Knowledge Assessment

Question 1 of 6

1. Question

Why is the preservation of capital the overriding goal of money management?

a. It isn’t. Maximizing profit is the overriding goal.
b. It isn’t. Money management is all about portfolio diversification.
Because small losses are easy to recover from, while catastrophic losses require heroic gains, and if you lose your investing capital, you’re out of the game entirely
d. Because your goal should be to achieve a 100% successful trade percentage.

Question 2 of 6

2. Question

Is the statement “you can never go broke taking a profit?” true or false?

It’s true because mathematically, if you’re making money on your trades, you can’t possibly lose.
It’s true because once you achieve 100% successful trade status, you don’t have to worry about losses.
It’s false because of the Fibonacci sequence.
It’s false because your trades have to be considered together, as a cohesive whole. You need to maximize the profits on winning trades in order to offset losses on losers and still make a profit

Question 3 of 6

3. Question

Consider a small trader whose trading plan calls for a maximum risk on a trade of 1% of equity. She wishes to open a position where the risk to her technical stop is 5% of equity if the smallest possible position of one contract is taken. She makes the decision to take the trade and adjust her stop so that the risk is only 1% of equity. What has she done wrong and what should she have done?

By moving her stop arbitrarily, she has actually increased her risk, because she increased the probability that her stop will be taken out by normal price fluctuations. She should have looked for an alternate entry point where the risk to her technical stop is 1% or less of her equity.
She didn’t do anything wrong and shouldn’t have done anything differently.
She didn’t do anything wrong per se, but optimally, she should have looked for an alternate entry point where the risk to her technical stop is 1% or less of her equity.

Question 4 of 6

4. Question

A trader has tested a trading methodology successfully on the last two years of price history for the market in which he proposes to use it. Why might this be insufficient and what should he have done?

There was nothing wrong with the testing performed. It’s fine as is.
Not enough information to tell if the testing was adequate or not.
Testing on historic data is no guarantee of future performance. Live testing (paper trading) under a variety of market conditions is the element that’s missing.

Question 5 of 6

5. Question

Assume that you have $20,000 in total equity. You identify an investment opportunity with an entry price of $9.50. Your technical stop loss level is $9.12. If your desired maximum risk is 1% of equity, what is the largest position size, in shares, you should consider buying?

523 Shares
429 Shares
526 Shares
627 Shares

Question 6 of 6

6. Question

An investor opens a $20,000 trading account. The trader’s trading plan sets the maximum risk on any given trade to be 1% of equity. The trader’s first three trades result in three losses. Those trades were closed without question when the stop loss level was reached by price action. Each trade was closed before a new trade was initiated.
Assume the following:
The stop loss placement was technically based
Each trade’s stop loss was at 1% of equity
For the sake of simplicity, assume there are no trading costs, brokerage fees, slippage, etc.

Calculate the expected remaining equity after the third trade:

$19,332.76
$19,202.05
$19,400.96
$19,405.98