When to Trade — Timing & Sessions
Level 2 — Recall & Short Application
Time Limit: 30 minutes | Total Marks: 40
Instructions: Answer all questions. Show working where calculations are required. Use notation for any math.
Q1. List the four main phases of a typical equity trading session in chronological order, and give the approximate clock time for the regular session open and close (using US market hours as reference). (4 marks)
Q2. Define "pre-market session." State any TWO characteristics of price behavior during this window. (4 marks)
Q3. What is the "opening range"? Explain in one or two lines why the first 15–30 minutes is considered high-risk yet high-opportunity for traders. (4 marks)
Q4. Describe the "midday lull." State TWO consequences for a trader of trading during a low-liquidity midday period. (4 marks)
Q5. Define the "power hour." Give ONE reason why volume and volatility typically increase during the closing session. (4 marks)
Q6. An economic calendar lists an event with three data points: Previous = 3.4%, Forecast = 3.6%, Actual = 4.1%. (a) Which value is the "surprise" measured against? (1 mark) (b) Calculate the surprise (Actual − Forecast). (1 mark) (c) State whether this is likely a bullish or bearish surprise for the currency/asset if the metric is inflation, and briefly why. (2 marks) (4 marks total)
Q7. Distinguish between scheduled news events and unscheduled news events, giving one example of each. (4 marks)
Q8. A stock closes at \200$188$ on Tuesday after a poor earnings report released overnight. (a) Calculate the gap in dollars and as a percentage of the previous close. (2 marks) (b) Name the type of risk this illustrates and state why a stop-loss order may NOT protect against it. (2 marks) (4 marks total)
Q9. Define a "volatility window." Give TWO examples of calendar events that create such windows. (4 marks)
Q10. State TWO times or days that traders commonly avoid, and give a one-line reason for each. (4 marks)
END OF PAPER
Answer keyMark scheme & solutions
When to Trade — Timing & Sessions (Level 2)
Q1. (4 marks) Four phases in order: Pre-market → Opening (opening range) → Midday lull → Power hour / Close (and after-hours may be noted). (2 marks — 0.5 each phase) Regular US session open 9:30 AM ET, close 4:00 PM ET. (2 marks — 1 each) Why: Sessions are defined by liquidity and participation patterns that shift predictably across the trading day.
Q2. (4 marks) Definition: Trading activity that occurs before the official market open (US: roughly 4:00–9:30 AM ET). (2 marks) Any TWO characteristics (1 mark each): lower liquidity / thin volume; wider bid-ask spreads; higher volatility; driven by overnight news & earnings; prices can gap; not fully representative of the regular session direction. Why: Fewer participants means price can move sharply on small order flow.
Q3. (4 marks) Opening range = the high and low established during the first minutes (e.g. first 15–30 min) of the regular session. (2 marks) High-risk/high-opportunity because: overnight orders and news flood in creating large volume and rapid price swings — big moves offer opportunity but wide spreads and false breakouts create risk. (2 marks)
Q4. (4 marks) Midday lull = the low-activity period around the middle of the session (roughly 11:30 AM–1:30/2:00 PM ET) when volume and volatility fall as institutional participation eases. (2 marks) Any TWO consequences (1 mark each): wider spreads / worse fills; choppy, directionless price (whipsaws); reduced follow-through on breakouts; harder to enter/exit large positions; more slippage.
Q5. (4 marks) Power hour = the final hour of the trading day (US: ~3:00–4:00 PM ET) marked by rising volume and volatility. (2 marks) Any ONE reason (2 marks): institutional/portfolio rebalancing before close; traders closing intraday positions; MOC (market-on-close) orders; reaction to the day's news; index rebalancing / options positioning.
Q6. (4 marks) (a) Surprise is measured against the Forecast (consensus expectation). (1 mark) (b) Surprise (higher-than-expected). (1 mark) (c) For an inflation metric, a hotter-than-expected reading is typically bullish for the currency (raises rate-hike expectations) but bearish for equities/bonds. Accept a well-reasoned answer naming the asset and directional logic. (2 marks) Why: Markets price the forecast in advance; only the deviation (surprise) moves price.
Q7. (4 marks) Scheduled events: known in advance and on the economic calendar (e.g. Fed rate decision, CPI release, earnings, NFP). (2 marks) Unscheduled events: unexpected, no set time (e.g. geopolitical shock, natural disaster, surprise CEO resignation, flash crash). (2 marks) Why: Scheduled events allow traders to prepare/position; unscheduled events cause abrupt, unhedgeable moves.
Q8. (4 marks) (a) Gap = 200 - 188 = \12= \dfrac{12}{200}\times 100 = 6%$ down. (1 mark) (b) This is gap / overnight risk. (1 mark) A stop-loss triggers only once trading resumes; the market gaps past the stop level, so the fill occurs at the (lower) open — not the stop price. (1 mark)
Q9. (4 marks) Volatility window = a period of expected elevated price movement surrounding a known catalyst. (2 marks) Any TWO examples (1 mark each): options expiry (weekly/monthly/quarterly), central-bank rate decisions, CPI/inflation releases, earnings announcements, jobs (NFP) reports, triple/quad witching.
Q10. (4 marks) Any TWO with reasons (2 marks each):
- Midday lull — low liquidity, choppy, poor fills.
- First few minutes of open for beginners — excessive volatility / false moves.
- Just before major news releases — unpredictable spikes.
- Options expiry days (esp. triple witching) — erratic pinning/volatility.
- Friday afternoon / before long weekends — thin volume, position-squaring, weekend gap risk.
[
{"claim":"Q6 surprise = Actual - Forecast = 0.5%", "code":"actual=4.1; forecast=3.6; surprise=actual-forecast; result = abs(surprise-0.5)<1e-9"},
{"claim":"Q8 dollar gap is $12", "code":"prev=200; open=188; gap=prev-open; result = gap==12"},
{"claim":"Q8 percentage gap is 6%", "code":"prev=200; open=188; pct=(prev-open)/prev*100; result = abs(pct-6)<1e-9"},
{"claim":"US regular session length is 6.5 hours", "code":"open_min=9*60+30; close_min=16*60; hours=(close_min-open_min)/60; result = abs(hours-6.5)<1e-9"}
]