Level 2 — RecallIndicators & Oscillators

Indicators & Oscillators

⏱ 30 minutes40 marksprintable — key stays hidden on paper

Level 2 — Recall (Definitions, Standard Problems, Short Derivations) Time Limit: 30 minutes Total Marks: 40

Q1. State the key difference between a Simple Moving Average (SMA) and an Exponential Moving Average (EMA). Which one reacts faster to recent price changes and why? (4 marks)

Q2. Define a golden cross and a death cross in the context of moving average crossovers. State the typical MA periods used. (4 marks)

Q3. The RSI of a stock is calculated over 14 periods. The average gain is $2.4$ and the average loss is $1.2$ . (a) Compute the Relative Strength (RS). (b) Compute the RSI using $RSI = 100 - \dfrac{100}{1 + RS}$ . (c) State whether this reading is overbought, oversold, or neutral (thresholds 70/30). (5 marks)

Q4. Explain what is meant by bullish RSI divergence and bearish RSI divergence. (4 marks)

Q5. The MACD line is defined using two EMAs and a signal line. (a) Write the standard formula for the MACD line. (b) State what the signal line is. (c) Define the MACD histogram. (5 marks)

Q6. Bollinger Bands use a 20-period SMA of $50$ and a standard deviation of $2$ . Using the standard multiplier $k = 2$ : (a) Calculate the upper band. (b) Calculate the lower band. (c) Explain what a Bollinger Band squeeze indicates. (5 marks)

Q7. For the stochastic oscillator, a stock's current close is $45$ , the lowest low over the period is $40$ , and the highest high is $50$ . Compute the %K value and state whether it signals overbought (>80) or oversold (<20). (4 marks)

Q8. Define the ADX indicator. What ADX value range typically indicates a strong trend, and does ADX indicate trend direction? (3 marks)

Q9. Given intraday data — total price×volume traded = $1{,}200{,}000$ and total volume = $8{,}000$ shares — compute the VWAP. State one common use of VWAP by traders. (3 marks)

Q10. Briefly explain the concept of indicator overload and give one reason why using too many indicators can harm trading decisions. (3 marks)

End of Paper

Answer keyMark scheme & solutions

Q1. (4 marks)

SMA gives equal weight to all prices in the period (1 mark).
EMA gives more weight to recent prices via an exponential weighting factor (1 mark).
EMA reacts faster (1 mark) because recent data is weighted more heavily, so it responds quicker to new price movements while SMA lags more (1 mark).

Q2. (4 marks)

Golden cross: short-term MA crosses above long-term MA → bullish signal (1.5 marks).
Death cross: short-term MA crosses below long-term MA → bearish signal (1.5 marks).
Typical periods: 50-day and 200-day MAs (1 mark).

Q3. (5 marks) (a) $RS = \dfrac{\text{avg gain}}{\text{avg loss}} = \dfrac{2.4}{1.2} = 2$ (2 marks). (b) $RSI = 100 - \dfrac{100}{1+2} = 100 - 33.33 = 66.67$ (2 marks). (c) $66.67 < 70$ and $> 30$ → neutral (approaching overbought) (1 mark).

Q4. (4 marks)

Bullish divergence: price makes a lower low but RSI makes a higher low → weakening downtrend, potential reversal up (2 marks).
Bearish divergence: price makes a higher high but RSI makes a lower high → weakening uptrend, potential reversal down (2 marks).

Q5. (5 marks) (a) $MACD = EMA_{12} - EMA_{26}$ (2 marks). (b) Signal line = 9-period EMA of the MACD line (2 marks). (c) Histogram = MACD line − Signal line (1 mark).

Q6. (5 marks) (a) Upper band $= 50 + 2\times2 = 54$ (2 marks). (b) Lower band $= 50 - 2\times2 = 46$ (2 marks). (c) A squeeze = bands narrowing due to low volatility, often preceding a big breakout move (1 mark).

Q7. (4 marks)

$\%K = \dfrac{C - L}{H - L}\times 100 = \dfrac{45-40}{50-40}\times 100 = \dfrac{5}{10}\times100 = 50$ (3 marks).
$50$ is between 20 and 80 → neither overbought nor oversold (neutral) (1 mark).

Q8. (3 marks)

ADX = Average Directional Index, measures trend strength (1 mark).
ADX > 25 typically indicates a strong trend (1 mark).
ADX does not indicate direction, only strength (1 mark).

Q9. (3 marks)

$VWAP = \dfrac{\sum (Price\times Volume)}{\sum Volume} = \dfrac{1{,}200{,}000}{8{,}000} = 150$ (2 marks).
Use: benchmark for fair intraday execution price / institutions gauge whether they bought above or below average (1 mark).

Q10. (3 marks)

Indicator overload = using too many indicators at once (1 mark).
Many indicators give conflicting/redundant signals (they often measure the same thing), causing analysis paralysis and delayed decisions (2 marks).

[
  {"claim":"Q3 RS=2 and RSI=66.67","code":"RS=Rational(24,10)/Rational(12,10); RSI=100-100/(1+RS); result=(RS==2) and (abs(float(RSI)-66.6667)<0.01)"},
  {"claim":"Q6 upper band 54 lower band 46","code":"up=50+2*2; low=50-2*2; result=(up==54) and (low==46)"},
  {"claim":"Q7 %K equals 50","code":"K=(45-40)/(50-40)*100; result=(K==50)"},
  {"claim":"Q9 VWAP equals 150","code":"v=Rational(1200000,8000); result=(v==150)"}
]