Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

Which of the following statements regarding systematic trading strategies is CORRECT?

1. Systematic trading relies on fundamental analysis.

2. Weighted moving average strategies are a function of a chosen smoothing factor.

3. A buy signal in a breakout strategy occurs when the price exceeds an upper bound.

4. Trend-following strategies often utilize market anomaly strategies.

The correct answer is: A buy signal in a breakout strategy occurs when the price exceeds an upper bound.

In systematic trading strategies, a buy signal in a breakout strategy does indeed occur when the price exceeds an upper bound. This is a key aspect of breakout trading, where the strategy is designed to identify levels of support and resistance. Traders set upper bounds based on historical price action or technical indicators, and once the asset's price surpasses this upper limit, it suggests that a new upward trend may be starting, warranting a buy position. This is grounded in the notion that once a price breaks through resistance, it often continues to rise as additional buying interest may develop. The other statements present inaccuracies or misunderstandings regarding systematic trading strategies. For example, systematic trading typically involves quantitative analysis rather than fundamental analysis, as it relies on established models and historical data to make trading decisions. Additionally, while weighted moving average strategies do utilize a smoothing factor, the core focus in systematic trading lies in their ability to adapt to price movements over time by giving different weights to recent prices. Lastly, trend-following strategies are not primarily focused on market anomalies; rather, they are developed to capitalize on sustained market movements and trends, often disregarding anomalies that could introduce noise into long-term trend analysis.