship between stocks and bonds.
Inflation has become a threat and upset the relationship between stocks and bonds.
Federal Reserve policies have distorted the stock–bond relationship.
The relationship has broken down permanently.
This is the incorrect answer because deflation has become a threat for the first time since the
1930s and upset the previous balance between interest rates and stocks.
Question 126
Outperformance of low P/E stocks is known as ___________ anomaly.
The value stock effect
The January effect
The mean reversion
The size effect
This is the incorrect answer because it shows that small-cap stocks experience unusually high
returns in the first two weeks of January.
Question 127
TB.LII.correl.262
What is the best interpretation of a coefficient of determination of 0.75?
75% of the total variation in y can be explained by the linear relationship between x
and y.
75% of the total variation in x can be explained by the linear relationship between x
and y.
25% of the total variation in y can be explained by the linear relationship between x
and y.
25% of the total variation in x can be explained by the linear relationship between x
and y.
This is the incorrect answer because it should be 75% of the total variation in y, not x.
Question 128
TB.LII.smpl.mod.bond.276
Which of the following is not an indicator in the Zweig bond model?
Changes in the 10-year U.S. Treasury yield
The longer term slope of the Dow Jones 20 Bond Average
Changes in the discount rate
Difference between yields on AAA corporate bonds and 90-day commercial paper
This is the incorrect answer because it is one of the five indicators. The five indicators are the
short-term slope of the Dow Jones 20 Bond Average, the longer term slope of the Dow Jones 20
Bond Average, changes to the discount rate, the yield curve, and a simple trend indicator.
Question 129
Which of the following is a disadvantage of long-term trading?
Drawdowns can be very severe.
It will miss major trends.
Transaction costs become a factor.
It demand instant reflexes.
This is the incorrect answer because it relates swing trading.
Question 130
Which model is premised on investors' biased interpretations of private research?
DHS
BSV
HS
Efficient market hypothesis
This is the incorrect answer because the BSV model explains how investors' biased
interpretations of public information can predict the occurrence of phenomena that are observed
in actual market data.
Question 131
Which of the following is key argument in the Smart-versus-Dumb Paradox to the EMH?
Arbitrageurs must have earned higher returns in the past despite the notion of market
efficiency.
Arbitrageurs must have earned lower returns in the past despite the notion of market
efficiency.
This is the incorrect answer because it relates to the Cost of Information Paradox.
Question 132
Which of the following methods is not used for measuring relative strength?
Beta
Alpha
Trend slope
The Levy methods
This is the incorrect answer because relative strength is measured using the percentage change,
alpha, trend slope, and Levy methods.
Question 133
If the RSI rises above its upper reference line and then crosses below it, this is signal to:
Sell short.
Buy.
Be neutral on the market.
Sell short and then buy.
This is the incorrect answer because the trader should sell because the market is overbought.
Question 134
TB.LII.correl.186
If the correlation based on percentage price changes between stock A and Stock B is 0.8, it
indicates:
A very slight linear relationship between the two variables
A meaningful relationship between the two variables
A very strong relationship between the two variables
An extremely strong relationship between the two variables
Correct. The correlation coefficient varies between +1 and –1. +1 indicates a perfect linear
relationship with a positive slope between the two variables while –1 indicates a perfect linear
relationship with a negative slope between the two variables. A reading of 0.8 means that the
variables are likely to exhibit a very strong relationship.
Question 135
TB.LII.regr.an.038
To compare the strength of one market with another, we could use:
Linear regression
The Fisher Transform
Falsification
Volatility bands
Incorrect. The Fisher Transform by John Ehlers is used in cycle analysis to produce turning
points. The Fisher Transform uses the midpoint or median price in a series of calculations to
produce an oscillator. Unlike the Hilbert Transform, the Fisher Transform assumes that prices
are not normally distributed.
Question 136
Which of the following statements about profit factor is correct?
It represents total profit to total loss.
It represents total loss to total equity contributed.
A low number suggests greater profits.
A profit factor below 1.0 means that the system is gaining.
This is the incorrect answer because the profit factor is the total profit to total loss.
Question 137
TB.LII.correl.187
Spearman's rank correlation coefficient differs from Pearson's correlation coefficient in that:
Linearity is not an assumption.
It does not require the assumption that the variables are randomly distributed.
Spearman's rank correlation takes values between -1 and +1 while Pearson's
correlation does not.
It requires the use of auto-regression.
Correct. Unlike Pearson's correlation coefficient, Spearman's rank correlation does not require
the assumption that the variables are randomly distributed.
Question 138
An early critic of the efficient markets hypothesis was:
John Bogle
Charles Ellis
John Maynard Keynes
Daniel Kahneman
Correct. John Maynard Keynes' book General Theory of Employment, Interest and Money
remains a classic in the economics literature. Keynes was also a successful speculator. He said,
when discussing long-term expectations and stock values, that stock prices may often reflect
irrelevant concerns and ideas. Price trends are often determined by people who do not really
know what is going on in the businesses they are valuing. Keynes says that markets cannot be
efficient because valuations are often formed from predictions based on little more than our need
to avoid anxiety about uncertainty.
1 A D A C A A B B A B
11 A B C C A A A A A A
21 D D A A A B A A A A
31 A B A A B D A A A A
41 A A B A A C A A B A
51 A B A A C B C C B B
61 A C B B A A D C C A
71 B A C A C A A A A A
81 A C A C A A A A A A
91 C A A A B A A B B A
101 A A A D D B A A A A
111 A C B A A A A A A A
121 C A A B A A A A A A
131 A A A C A A B C

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CMT OFFICIAL SAMPLE PAPER

a. Linear relationship, as the best fit line is curvilinear.

a. any near-term strength should be considered as an opportunity to reduce

In the chart shown below, the On-Balance Volume (OBV) indicator is

In the following chart, where is a negative divergence in RSI observed?

Identify the chart pattern highlighted below.

What chart pattern do you see highlighted in this chart?

a. Negative divergence is observed between price and indicator.

a. Shares are losing momentum which can be confirmed by negative divergence

11.Which is not one of the Dow Theory principles?

16. Near the end of a recession:

18. Identify the following assumption under the correlation coefficient:

19. _______moving average uses reverse linear weights:

a) Linear relationship, as the Best Fit line is curvilinear.

a) Hold long positions

a) Piercing Line & Hammer

28. Tick volume refers to:

31. In regard to cycle analysis, translation is:

35. The payoff ratio is:

39. The “maximum cumulative drawdown” is a measure of:

51. The biggest drawback of a relative strength system is that:

a) confirming bearish price action.

58. Divergences between RSI and prices tend to occur at:

59. ____________ is an indicator/oscillator which measures any security‟s strength by monitoring

61. Decline in ADX indicates:

62. Open interest can be defined as:

64. When ADX falls below both Directional lines, it identifies:

67. When price direction is sideways and OBV direction is up it suggests:

69. The most profitable _____________ are long-term.

73. _________is a valuable piece of information when analyzing patterns.

74. A sell signal using a MACD indicator is generated when:

81. A Call Option writer makes money

82. European Options are different than American Options because?

85. When is a buy signal given while using MACD-histogram?

91. A burst of extremely high volume reflects:

92. Which is not an indicator used in the Zweig Bond Model?

94. Put options will expire worthless if:

98.When hard assets rise in value, _________ will decline.

99. When ADX rallies above both directional lines, it identifies:

102. Phase refers to:

103. __________ and ___________ have seasonal patterns.

109. A V-top or V-bottom is always accompanied by ______ and usually ______.

a) Piercing Line & hammer

113. The simplest and easiest method of intermarket analysis is:

a) Negative divergence is observed between price and indicator.

146. The McClellan Oscillator is what type of indicator? a) Momentum

Dark cloud cover

The death cross

Diverging positively from price action

Strong market participants are buying the security.

Dead cat bounce

Confirming price action

The 20-day exponential moving average for Day 21 is closest to:

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103. and _ have seasonal patterns.

109. A V-top or V-bottom is always accompanied by and usually .