Trading vs Investing & Styles

Question 1 (10 marks)

(a) Best style: Swing trading (6 marks)

• Identifies swing trading — 2 marks.
• Fit-factors (2 marks each, any three):
  • Full-time job 9–6 → cannot watch intraday screens, but swing trades are managed over days, checked outside market hours. (2)
  • Anxious watching every tick → swing avoids second-by-second monitoring required by scalping/intraday. (2)
  • Enjoys chart analysis on weekends → swing entries are planned off charts. (2)
  • Tolerates holding losers a few days on valid thesis → matches the multi-day swing holding period. (2)

(b) Unsuitable styles (4 marks)

• Scalping — requires constant, second-by-second screen focus; impossible with a full-time job and her tick-anxiety. (2)
• Intraday/day trading — positions must be watched and closed same day during market hours; conflicts with her 9–6 job. (2) (Accept positional as a partial alternative but the two above are the clearest.)

Question 2 (12 marks)

(a) Compounded outcome (4 marks) $100000 \times (1.20)^{12}$ $1.20^{12} \approx 8.916$, so $\approx ₹8,91,600 \approx ₹8,92,000$. (4) (Method 2, correct exponent 1; correct value 2; rounding 1.)

(b) Comparison (3 marks) The true outcome (~₹8.92 lakh, ~8.9×) is less than the advertised 10× (₹10 lakh). Advertised is larger by a factor of about $10/8.92 \approx 1.12$. (3) (Direction 2, factor 1.)

(c) Why unrealistic (5 marks)

• Realistic sustained returns are on the order of low-to-mid double-digit annual percentages, not per month. (2)
• 20% compounded monthly is astronomically improbable to sustain; even a genuine near-8.9× annual return is far beyond what professionals achieve consistently. (2)
• Such ads exploit compounding math and ignore drawdowns, taxes, and slippage. (1)

Question 3 (10 marks)

(a) Philosophies (2 marks)

• Trader A → Momentum trading. (1)
• Trader B → Mean-reversion trading. (1)

(b) Favourable conditions (4 marks)

• Trader A (momentum) succeeds in a strong trending market. (2)
• Trader B (mean-reversion) succeeds in a range-bound / overextended, mean-reverting market. (2)

(c) Risk-control rules (4 marks)

• Trader A: place a trailing stop below the trend / recent swing low, so if momentum reverses the position is exited automatically. (2)
• Trader B: place a hard stop above the recent high / a defined distance, since a runaway trend could produce unlimited short losses. (2)

Question 4 (10 marks)

(a) Best style (4 marks) Positional (trend) trading — with only one end-of-day check and multi-week/month holds, positional needs the least intraday attention. (Swing is also acceptable if he checks EOD and holds days; award full marks for either well-justified choice given "30 min at close.") (4)

(b) Screen-time ranking, highest → lowest (3 marks) Scalping > Intraday > Swing > Positional. (3, all correct)

(c) Why scalping is capital-intensive (3 marks)

• Profit per trade is tiny, so meaningful money requires large position sizes to make small moves worthwhile. (2)
• Large size + high trade frequency also means high margin usage and cost drag, demanding substantial capital. (1)

Question 5 (8 marks)

(a) Style (2 marks) Swing trading (3–10 day holds, technical setups, checked twice daily). (2)

(b) Net return (4 marks)

• Winners: $20 \times 0.55 = 11$ trades × (+2%) = +22%. (1)
• Losers: $20 \times 0.45 = 9$ trades × (−1%) = −9%. (1)
• Net (arithmetic sum, ignoring compounding): $+22\% - 9\% = +13\%$. (2)

(c) Why it may fail (2 marks) Any one: real win-rate may fall below 55%; transaction costs/slippage erode edge; poor discipline (moving stops); risk of a losing streak / drawdown; assumption of fixed R:R rarely holds live. (2)

[
  {"claim":"20% monthly compounded on 100000 for 12 months ≈ 891600","code":"val=100000*(1.20**12); result = abs(val-891610) < 200"},
  {"claim":"Advertised 10x exceeds true compounded factor (~8.916x)","code":"factor=1.20**12; result = (10 > factor) and abs(10/factor - 1.121) < 0.01"},
  {"claim":"Q5 net return from 20 trades at 55% win, +2/-1 = +13%","code":"wins=20*0.55; losses=20*0.45; net=wins*2 - losses*1; result = net == 13"},
  {"claim":"Q5 winners contribute +22 and losers -9","code":"w=round(20*0.55)*2; l=round(20*0.45)*(-1); result = (w==22) and (l==-9)"}
]