Day Trading MCQs

Day Trading MCQs

Try to answer these 80+ Day Trading MCQs and check your understanding of the Day Trading subject.
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1: What would a day trader do to ensure that profits earned from a security are maintained without selling it immediately?

A.   Place a stop loss order

B.   Short sell the stock

C.   Sell an options contract on the stock

D.   Just watch the price and see what happens 

2: Why is it important for day traders to close out all positions before the day is over?

A.   If they do not, they are no longer day traders.

B.   Taxes are lower if positions are closed out.

C.   Overnight changes in the demand for the security can drastically affect the price.

D.   They are required to if trading on margin. 

3: What is the SEC definition of a "pattern day trader"?

A.   A trader who profits from short selling

B.   A trader who buys and sells on the same trading day, and does this four or more times within a 5 day period

C.   A trader who sells and buys stock options instead of stocks

D.   A trader who makes profits; the ones who lose money are not day traders 

4: What does the $25,000 margin account requirement do to protect a day trader?

A.   It guarantees they will always have $25,000 money available if they decide to quit day trading.

B.   Little — the requirement is more to protect the brokerage.

C.   It is a reserve they can use for trading at some later date.

D.   It buys insurance from the NASD 

5: What would a range trader who sees a breakout most likely do?

A.   Nothing, wait and see what else happens.

B.   Tell their friends to buy the stock.

C.   Call the company to find out what is happening.

D.   Purchase or sell the stock depending on the direction as the price is likely to continue in the same direction for some time 

6: What is the "futures market"?

A.   An exchange for futures contracts on commodities

B.   An exchange for stocks based on anticipated prices one year from now

C.   An exchange for options contracts

D.   An exchange for foreign currency 

7: What is the end result of most technical analyses?

A.   Short selling stocks

B.   A chart indicating price movements and a prediction for future price movements

C.   Calling companies for more information about their stock price

D.   Nothing; it usually results in useless information 

8: What would be the exit point for an arbitrage trader?

A.   Within one year

B.   Within one week

C.   None; transactions are done simultaneously both for entry and exit

D.   Some time during the day when the other side of the transaction can be completed 

9: What is "after hours trading"?

A.   Trading on foreign exchanges

B.   Setting limit orders which will be executed after market hours

C.   Trading in currency transactions

D.   Trading in stocks after the market has closed, creating orders which will be executed the following day

10: Why is short selling risky?

A.   Because if the price of the security rises endlessly, there is no limit on the losses that can be incurred

B.   Because the brokers can mandate the seller cover their position at any point

C.   Because there are no laws protecting short sellers

D.   Because inexperienced short sellers can create havoc in the market 

11: What does algorithmic trading look to profit from?

A.   From misinformation in news reports

B.   From company financial statements

C.   From misinforming other traders

D.   From mistakes made during the previous trading day by other day traders

12: What requirements do brokerages have for day traders?

A.   No requirements are there.

B.   Minimum deposits must be at least $1,000.

C.   They must come into the office and sign an agreement.

D.   Brokerages must ask traders if they understand the risky style of trading and that there is a possibility of losing their investment capital. 

13: What would an investor infer from a stock price which has steadily risen for three days?

A.   That someone inside the company is giving false news reports

B.   That insiders are selling all of their stock

C.   That short sellers are covering their positions

D.   That the stock will most likely continue in this direction

14: What is the best way to reduce variable expenses?

A.   Working at the library using their computers

B.   Working with a brokerage which charges low commissions from frequent traders

C.   Refusing to pay commissions

D.   Refusing to pay the margin requirements 

15: Which of the following is closest in meaning to arbitrage trading?

A.   Day trading

B.   Short selling

C.   Scalping

D.   Profiting

16: Which of the following is an additional requirement of a day traders account?

A.   Deposits are restricted for two months.

B.   Deposits cannot be withdrawn for two days.

C.   They must make at least ten transactions a week or their account is closed.

D.   The minimum trade commission is $10. 

17: How does a day trader immediately set their exit point?

A.   By telling their friends to watch the stock for them

B.   By placing a limit order to sell after purchase

C.   By selling options contracts

D.   By trying to arbitrage the stock

18: What is the main benefit of leveraging capital?

A.   If the deal doesn't work, there is no obligation on the trader's part.

B.   It has potential for substantially large returns using borrowed money.

C.   It reduces taxes.

D.   It allows them to avoid being classified as a day trader 

19: What is required of a brokerage when they spot a pattern day trader?

A.   Automatically extend $25,000 in margin

B.   Freeze the trader's account until the $25,000 margin requirement is met

C.   Nothing; it is the trader's obligation to self regulate

D.   Send a notice 

20: Which of the following is a positive attribute often associated with short sellers?

A.   They have lower commission rates.

B.   They tend to do extensive dilligent research on securities due to the substantially risky nature of the trades.

C.   Their errors create opportunities for others.

D.   Their actions often indicate market direction. 

21: What is the concept of ignoring predetermined exit points to allow for further profit?

A.   Short selling

B.   Selling options contracts

C.   Letting a stock run

D.   Margin trading 

22: What is "FOREX"?

A.   Over the Counter Bulletin Board

B.   A stock exchange

C.   An options exchange

D.   A foreign currency exchange 

23: Why do arbitrage opportunities seldom exist?

A.   Because the SEC looks for them and fixes them before traders can profit

B.   Because the profits are so small they are not worthwhile

C.   Because the law of one price — supply and demand will close the gap quickly

D.   Because they are illegal 

24: What is the purpose of sliding the stop loss upwards?

A.   It allows for less taxes on additional profits.

B.   It allows the trader to short sell the stock.

C.   It is only for risky traders.

D.   It allows the trader to lock in additional profits on a stock that is increasing in price.

25: By doing which of the following would a day trader be leveraging capital?

A.   Buying 100 shares of a hot new company

B.   Buying stock options

C.   Short selling stock

D.   Passing on a transaction 

26: What type of order will a short seller subsequently place in order to limit their potential losses?

A.   Purchase limit order

B.   Option contract purchase

C.   Stop loss order

D.   Arbitrage trade 

27: What does a limit order do?

A.   It limits other traders' ability to buy the same stock.

B.   When the stock price hits a certain trigger point, a market order to sell or buy a stock becomes effective.

C.   It limits your taxation.

D.   It limits how many transactions you can make in a day. 

28: What can affect the amount of margin required, apart from minimum requirements?

A.   The exchange the trader trades on

B.   The credit risk of the investor

C.   The amount of capital the trader has outside of their account

D.   The history the trader has of success 

29: What is a simple technique a beginning day trader would use?

A.   Options contracts trading

B.   Fundamental analysis

C.   Regression analysis

D.   News trading — using news releases about companies as indicators of stock prices 

30: What would a trader do if they calculated a price based on fundamental analysis which was higher than the current market price?

A.   Purchase the stock as it will potentially normalize back to the calculated price.

B.   Nothing; they would wait and see what happens.

C.   Tell their friends to short sell the stock.

D.   Call the company and ask why. 

31: What is short selling?

A.   Selling less shares than you own

B.   Selling a security before owning it, with the intent of later purchasing it at a lower price

C.   Selling a stock for less than it is trading for

D.   Creating a limit order for a lower price than the current market price 

A.   Traders will often enter transactions overnight in order to avoid the classification, exposing themselves to more risk and potential loss than if they were allowed to trade as they know best.

B.   No one can afford a $25,000 margin account.

C.   It makes day trading non accessible to inexperienced people.

D.   The government should not meddle in the public's well being. 

33: Why would an investor have an exit before entry?

A.   Because they do not know how to trade properly

B.   Because they are trading on margin

C.   Because they are short selling a stock

D.   Because they are writing options contracts 

34: When is stock analysis performed?

A.   After the trading day to plan for the following day

B.   A week in advance

C.   Over several months

D.   Always on the fly 

35: What is the main risk a day trader is subject to?

A.   Trade risk

B.   Intraday risk

C.   Exchange rate risk

D.   Interest rate risk 

36: What is "technical analysis"?

A.   Stock analysis based on price movements and charting

B.   Stock analysis based on company fundamentals such as financial statements

C.   Stock analysis based on new reports during the day

D.   Stock analysis based on volume sales 

37: What is the "settlement date"?

A.   The date on which a transaction is executed

B.   The date on which an account holder's statement comes out

C.   The date on which a company's dividend is declared

D.   The day on which a transaction is finalized by the broker transferring ownership of the security

38: What stipulation does the SEC place on a pattern day trader?

A.   They must make at least ten transactions a week.

B.   They must pay minimum commissions of $10 per transaction.

C.   They must maintain at least $25,000 in a margin account.

D.   They can only trade on the US exchanges. 

39: Which of the following provides some form of ongoing return on investment?

A.   Investing in companies with drastic price range history

B.   Investing in companies with a solid history of consistent dividends

C.   Investing in new companies

D.   Short selling only 

40: What is meant by "arbitrage"?

A.   Selling a stock without owning it

B.   Profiting on price differences between the markets

C.   Selling stock options

D.   Illegally selling stocks 

41: What would be the best technique for a day trader to utilize?

A.   Fundamental analysis

B.   Technical analysis

C.   Multiple techniques

D.   Charting 

42: What is meant by "swing trading"?

A.   Trading 10 or more times in one day

B.   Trading stocks with your friends

C.   Holding stocks for more than a day, but typically not more than a few weeks

D.   Trading stocks as a hobby 

43: What would a news trader potentially do if a stock price falls on seemingly good news?

A.   Nothing; they are only interested in bad news.

B.   Short sell the stock.

C.   Purchase the stock as it may rebound quickly.

D.   Tell their friends to short sell the stock. 

44: What is a "locate"?

A.   A person who locates hot stock tips

B.   A person who locates potential short sale deals

C.   A person who will provide the securities being sold temporarily, typically a brokerage

D.   A person who locates short sales which are out of compliance 

45: How does a day trader fundamentally leverage their capital?

A.   By referring friends to a brokerage and thus earning referral fees

B.   By consistently buying and selling and thus increasing value

C.   By not executing some transactions just to save the $10 commission

D.   By not reporting their activity to the government 

46: Why is it important for a day trader to have a methodology to adhere to?

A.   Because it is required to by law

B.   Because it reduces their tax obligations

C.   Because the brokerage will ask from time to time what their strategy is

D.   In order to consistently pick stocks which fit their portfolio without getting distracted by other opportunities 

47: What is meant by "range trading"?

A.   Trading in stocks of appliance manufacturers

B.   Trading in stocks based on news releases

C.   Trading in stocks based on the analysis of company financials

D.   Buying and selling stocks based on the history of trading within a certain price range 

48: Why is news trading a relatively simple strategy?

A.   Because it is cheaper to trade

B.   Because it can be done months in advance

C.   Because it does not require as much analysis

D.   Because brokerages will provide you with the news and tell you what to do

49: What is meant by days to cover?

A.   The number of days available for trading in the month

B.   The number of days until a locate must be found

C.   The number of days until a transaction clears

D.   The maximum number of days available to the trader to cover their short position 

50: What is "spread"?

A.   The difference in price between the bid and ask amounts

B.   The difference between opening and closing prices

C.   The difference between the price of the same security on two markets

D.   The difference between strike price and current price