CMT Level 3 Study Material 2026 - Updated for Current Exam

CMT Level 3 Study Material 2026 - Updated for Current Exam A strong open followed by strong close will allow trader to do what? - answer - Buy on a pullback after next open. A weak close after strong open will allow trader to do what? - answer - Sell short near following open Highs and lows occur where during the day? - answer - Most often at the open Large opening gaps imply what about the day? - answer - Greater volatility Pivot point calculation - answer - P = (H+L+C)/3 R1 = 2P-L S1 = 2P-H R2 = (P-S1)+R1 S2 = P-(R1-S1) Weaknesses of Candlestick charting - answer - 1. Majority of patterns are reversal patterns and require a trade against the trend. 2. Can't determine whether high or low was created first. What is a high wave candle and its significance? - answer - Candle with long upper and lower shadows and small real body. When appears in a trend then shows that the market is uncertain about current trend and may soon reverse. Same for doji's and spinning tops. 4 Events that diminish candles effectiveness - answer - 1. Trend slowing 2. Prices converging 3. Rising candles with successively lower closes. 4. Falling candles with successively higher closes. Advance block candlestick pattern - answer - Bearish reversal pattern 3 white candles with progressively smaller real bodies and longer upper shadows indicating buying power is weakening. Confirmation when close is below midpoint of first candle. Counterattack pattern - answer - Reversal Candle pattern where two candles have opposite color real bodies and the same close. Separating lines pattern - answer - Continuation pattern where two candles have opposite color real bodies and the same open. Upside Tasuki Gap - answer - A continuation pattern with a long white body followed by another white body that has gapped above the first one. The third day is black and opens within the body of the second day, then closes in the gap between the first two days, but does not close the gap. Buy trigger is at the high of the second candle shadow. Stop loss at the low of the window; high of first candle. 3 steps added to trading plan to limit major disadvantage of trend following system - answer - 1. reduce size or not trade during trendless period (employ trending indicator to determine) 2. reduce trading or stop after equity curve declines by pre-defined amount. 3. reduce or stop trading after equity curve entered pre-defined downtrend. 3 major disadvantages of trend following systems - answer - 1. Series of small losses that add up to a large drawdown in trendless market. (biggest issue) 2. Subject to whipsaws 3. Causes extreme volatility in equity curve How is total risk of a system measured? - answer - Standard deviation of returns How is systematic risk of system measured? - answer - By the beta coefficient of the stocks. 3 conditions that must be met for group think to be useful - answer - 1. people must be unaffected by others decisions. 2. probability of being correct must be independent of probability of everyone else being correct. 3. people must be unaffected by their vote being decisive. Monte Carlo Simulation description - answer - method that creates a sampling distribution from an original sample by randomly resampling and creating an equity curve. process repeated thousands of times and if majority of equity curves are profitable then it's likely that the system is robust and will be profitable. 2 reasons why Gold has inverse relationship with USD. - answer - 1. Hedge vs. inflation 2. Safe haven for weak $ and financial crisis. Rule of thumb about size of st. deviation vs. monthly returns - answer - St. deviation should not be more than 5x the monthly return. Total risk formulas - answer - TR = market risk + firm specific risk TR = systematic risk + unsystematic risk TR = undiversifiable risk + diversifiable risk Decisions required for successful trading system - answer - 1. Markets 2. Position sizing 3. Entries 4. Stops 5. Exits 6 Tactics 5 Initial