Question

2. Which of the following is an important reason to know the economic theory behind patterns in returns you trade on or recommend to clients? MARK ALL THAT APPLY (e.g., if you think A and B are right, mark AB on the answer key) (a) Impressing your friends with your knowledge (b) Understanding whether your trading strategy will persist into the future (c) Determining whether a strategy fits with the other risks in your client's portfolio, including human capital risks (d) Identifying whether the economic conditions are right for your strategy to succeed (e) Knowing the theory increases the statistical significance of your as

Answer 1

It is very important to understand the basic economic logic behind any pattern that you are trading.

1. This is not the reasoning behind why you should understand the economic logic behind any trading pattern.
2. This is important reason. It is important to understand that the logic or pattern that you are going to trade is going to continue or it is going to reverse now or you will lose the profits that you have earned.
3. This is important reason. It is important to consider the risk of the pattern that you are trading with reference to the overall portfolio risk whether you are too much exposed to risk. Human capital risk is also important to consider because it can reduce or increase the overall potential risk of the portfolio.
4. This is an important reason. Whatever the pattern or logic that you are applying if the market conditions are unfavorable then you will end up losing capital. So favorable market condition is important.
5. This is not correct reason. Knowing the theory behind a scenario will not increase the statistical significance. The knowledge has to applied at the right time & bring in sustainable returns.