Market Psychology

Question 1

What is price action?

Answer 1

Price action refers to the movement of a security’s price and is encompassed in technical analysis.

Question 2

_____________is the most direct and easily accessible method of seeing overall supply/demand relationships.

Answer 2

the price action

There may be fundamental news not known to the general public, but you can expect it is already in the price. Those who have advance knowledge of some market-moving event will most likely buy or sell until current prices reflect their information.

Question 3

In market terms, what is a ‘Bull’?

Answer 3

A bull is an investor who thinks the market, a specific security or an industry is poised to rise. Investors who adopt a bull approach purchase securities under the assumption that they can sell them later at a higher price. Bulls are optimistic investors who are attempting to profit from the upward movement of stocks.

Question 4

In Market terms, what is a Bear?

Answer 4

A bear is an investor who believes that a particular security or market is headed downward and attempts to profit from a decline in stock prices. Bears are typically pessimistic about the state of a given market. For example, if an investor were bearish on the Standard & Poor’s (S&P) 500, that investor would attempt to profit from a decline in the broad market index.

Question 5

The daily opening prices tend to show:

Answer 5

the amateurs’ opinion of the value, since they are often acting in the morning before going to work.

Question 6

The days closing prices reflect the decisions of :

Answer 6

professional traders.

Question 7

If closing prices (professionals) are higher than the opening prices (amatuers), this means that

Answer 7

professionals are probably more bullish than amateurs, and if c

Question 8

The high of each bar reflects the maximum power of

Answer 8

Bulls

Question 9

the low of each bar displays the maximum power of .

Answer 9

bears

Question 10

the distances between the highs and lows reflect

Answer 10

the intensity of the conflict between bulls and bears. If you want to estimate activity in the market, it’s this distance you’ll need to pay attention to.

Question 11

An average-sized distance between high and Low prices (B) in a bar represents

Answer 11

a cool market

Question 12

a distance between high and low price of a bar half the average size (C) indicates

Answer 12

a sleepy market

Question 13

a bar with distance between high and low that is double the average size (A) marks an ….

Answer 13

overheating market.

Question 14

What is slippage?

Answer 14

Slippage refers to the difference between the order (expected) price of a trade and the price at which the trade is actually filled (executed).

Slippage often occurs during periods of higher volatility when market orders are used, and also when large orders are executed when there may not be enough interest at the desired price level to maintain the expected price of trade.

Question 15

Slippage is normally lower in quiet markets, so avoid getting into the market when …..

Answer 15

there is a huge discrepancy between high and low prices, a clear indicator that the market is overheating.

Question 16

there are two more elements that a bar chart reveals, elements that will help you grasp the mood of a market. They are….

Answer 16

Support and resistance levels

Question 17

When buying is so strong that it reverses or interrupts a downward price trend, we’re witnessing

Answer 17

support. You can imagine support as the floor that you bounce a basketball on. Every time the ball hits the floor, it bounces back up.

Question 18

A support level exists, because people in the market have

Answer 18

memories. If the price of a stock was falling and stopped at a certain level and then increased, traders would remember this low level and be likely to buy when prices approach it again.

Question 19

When selling is so strong that it reverses or interrupts an uptrend, the market is demonstrating ……

Answer 19

resistance. Imagine a ball being tossed up, hitting the ceiling and dropping down. In this example the ceiling would be the resistance level. Using chart analysis you can find resistance levels by connecting two or more highs in a chart with a horizontal line

Question 20

Essentially, you should begin selling when you hit the…. and buy at the …..

Answer 20

resistance level – before prices go down – support level – when prices are at their lowest. In fact, many traders usually buy at support and sell at resistance zones, which also helps entrench and reinforce these levels even further.

Question 21

No matter what you choose to trade, there are always two criteria they should meet:

Answer 21

liquidity and volatility. Liquidity is the average daily volume of traded shares. The higher the liquidity, the more shares are available for sale, and the easier it will be to trade at your desired order price.

Question 22

To ensure you never find yourself in without enough buyers when it’s time to sell, screen only for stocks that are traded at a rate above ….. .

Answer 22

a million shares per day (safe), 500k per day (moderate safe), less than 100k per day (more risk of being stuck with shares for longer periods of time and being subject to market moves).

Question 23

Volatility is …. The higher the volatility, the more opportunities there is to …..

Answer 23

average short-term movement in the price of the stock. make money – and lose it

Question 24

We can measure volatility with _____________ , which compares the volatility of a certain stock to

Answer 24

a beta

its benchmark, a general figure, such as a market index, that reflects the health of the market.

Question 25

if you have a beta with a value of two, that means that if the benchmark rises five percent, stock is likely to rise ....

Answer 25

ten percent, and vice versa when the benchmark falls. It’s advisable for beginners to focus on low betas, as this limits the amount you could lose when trading.

Question 26

Use two simple rules to minimize your risk. No matter how great your profits are in trading, without proper risk management, all your capital could disappear in minutes. If you want to be secure, you’ll need to follow two key rules.

Answer 26

The first of these is the 2% rule. second rule you need to implement is the 6% rule

Question 27

the 2% rule or risk management.

Answer 27

This prohibits you from risking more than 2 percent of your trading account balance, or trading equity, on a single trade.

Question 28

Say you have $50,000 of trading capital in your account. The 2% rule of risk management dictates that you can only risk \_\_\_\_\_\_\_\_\_\_.....per trade.

Answer 28

$1,000 (=50,000 X 0.02)

Question 29

An important tool in risk management is a stop order. A stop order means that......

Answer 29

when the price of the stock falls to a given amount, the stock is automatically sold.

Question 30

The 2% rule is one of the most effective ways of minimizing your losses. If you have an account of 100,000 You can risk (2% of the account) or $\_\_\_\_\_\_\_\_ per trade? If a stock you want to buy is worth $50, and the stop loss is needed at $48 (just below the next support level) it means you can buy a maximum of _______ shares.

Answer 30

$1000 per trade (50,000x .02) 1000 shares ($2,000 allowed risk/$2 per share)=1000 shares In our example, if the stop loss is triggered when the price drops from $50 to $48 you theoretically lose a max of $2 x 1000 shares or $2000 (2%)

Question 31

the 6% rule or risk management. This rule dictates that you can’t open any new trades for the rest of the month if

Answer 31

your total losses in the month plus the risk in open trades reaches 6 percent of your trading capital.

Question 32

Per the 6% rule of risk management what is you total sustainable losses for the month before you have to quit trading? Assume $100,000 Account You’ve sustained $5,000 already for the month How much can you have in open trade positions at risk?

Answer 32

calculating this month’s total losses, then add your current risks in open trades. $5,000 + $1,000= $6,000 Or 6% of Account - current month’s losses= remaining positions allowed open. $6,000 - $5,000= $1,000 you’d best abstain from opening new trades before the month is up if your open positions are $1,000 or greater!

Question 33

The cornerstone of successful trading is

Answer 33

record keeping, because it helps you develop and maintain discipline. If you don’t keep an eye on how much you are gaining or losing, how can you ensure you improve your strategies in the future?

Question 34

Journaling can prevent

Answer 34

emotional trading, as you’ll see for yourself how much feel-good trading costs you. what’s more, you’re bound to find a pre-existing template online that suits you!

Question 35

One of the main things you should be looking for in your journal entries is your

Answer 35

personal equity curve. This will help you determine whether you’re making money or losing money in the long-term, and reveal whether your trading system is up to scratch. If your equity curve shows a downtrend, it may be a call for you to pay closer attention to your system, or your discipline, to see what needs tightening up.