CMT Exam Level 1 with all Correct & 100% Verified
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(Just Released)
1.1 Name the principal individuals who created and organized the concepts of Dow theory
✔Correct Answer-Charles Dow- founding father of technical analysis in the US. Founding partner
of the Wall Street Journal. He developed the original market concepts but never called it "Dow
Theory" himself
William Peter Hamilton- second editor in chief of the WSJ, helped rearrange Dow's original
concept after his passing in 1902
S. A. Nelson: Worked with Hamilton to rearrange Dow's original concept and was the one who
came up with title "Dow Theory"
1.1 Identify the two important stock averages that Dow Jones began publishing in the 1800s
✔Correct Answer-Dow Jones began publishing two important stock averages in the 1800s
1) The Railroad Average: First published in 1883 in the Customer's Afternoon Letter
2) The Dow Jones Industrial Average: Introduced in 1896 in the WSJ
1.1 Recall some of the earliest European and Asian markets for which prices were charted
✔Correct Answer-Japan: Honma Munehisa plotted rice prices in the early 18th century,
introducing candlestick charts when rice was the country's currency
England: Lottery ticket prices were plotted in the late 16th century
Amsterdam: Diamond merchant Joseph de la Vega's price accounts were plotted in Holland
during the 17th century
1.2 State the two stock indexes that Dow employed in his analysis ✔Correct Answer-Based on
the text, Charles Dow employed two stock indexes in his analysis:
The Railroad Average (released July 3, 1884) Contained 11 stocks (nine railroad companies and
two non-railroad companies)
The Dow Jones Industrial Average (released May 26, 1896) A composite of 12 stocks
Note: The Railroad Average was later renamed to The Dow Jones Transportation Average on
January 2, 1970, and expanded to include airlines and truckers.
1.2 Recall why Dow thought these two averages were so important ✔Correct Answer-The
Railroad Average tracked the nation's largest industry at the time, which had the greatest
impact on the American economy
The railroad companies made their profits by hauling other companies' products, while the
Industrial Average tracked the producers of those products
Together, the producers (Industrials) and shippers (Railroads) made up the critical
interdependent parts of the U.S. economy
,When both averages confirmed each other's price trends, the moves had meaning and could
help identify primary market trends
1.2 Characteristics of a Secondary Reaction (small retracement not reverse into new primary
trend) ✔Correct Answer-Number of clear downswings
If there's one that breaks previous lows (losing 5% in a day) then it might be a reverse
(especially breaking of trend lines)
Retracement last from 3 weeks to 3 months
Secondary Reaction will have light volume but if it were the same or higher than it can be a
change in primary change
1.2 Basic Dow Theory Tenet- Trends and the time of each TENET ONE ✔Correct Answer-The
market has three movements (waves)
1) The Primary Trend- months to years
2) The Secondary Trend- ten days to 3 months
3) The Minor or Short-Term Trend- hours to months
Dow suggested traders avoid trying to predict the secondary trend and just trade with the
trend.
1.2 Dow Theory TENET TWO Discount News ✔Correct Answer-The stock market discounts all
news
The averages discount everything
1.2 Dow Theory TENET THREE Confirmation ✔Correct Answer-Wanted to see confirmation
between Industrials (producers) and Railroad (means of delivering those goods)
Primary down/uptrend was only established when both posted lower troughs/higher peaks
Today can use S&P500 and Russell 2000
1.2 Dow Theory TENET FOUR VOLUME ✔Correct Answer-Trends are confirmed by volume
1.2 Dow Theory TENET FIVE Only use Closes ✔Correct Answer-Intraday traders closed their
position and large funds trade later in the day
1.2 Dow Theory TENET SIX Trends Persist ✔Correct Answer-Trends exist until definitive signals
prove they have ended
Give benefit of the doubt until obvious
1.2 Criticisms of Dow ✔Correct Answer-Signals lag in trend which reduce profit and risk
Trends are not strictly defined
1.3 Name four asset classes amenable to technical analysis ✔Correct Answer-Stocks (equities)
Bonds (fixed income and interest rates)
Currencies (foreign exchange and cryptocurrencies)
,Commodities (hard or physical assets)
These asset classes require robust activity and liquidity and price history in order for technical
analysis to be effectively applied.
1.3 List five tradable instruments that a technician is likely to employ ✔Correct Answer-Cash
(or spot): The price to buy or sell an asset right now
Futures: A contract to buy or sell an asset at a defined time in the future
Options: A contract granting the right to buy or sell an asset at or during a defined time and at a
defined price
Index: A mathematical average of the prices of an underlying basket of assets
Exchange-traded product (ETP): A basket of underlying assets trading as a unit
1.3 Recall the necessary characteristics of a market for technical analysis to be applicable
✔Correct Answer-Technical analysis requires the following key market characteristics to be
applicable:
Robust activity: The market must have sufficient trading volume and frequency
Price history: There must be adequate historical price data available
Liquidity: The market should have enough trading activity for price discovery
Regular price settlement/fixing: The market needs consistent price data points
All 4 of the asset types have all 5 of the tradeable instruments available but not all are actively
traded
1.3 Describe data-handling issues with which a technician should be familiar ✔Correct
Answer-Price Spikes: Market data is subject to reporting errors that can create "price spikes"
during its journey from trade to analyst's screen
Out-of-Order Reporting: Data may arrive in a non-chronological sequence, requiring vendors to
attempt putting trades in correct time order
Data Filter: Vendors use filters to screen out bad trades, but these can sometimes allow
erroneous trades through or reject valid ones, affecting highs/lows and potentially impacting
trend lines and indicators
Late Trades: Different vendors handle trades reported after market close differently, particularly
affecting intraday intervals
Intraday Interval Building: There may be inconsistencies in how vendors assign trades to specific
time intervals (e.g., whether a 12 PM trade belongs to the 12 PM hour or the end of 11 AM
hour)
1.4 Define the Efficient Markets Hypothesis (EMH) ✔Correct Answer-The Efficient Markets
Hypothesis (EMH), as defined by Eugene Fama, states that "security prices fully reflect all
available information." It's a simple but profound concept suggesting that investors collectively
incorporate all available information into asset prices, resulting in prices that represent the best
available estimate of an asset's value at any given time.
, The EMH is a fundamental theory in modern financial thought, implying that because markets
efficiently process all available information, investors and traders face significant challenges in
outperforming the markets. This is because predicting future prices is considered either futile or
impractical, regardless of the data being used.
1.4 Recall a commonly accepted implication of the EMH ✔Correct Answer-The commonly
accepted implication of the EMH is that investors and traders will have a difficult time
outperforming the markets, primarily because the task of forecasting future prices, no matter
the data being used, is either futile at worst or impractical at best. Thus, these ideas discourage
an optimistic investor from seeking better-than-average returns among well-chosen individual
securities or active investing strategies and instead encourage the practice of passive investing
using index-tracking portfolios to keep pace with market averages.
1.4 Explain the Joint Hypothesis problem ✔Correct Answer-The Joint Hypothesis problem
arises because market efficiency cannot be tested on its own - it must be tested jointly with
some model of equilibrium (an asset-pricing model). When evidence contradicts the EMH, it's
practically impossible to determine if the contradiction stems from market inefficiency or from
an ineffective model of what efficiency should look like.
As Fama points out, this means the EMH is not really a statement about the efficiency of market
prices themselves, but rather about how efficiently the market adjusts to new information. To
work around this problem, researchers must carefully define the specific information sets they
use in their tests.
1.4 State the three forms of tests for the EMH ✔Correct Answer-The weak form: Testing
against historical prices
The semi-strong form: Testing against any publicly available information
The strong form: Testing against any information, even if not publicly available
Most researchers focus on the weak and semi-strong forms of tests, as the strong form tests are
difficult to conduct due to the challenges in capturing all available information. The weak form
tests, being more specific, tend to produce the more conclusive research results.
1.4 Express three anomalies that challenge the EMH ✔Correct Answer-Based on the provided
text, there are three major anomalies that challenge the EMH, represented by specific
examples:
Value Investing: Demonstrated by Warren Buffett and Charlie Munger's Berkshire Hathaway,
which has outperformed markets for over four decades using publicly available information to
select value stocks
Momentum Investing: Exemplified by Cliff Asness and AQR Capital Management, who have
successfully used momentum strategies to outperform the S&P 500 over 20 years
Day Trading: Represented by SMB Capital's Mike Bellafiore and Steven Spencer, who have
achieved consistent profitability for 11 consecutive years using only technical analysis and
publicly available data
These anomalies demonstrate persistent market-beating performance that challenges the
EMH's implication that outperforming the market should be either futile or impractical.
Answers |Actual Complete Exam |Already Graded A+
(Just Released)
1.1 Name the principal individuals who created and organized the concepts of Dow theory
✔Correct Answer-Charles Dow- founding father of technical analysis in the US. Founding partner
of the Wall Street Journal. He developed the original market concepts but never called it "Dow
Theory" himself
William Peter Hamilton- second editor in chief of the WSJ, helped rearrange Dow's original
concept after his passing in 1902
S. A. Nelson: Worked with Hamilton to rearrange Dow's original concept and was the one who
came up with title "Dow Theory"
1.1 Identify the two important stock averages that Dow Jones began publishing in the 1800s
✔Correct Answer-Dow Jones began publishing two important stock averages in the 1800s
1) The Railroad Average: First published in 1883 in the Customer's Afternoon Letter
2) The Dow Jones Industrial Average: Introduced in 1896 in the WSJ
1.1 Recall some of the earliest European and Asian markets for which prices were charted
✔Correct Answer-Japan: Honma Munehisa plotted rice prices in the early 18th century,
introducing candlestick charts when rice was the country's currency
England: Lottery ticket prices were plotted in the late 16th century
Amsterdam: Diamond merchant Joseph de la Vega's price accounts were plotted in Holland
during the 17th century
1.2 State the two stock indexes that Dow employed in his analysis ✔Correct Answer-Based on
the text, Charles Dow employed two stock indexes in his analysis:
The Railroad Average (released July 3, 1884) Contained 11 stocks (nine railroad companies and
two non-railroad companies)
The Dow Jones Industrial Average (released May 26, 1896) A composite of 12 stocks
Note: The Railroad Average was later renamed to The Dow Jones Transportation Average on
January 2, 1970, and expanded to include airlines and truckers.
1.2 Recall why Dow thought these two averages were so important ✔Correct Answer-The
Railroad Average tracked the nation's largest industry at the time, which had the greatest
impact on the American economy
The railroad companies made their profits by hauling other companies' products, while the
Industrial Average tracked the producers of those products
Together, the producers (Industrials) and shippers (Railroads) made up the critical
interdependent parts of the U.S. economy
,When both averages confirmed each other's price trends, the moves had meaning and could
help identify primary market trends
1.2 Characteristics of a Secondary Reaction (small retracement not reverse into new primary
trend) ✔Correct Answer-Number of clear downswings
If there's one that breaks previous lows (losing 5% in a day) then it might be a reverse
(especially breaking of trend lines)
Retracement last from 3 weeks to 3 months
Secondary Reaction will have light volume but if it were the same or higher than it can be a
change in primary change
1.2 Basic Dow Theory Tenet- Trends and the time of each TENET ONE ✔Correct Answer-The
market has three movements (waves)
1) The Primary Trend- months to years
2) The Secondary Trend- ten days to 3 months
3) The Minor or Short-Term Trend- hours to months
Dow suggested traders avoid trying to predict the secondary trend and just trade with the
trend.
1.2 Dow Theory TENET TWO Discount News ✔Correct Answer-The stock market discounts all
news
The averages discount everything
1.2 Dow Theory TENET THREE Confirmation ✔Correct Answer-Wanted to see confirmation
between Industrials (producers) and Railroad (means of delivering those goods)
Primary down/uptrend was only established when both posted lower troughs/higher peaks
Today can use S&P500 and Russell 2000
1.2 Dow Theory TENET FOUR VOLUME ✔Correct Answer-Trends are confirmed by volume
1.2 Dow Theory TENET FIVE Only use Closes ✔Correct Answer-Intraday traders closed their
position and large funds trade later in the day
1.2 Dow Theory TENET SIX Trends Persist ✔Correct Answer-Trends exist until definitive signals
prove they have ended
Give benefit of the doubt until obvious
1.2 Criticisms of Dow ✔Correct Answer-Signals lag in trend which reduce profit and risk
Trends are not strictly defined
1.3 Name four asset classes amenable to technical analysis ✔Correct Answer-Stocks (equities)
Bonds (fixed income and interest rates)
Currencies (foreign exchange and cryptocurrencies)
,Commodities (hard or physical assets)
These asset classes require robust activity and liquidity and price history in order for technical
analysis to be effectively applied.
1.3 List five tradable instruments that a technician is likely to employ ✔Correct Answer-Cash
(or spot): The price to buy or sell an asset right now
Futures: A contract to buy or sell an asset at a defined time in the future
Options: A contract granting the right to buy or sell an asset at or during a defined time and at a
defined price
Index: A mathematical average of the prices of an underlying basket of assets
Exchange-traded product (ETP): A basket of underlying assets trading as a unit
1.3 Recall the necessary characteristics of a market for technical analysis to be applicable
✔Correct Answer-Technical analysis requires the following key market characteristics to be
applicable:
Robust activity: The market must have sufficient trading volume and frequency
Price history: There must be adequate historical price data available
Liquidity: The market should have enough trading activity for price discovery
Regular price settlement/fixing: The market needs consistent price data points
All 4 of the asset types have all 5 of the tradeable instruments available but not all are actively
traded
1.3 Describe data-handling issues with which a technician should be familiar ✔Correct
Answer-Price Spikes: Market data is subject to reporting errors that can create "price spikes"
during its journey from trade to analyst's screen
Out-of-Order Reporting: Data may arrive in a non-chronological sequence, requiring vendors to
attempt putting trades in correct time order
Data Filter: Vendors use filters to screen out bad trades, but these can sometimes allow
erroneous trades through or reject valid ones, affecting highs/lows and potentially impacting
trend lines and indicators
Late Trades: Different vendors handle trades reported after market close differently, particularly
affecting intraday intervals
Intraday Interval Building: There may be inconsistencies in how vendors assign trades to specific
time intervals (e.g., whether a 12 PM trade belongs to the 12 PM hour or the end of 11 AM
hour)
1.4 Define the Efficient Markets Hypothesis (EMH) ✔Correct Answer-The Efficient Markets
Hypothesis (EMH), as defined by Eugene Fama, states that "security prices fully reflect all
available information." It's a simple but profound concept suggesting that investors collectively
incorporate all available information into asset prices, resulting in prices that represent the best
available estimate of an asset's value at any given time.
, The EMH is a fundamental theory in modern financial thought, implying that because markets
efficiently process all available information, investors and traders face significant challenges in
outperforming the markets. This is because predicting future prices is considered either futile or
impractical, regardless of the data being used.
1.4 Recall a commonly accepted implication of the EMH ✔Correct Answer-The commonly
accepted implication of the EMH is that investors and traders will have a difficult time
outperforming the markets, primarily because the task of forecasting future prices, no matter
the data being used, is either futile at worst or impractical at best. Thus, these ideas discourage
an optimistic investor from seeking better-than-average returns among well-chosen individual
securities or active investing strategies and instead encourage the practice of passive investing
using index-tracking portfolios to keep pace with market averages.
1.4 Explain the Joint Hypothesis problem ✔Correct Answer-The Joint Hypothesis problem
arises because market efficiency cannot be tested on its own - it must be tested jointly with
some model of equilibrium (an asset-pricing model). When evidence contradicts the EMH, it's
practically impossible to determine if the contradiction stems from market inefficiency or from
an ineffective model of what efficiency should look like.
As Fama points out, this means the EMH is not really a statement about the efficiency of market
prices themselves, but rather about how efficiently the market adjusts to new information. To
work around this problem, researchers must carefully define the specific information sets they
use in their tests.
1.4 State the three forms of tests for the EMH ✔Correct Answer-The weak form: Testing
against historical prices
The semi-strong form: Testing against any publicly available information
The strong form: Testing against any information, even if not publicly available
Most researchers focus on the weak and semi-strong forms of tests, as the strong form tests are
difficult to conduct due to the challenges in capturing all available information. The weak form
tests, being more specific, tend to produce the more conclusive research results.
1.4 Express three anomalies that challenge the EMH ✔Correct Answer-Based on the provided
text, there are three major anomalies that challenge the EMH, represented by specific
examples:
Value Investing: Demonstrated by Warren Buffett and Charlie Munger's Berkshire Hathaway,
which has outperformed markets for over four decades using publicly available information to
select value stocks
Momentum Investing: Exemplified by Cliff Asness and AQR Capital Management, who have
successfully used momentum strategies to outperform the S&P 500 over 20 years
Day Trading: Represented by SMB Capital's Mike Bellafiore and Steven Spencer, who have
achieved consistent profitability for 11 consecutive years using only technical analysis and
publicly available data
These anomalies demonstrate persistent market-beating performance that challenges the
EMH's implication that outperforming the market should be either futile or impractical.
