Returns And Technical Indicators

30 essential concepts in returns calculation and technical analysis

What You'll Learn

Master financial returns calculations and technical analysis with 30 comprehensive flashcards. Learn Bollinger Bands, moving averages (SMA/EMA), Golden Cross, Death Cross, return compounding, and trading signals for quantitative finance.

Key Topics

  • Returns calculation: daily, cumulative, and compounding formulas
  • Bollinger Bands: construction, interpretation, and trading signals
  • Moving averages: SMA vs EMA comparison and applications
  • Golden Cross and Death Cross signals for trend identification

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How to study this deck

Start with a quick skim of the questions, then launch study mode to flip cards until you can answer each prompt without hesitation. Revisit tricky cards using shuffle or reverse order, and schedule a follow-up review within 48 hours to reinforce retention.

Preview: Returns And Technical Indicators

Question

What is the formula for daily return?

Answer

(P_t / P_{t-1}) - 1 OR (P_t - P_{t-1}) / P_{t-1}

Question

What is the formula for cumulative return?

Answer

(P_final / P_initial) - 1

Question

Why do we use percentage returns instead of absolute price changes?

Answer

1) Comparability across different price levels, 2) Portfolio aggregation, 3) Compounding over time, 4) Scale-invariant (10% means same thing for $1 or $1000 stock)

Question

Do daily returns add together to give cumulative return?

Answer

No! Returns compound (multiply). Use: (1 + r_1) × (1 + r_2) × (1 + r_3) - 1

Question

A stock goes from $100 to $110 to $99. What is the cumulative return?

Answer

(1.10) × (0.90) - 1 = 0.99 - 1 = -1% (NOT +10% and -10% = 0%)

Question

What are the three components of Bollinger Bands?

Answer

1) Middle Band: 20-day SMA, 2) Upper Band: SMA + 2σ, 3) Lower Band: SMA - 2σ

Question

What does it mean when Bollinger Bands are wide vs narrow?

Answer

Wide bands = high volatility (large price swings). Narrow bands = low volatility (stable prices, often called a 'squeeze')

Question

What is a Bollinger Band squeeze and what does it predict?

Answer

Narrow bands indicate low volatility. Often precedes a breakout (explosive move) in one direction as the 'coiled spring' releases

Question

Mean reversion trading signal: When do you BUY using Bollinger Bands?

Answer

When price touches or crosses below the LOWER band (oversold, expect reversion to mean)

Question

Mean reversion trading signal: When do you SELL using Bollinger Bands?

Answer

When price touches or crosses above the UPPER band (overbought, expect reversion to mean)

Question

Momentum trading signal: What does price above the middle Bollinger Band suggest?

Answer

Bullish momentum - price trending upward above the SMA

Question

If a stock price is $50, 20-day SMA is $48, and 20-day std dev is $2, what are the Bollinger Bands?

Answer

Upper: $48 + 2(2) = $52, Middle: $48, Lower: $48 - 2(2) = $44

Question

What is a Simple Moving Average (SMA)?

Answer

Average price over last N days with equal weight to each day. Example: 5-day SMA = (P_1 + P_2 + P_3 + P_4 + P_5) / 5

Question

What is an Exponential Moving Average (EMA)?

Answer

Moving average that gives MORE weight to recent prices. Reacts faster to price changes than SMA.

Question

Which reacts faster to sudden price changes: SMA or EMA?

Answer

EMA reacts faster because recent prices have more weight. SMA is smoother but slower (lagging).

Question

When would you prefer SMA over EMA?

Answer

Long-term trend identification, reducing noise/false signals, avoiding overreaction to short-term volatility

Question

When would you prefer EMA over SMA?

Answer

Short-term trading, catching trends early, day trading where fast reaction is important

Question

What is a Golden Cross?

Answer

BULLISH signal: Short-term MA (e.g., 50-day) crosses ABOVE long-term MA (e.g., 200-day). Suggests upward momentum building.

Question

What is a Death Cross?

Answer

BEARISH signal: Short-term MA (e.g., 50-day) crosses BELOW long-term MA (e.g., 200-day). Suggests downward momentum.

Question

If 50-day SMA is $105 and 200-day SMA is $100, what happened?

Answer

A Golden Cross occurred in the past. The 50-day crossed above the 200-day, indicating a bullish trend.

Question

Why does the 50-day MA react faster than the 200-day MA?

Answer

50-day only looks back 50 days (more responsive to recent changes). 200-day looks back 200 days (slower to react, like a cruise ship vs speedboat).

Question

Price above both 50-day and 200-day SMAs suggests what?

Answer

Bullish trend - both short-term and long-term momentum are upward

Question

What is the difference between mean reversion and momentum trading with Bollinger Bands?

Answer

Mean reversion: Buy at lower band, sell at upper band (expect return to mean). Momentum: Buy when above SMA, sell when below (ride the trend).

Question

Stock prices: Day 1=$100, Day 2=$105, Day 3=$103. Calculate daily returns.

Answer

Day 2: (105/100)-1 = 5%. Day 3: (103/105)-1 = -1.9%

Question

Using previous question, what is the cumulative return from Day 1 to Day 3?

Answer

(103/100) - 1 = 3% OR (1.05) × (0.981) - 1 = 3%

Question

What does 'rolling window' mean in technical indicators?

Answer

A moving calculation window (e.g., 20-day rolling mean recalculates each day using the last 20 days)

Question

Why use Adjusted Close instead of Close price?

Answer

Adjusted Close accounts for stock splits and dividends, giving true returns. Close price alone can be misleading after corporate actions.

Question

In pandas, what does .pct_change() compute?

Answer

Daily returns (percentage change): (P_t / P_{t-1}) - 1

Question

If a stock has daily returns of +2%, -1%, +3%, what is the cumulative return?

Answer

(1.02) × (0.99) × (1.03) - 1 = 1.0404 - 1 = 4.04%

Question

What does high standard deviation in Bollinger Bands indicate?

Answer

High volatility - prices are swinging significantly from the mean, creating wider bands

Question

Can the same Bollinger Band signal mean different things to different traders?

Answer

Yes! Price at upper band = SELL for mean reversion traders, but could be HOLD/BUY for momentum traders riding the trend