Trading Strategies

Question 1 (12)

(a) Range width $= 502.00 - 495.00 = 7.00$.

• Long entry: break above High \Rightarrow \502.00$; stop = opposite end (Low)$= $495.00$. (1)
• Short entry: break below Low \Rightarrow \495.00$; stop = opposite end (High)$= $502.00$. (1)
• Rationale: opposite end invalidates the breakout thesis. (1)

(b) Per-share risk (long) $= 502.00 - 495.00 = 7.00$. Position $= \dfrac{3000}{7.00} = 428.57 \Rightarrow \mathbf{428}$ shares (round down). (3)

(c) Risk = $7.00$; reward = $2\times 7 = 14.00$. Target = 502.00 + 14.00 = \mathbf{\516.00}$. (2)

(d) (1 each, max 4)

• Volume confirmation addresses false/low-conviction breakouts — breaks on thin volume often fail; volume shows real participation.
• Retest filter addresses whipsaw — waiting for price to hold above the level on a pullback confirms it flipped resistance→support and improves entry risk/reward.
• Together they cut the ORB "first-candle fakeout" failure common in low-liquidity opens.

Question 2 (10)

(a) $RS = \dfrac{\overline{G}}{\overline{L}}$, $\;RSI = 100 - \dfrac{100}{1+RS}$. Range $0$–$100$. (3)

(b) $\overline{G} = (2+0+3+0+1)/5 = 6/5 = 1.20$. (1) $\overline{L} = (0+1+0+4+0)/5 = 5/5 = 1.00$. (1) $RS = 1.20/1.00 = 1.20$. (1) $RSI = 100 - \dfrac{100}{1+1.20} = 100 - \dfrac{100}{2.20} = 100 - 45.4545 = \mathbf{54.55}$. (2)

(c) In a strong trend RSI stays overbought/oversold (e.g. >70) for long stretches, so counter-trend signals fail. Fix: use RSI only in direction of trend, shift bands (e.g. 40–80 in uptrend), or use RSI for pullback entries not reversals. (2)

Question 3 (12)

(a) (6, marks for computing both SMAs, storing prev cross state, generating long/exit)

for i in range(s-1, len(P)):
    fast = mean(P[i-f+1 : i+1])
    slow = mean(P[i-s+1 : i+1])
    prev_fast = mean(P[i-f : i])
    prev_slow = mean(P[i-s : i])
    if prev_fast <= prev_slow and fast > slow:
        signal[i] = "LONG"          # bullish cross
    elif prev_fast >= prev_slow and fast < slow:
        signal[i] = "EXIT"          # bearish cross
    else:
        signal[i] = "HOLD"

(b) $P=[10,12,14,13,15]$, 3-SMA:

• at index 3 (10,12,14→13,14): $(12+14+13)/3 = 39/3 = \mathbf{13.00}$. (1.5)
• at index 4: $(14+13+15)/3 = 42/3 = \mathbf{14.00}$. (1.5)

(c) Weakness: in ranges the MAs interweave producing repeated whipsaw crosses and losses. (1.5) Mitigation: add a trend/volatility filter (ADX threshold, price-vs-longer-MA slope, or minimum separation between MAs) to trade only when trending. (1.5)

Question 4 (10)

(a) (1 each, max 4)

• MACD line $= EMA_{12} - EMA_{26}$.
• Signal line $= EMA_{9}(\text{MACD line})$.
• Histogram $= \text{MACD line} - \text{Signal line}$.
• $(12,26,9)$ = fast EMA, slow EMA, signal EMA periods.

(b) MACD $= 148.20 - 146.00 = 2.20$. (1) Histogram $= 2.20 - 1.50 = 0.70$ (positive). (1) Interpretation: MACD above signal with positive/widening histogram ⇒ bullish momentum increasing. (1)

(c) $k = \dfrac{2}{12+1} = \dfrac{2}{13} = 0.1538$. (1) $EMA_{today} = P\cdot k + EMA_{yest}(1-k) = 151.00(0.1538) + 148.20(0.8462)$ $= 23.231 + 125.406 = \mathbf{148.63}$. (2)

Question 5 (8)

(a) $VWAP = \dfrac{\sum (P_i \cdot V_i)}{\sum V_i}$. (1.5) It is the volume-weighted average traded price of the session, so it represents the average participant's cost basis / fair value — price above VWAP favors buyers, below favors sellers. (1.5)

(b) Numerator $= 100(20) + 200(21) + 200(22) = 2000 + 4200 + 4400 = 10600$. Volume $= 100+200+200 = 500$. VWAP = 10600/500 = \mathbf{\21.20}$. (3)

(c) (1 each)

• Mean-reversion long: price dips well below VWAP in a rangey market → buy anticipating snap-back toward VWAP.
• Trend-continuation long: price holds above rising VWAP, pulls back to VWAP and bounces → buy in direction of trend using VWAP as dynamic support.

Question 6 (8)

(a) Likely breakaway gap (1): justified by (i) high volume confirming conviction, and (ii) gap clears prior resistance starting a new leg (not into resistance). (2)

(b) Gap-fill logic: gaps (esp. common/area gaps with weak follow-through) tend to be "filled" as price retraces to the prior close; trade toward the pre-gap close. (2) Stop: just beyond the gap extreme (the gap-day high for a short-the-gap-up fill, or low for gap-down). (1)

(c) (i) → range trading (fade support/resistance); (ii) → trend-following / MA crossover; (iii) → reversal / supply-demand zone trade. (2, all three correct)

[
  {"claim":"ORB long position size floor(3000/7)=428","code":"import math; result = math.floor(3000/7.0)==428"},
  {"claim":"ORB 2:1 target = 516","code":"result = 502.00 + 2*(502.00-495.00) == 516.00"},
  {"claim":"RSI with G=1.2 L=1.0 is 54.55","code":"RS=1.2/1.0; rsi=100-100/(1+RS); result = round(rsi,2)==54.55"},
  {"claim":"3-SMA last two points 13 and 14","code":"P=[10,12,14,13,15]; a=(P[1]+P[2]+P[3])/3; b=(P[2]+P[3]+P[4])/3; result = (a==13.0 and b==14.0)"},
  {"claim":"MACD=2.20 histogram=0.70","code":"macd=148.20-146.00; hist=macd-1.50; result = (round(macd,2)==2.20 and round(hist,2)==0.70)"},
  {"claim":"EMA12 today approx 148.63","code":"k=2/13; ema=151.00*k+148.20*(1-k); result = round(ema,2)==148.63"},
  {"claim":"VWAP = 21.20","code":"num=100*20+200*21+200*22; vwap=num/500; result = round(vwap,2)==21.20"}
]