CMT Level 1 Study Guide
Questions and Answers 100%
Correct
Define what is meant by a trend in technical analysis - CORRECT ANSWER--
Uptrend is when prices reach higher peaks and higher troughs (VV for
Downtrend)
- Flat trend (sideways trend) is when a price trades in a range without significant
underlying upward or downward movement
Explain why determining the trend is important to analysts - CORRECT
ANSWER-o From a technical analysts perspective "a trend is a directional
movement of prices that remains in effect long enough to be identified and still be
profitable."
• Identify Primary, Secondary, short-term, and intraday trends - CORRECT
ANSWER-o Primary Trend - measured in months or years
o Secondary Trend - Measured in weeks or months
o Short-term Trend - measured in days
,o Intraday trend - measured in minutes or hours
• Describe the basic beliefs behind the art of technical analysis - CORRECT
ANSWER-o 1. Freely Traded, market prices, in general, travel in trends
o 2. Price is determined by the interaction of supply and demand
o 3. Price discounts everything
o 4. Prices are nonrandom
o 5. History will repeat itself and humans will behave similarly to the way they have
in the past
o 6. Patterns are fractal
o 7. Emotions are affected by earlier emotions through emotional feedback
(people telling other people to buy because they made money and are happy)
• Define "fractal" as used in describing price action - CORRECT ANSWER-
Fractal - Ability for trends to act similarly over different periods
• Describe the history of Dow Theory - CORRECT ANSWER-o Charles Dow
started it. Made an index to measure overall price movement in U.S. stocks. He
died. Journalist coined "Dow Theory." Friend took over and attempted to beat
Market. People analyzed it and determined he failed. Later on, more people
analyzed it and determined he beat it according to risk adjustment and timing
market.
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,• Discuss the basic principles of Dow Theory - CORRECT ANSWER-o 1. Ideal
Market picture consists of an uptrend, top, downtrend, and bottom, interspersed
with retracements and consolidations.
o 2. Economic rationale should be used to explain stock market action
o 3. Prices trend
• Identify the three basic types of trend identified in Dow Theory as defined by
time: primary, secondary and minor (Refer to pg 20 for picture) - CORRECT
ANSWER-o Primary - Can be several years, longest of the three, represents the
overall broad long-term movement of security prices.
o Secondary - intermediate trend that runs counter to the primary. Generally last a
few weeks to a few months. Price movement generally retraces from 33% to 66%
of the primary price change.
o Minor - Check pg. 21 for clarity - A line is two to three weeks of horizontal price
movement in an average within a 5% range.
• Describe the "ideal market picture" according to Dow Theory - CORRECT
ANSWER-o consists of an uptrend, top, downtrend, and bottom, interspersed
with retracements and consolidations (Ex. On P. 18)
• Express the concept of confirmation in Dow Theory - CORRECT ANSWER-o
In Dow's time, confirmation was the consideration of the Industrial Average and
Railroad Average together. Example is when there is a primary bullmarket but the
, secondary trend fails to make a new high (i.e. turn back into a primary). Could be a
warning that the primary is going to Bull Market (a non-confirmation). In today's
day, Confirmation is usually confirmed between the S&P500 and Russell 2000.
• Explain the role of volume in Dow Theory - CORRECT ANSWER-o Volume
cannot itself signal a trend reversal, but it is an important secondary confirmation
of a trend. However, price trend and confirmation overrode any consideration of
volume.
• List advantages of reviewing price information in chart format - CORRECT
ANSWER-o 1. Provide price history
o 2. Provide good sense of Market's volatility
o 3. Useful for the fundamental analyst - Analyst can find big price move on chart,
determine what fundamentals were changed at this time, and then construct a price
behavioral model
o 4. Serve as a timing tool for those who base their decisions on other info
o 5. Used as a money management tool by defining meaningful stop points
o 6. Reflects market behavior that is subject to certain repetitive patterns
• Review the data points required to construct the line, bar, and candlestick charts -
CORRECT ANSWER-o Line - Price and Time
o Bar - High, low, and closing price for each time interval (some contain the
opening price, as well)
COPYRIGHT ALL RIGHTS RESERVED ©️ 2025
Questions and Answers 100%
Correct
Define what is meant by a trend in technical analysis - CORRECT ANSWER--
Uptrend is when prices reach higher peaks and higher troughs (VV for
Downtrend)
- Flat trend (sideways trend) is when a price trades in a range without significant
underlying upward or downward movement
Explain why determining the trend is important to analysts - CORRECT
ANSWER-o From a technical analysts perspective "a trend is a directional
movement of prices that remains in effect long enough to be identified and still be
profitable."
• Identify Primary, Secondary, short-term, and intraday trends - CORRECT
ANSWER-o Primary Trend - measured in months or years
o Secondary Trend - Measured in weeks or months
o Short-term Trend - measured in days
,o Intraday trend - measured in minutes or hours
• Describe the basic beliefs behind the art of technical analysis - CORRECT
ANSWER-o 1. Freely Traded, market prices, in general, travel in trends
o 2. Price is determined by the interaction of supply and demand
o 3. Price discounts everything
o 4. Prices are nonrandom
o 5. History will repeat itself and humans will behave similarly to the way they have
in the past
o 6. Patterns are fractal
o 7. Emotions are affected by earlier emotions through emotional feedback
(people telling other people to buy because they made money and are happy)
• Define "fractal" as used in describing price action - CORRECT ANSWER-
Fractal - Ability for trends to act similarly over different periods
• Describe the history of Dow Theory - CORRECT ANSWER-o Charles Dow
started it. Made an index to measure overall price movement in U.S. stocks. He
died. Journalist coined "Dow Theory." Friend took over and attempted to beat
Market. People analyzed it and determined he failed. Later on, more people
analyzed it and determined he beat it according to risk adjustment and timing
market.
COPYRIGHT ALL RIGHTS RESERVED ©️ 2025
,• Discuss the basic principles of Dow Theory - CORRECT ANSWER-o 1. Ideal
Market picture consists of an uptrend, top, downtrend, and bottom, interspersed
with retracements and consolidations.
o 2. Economic rationale should be used to explain stock market action
o 3. Prices trend
• Identify the three basic types of trend identified in Dow Theory as defined by
time: primary, secondary and minor (Refer to pg 20 for picture) - CORRECT
ANSWER-o Primary - Can be several years, longest of the three, represents the
overall broad long-term movement of security prices.
o Secondary - intermediate trend that runs counter to the primary. Generally last a
few weeks to a few months. Price movement generally retraces from 33% to 66%
of the primary price change.
o Minor - Check pg. 21 for clarity - A line is two to three weeks of horizontal price
movement in an average within a 5% range.
• Describe the "ideal market picture" according to Dow Theory - CORRECT
ANSWER-o consists of an uptrend, top, downtrend, and bottom, interspersed
with retracements and consolidations (Ex. On P. 18)
• Express the concept of confirmation in Dow Theory - CORRECT ANSWER-o
In Dow's time, confirmation was the consideration of the Industrial Average and
Railroad Average together. Example is when there is a primary bullmarket but the
, secondary trend fails to make a new high (i.e. turn back into a primary). Could be a
warning that the primary is going to Bull Market (a non-confirmation). In today's
day, Confirmation is usually confirmed between the S&P500 and Russell 2000.
• Explain the role of volume in Dow Theory - CORRECT ANSWER-o Volume
cannot itself signal a trend reversal, but it is an important secondary confirmation
of a trend. However, price trend and confirmation overrode any consideration of
volume.
• List advantages of reviewing price information in chart format - CORRECT
ANSWER-o 1. Provide price history
o 2. Provide good sense of Market's volatility
o 3. Useful for the fundamental analyst - Analyst can find big price move on chart,
determine what fundamentals were changed at this time, and then construct a price
behavioral model
o 4. Serve as a timing tool for those who base their decisions on other info
o 5. Used as a money management tool by defining meaningful stop points
o 6. Reflects market behavior that is subject to certain repetitive patterns
• Review the data points required to construct the line, bar, and candlestick charts -
CORRECT ANSWER-o Line - Price and Time
o Bar - High, low, and closing price for each time interval (some contain the
opening price, as well)
COPYRIGHT ALL RIGHTS RESERVED ©️ 2025
