CMT Level 1 Study Guide with Complete Solutions
Construct various box size and reversal point and figure charts** - ANSWER-Near Pg.
255
• Classify sectors, capitalization, and other ways to segment the market - ANSWER-o
Sectors and Industries
o Capitalization
o Geography
o Other
- Growth, value, defensive, aggressive, etc.
• Classify the currency pairs as "major" or "cross" - ANSWER-o Major includes top
traded currencies trading with USD
o Cross is any foreign trading not including USD
• Classify various futures markets as industrial, agricultural, financial, and so on -
ANSWER-o Agricultural
-Commodities that are grown, raised, and harvested
o Energy
-Oil, Crude, refined products, gas, electricity, etc
o Equity and Equity Indexes
-Single stocks, global indexes, and many more
o Foreign Exchange
-Major currencies and emerging market currencies, and cross-rates
o Interest rates
-All fixed income markets from short term to long term US Treasury debt. Also includes
short sterling, bunds, gilts, Eurodollars, BTPs, JGBs, and swaps
• Define "box Size" and "reversal" - ANSWER-o Box size
Makes the chart more or less sensitive to changes in price direction; the smaller the
more changes will be seen; for longer term trends use a larger box
Size refers to what increment you use on the y axis; (I.E. if you're charting Microsoft
and want to make each both a change of 50 cents)
Also often related to current volatility of the market
o Reversal
Price must reverse direction by an amount that fills 3 boxes from the most extreme box
of the last column before a new column can begin (according to traditional PandF
charting)
,• Define "fractal" as used in describing price action - ANSWER-Fractal - Ability for
trends to act similarly over different periods
• Define "fungibility" in the context of financial markets - ANSWER-o Where two assets
are exactly the same besides a name or something that is not noticeably different
• Define "noise Trader" - ANSWER-o An irrational trader with no knowledge of finance
theory
-I.E. anyone who buys a stock just cause they like the company or want to, etc..
• Define "rule" as used in trading systems - ANSWER-o Function that transforms one or
more items of information, referred to as the rule's input, into the rule's output, which is
a recommended market position (short, long, neutral)
• Define "sentiment" as it relates to financial markets - ANSWER-o Sentiment is what
people think; i.e. if people think that Netflix is cheap and buy it, the stock will go up
o It explains whether the market price is above or below the estimated fair value
• Define "survivorship bias" - ANSWER-If a stock is doing bad or doesn't meet a criteria,
it is removed from an index and replaced
• Define "yield curve" - ANSWER-o A listing of a country's interest rates across the
spectrum of maturities in which it issues debt
• Define a composite wave - ANSWER-o A summation of individual cycles as well as
the trend
• Define an exchange-traded product - ANSWER-o A security that trades on an
exchange
• Define equity securities and primary data types - ANSWER-o Ownership share or
portion of the value of a company
o Price & volume
• Define Implied Volatility - ANSWER-o Estimated volatility of a security's price and is
critical in the pricing of options.
• Define Market Breadth - ANSWER-o Advance/Decline data of the Market is called
Breadth of the stock market.
(Advance - if closing price is above its previous close; VV for Decline; Unchanged is
self-explanatory)
• Define motive waves and corrective waves - ANSWER-Motive waves
, The basic pattern consists of five individual waves that are linked together and achieve
progress as market prices move up or down - this is called the motive wave because it
propels the market in the direction of the main wave
These run in a sequence of 5 and then are interrupted by a correction wave
(On the large trend - Motive waves are 1, 3, and 5; Corrective Waves are 2 and 4 - see
pg. 282 Figure 12.2 for clarification)
Corrective Waves
These interrupt the main trend and travel in the opposite direction
• Define open interest in futures - ANSWER-o Outstanding contracts in each month
• Define Probability - ANSWER-Measures the extent to which an event is likely to occur
• Define random variable and the phrase "independent and identically distributed" -
ANSWER-o Random variable - dictated by random phenomenon; it's completely
random
o Phrase means that the previous coin flips do not affect the probability of future coin
flips
• Define relative strength - ANSWER-o Compares an individual security or fund to that
of the overall market
• Define retracements, pullbacks, and throwbacks - ANSWER-o Retracements
Smaller countertrends to a primary trend
o Throwback
Retracing down on an upward trend
o Pullback
Retracing up on a downward trend
• Define short interest - ANSWER-o Total number of shares of a security that have been
sold short by customers and securities firms that have not yet been repurchased to
settle outstanding short positions in the Market.
• Define terms including overbought, oversold, failure swings, divergence, and reversal -
ANSWER-Overbought
- Upper Zone in a range that is close to the extreme bound (pg. 202)
Oversold
- Lower zone in a range that is close to the extreme bound
Failure Swings
- Specific type of breakout from an overbought or oversold zone
Divergence
- Not acting in concert with each other
Reversal
- Same as divergence except price leads the way instead of the oscillator
Indexes
, - Cumulative sums of data, usually some variation of volume and price that
continuously measure supply and demand over time rather than a specific
period
Oscillators
- Same but often bounded and limited to a specific past period
• Define the general concept of value investing - ANSWER-o Buying out of favor stocks
with strong fundamentals
• Define what is meant by "Chart Patterns" - ANSWER-o A configuration of price action
that is bounded, above and below, by some form of either a line or a curve.
• Describe "internal" and "external" indicators - ANSWER-o Internal
-Based on the market itself
-Includes price trend, momentum, corollary indicators such as # of rising stocks vs.
falling stocks on a given day
-Goal is to keep the eye on the market we are trying to predict the future of
o External
-Known to significantly influence the market
-Interest rates is example
• Describe "noise" vs. "information" - ANSWER-o Noise
- Any other reason of buying a stock besides Information
o Information
- Relevant and true information such as might be useful In predicting the future
earnings of a publicly traded company.
• Describe "the Greeks" used in Options - ANSWER-o Delta
-Measures how much an option price changes for a one point move in the underlying
asset. Range is 1-0 for calls and 0-1 for puts
o Gamma
- Measures the rate of change in delta
o Vega
- Measures the risk from changes in implied volatility.
o Theta
- Measures the rate of time-value decay
o Rho
- Measures the impact of changes in interest rates on option's price
Construct various box size and reversal point and figure charts** - ANSWER-Near Pg.
255
• Classify sectors, capitalization, and other ways to segment the market - ANSWER-o
Sectors and Industries
o Capitalization
o Geography
o Other
- Growth, value, defensive, aggressive, etc.
• Classify the currency pairs as "major" or "cross" - ANSWER-o Major includes top
traded currencies trading with USD
o Cross is any foreign trading not including USD
• Classify various futures markets as industrial, agricultural, financial, and so on -
ANSWER-o Agricultural
-Commodities that are grown, raised, and harvested
o Energy
-Oil, Crude, refined products, gas, electricity, etc
o Equity and Equity Indexes
-Single stocks, global indexes, and many more
o Foreign Exchange
-Major currencies and emerging market currencies, and cross-rates
o Interest rates
-All fixed income markets from short term to long term US Treasury debt. Also includes
short sterling, bunds, gilts, Eurodollars, BTPs, JGBs, and swaps
• Define "box Size" and "reversal" - ANSWER-o Box size
Makes the chart more or less sensitive to changes in price direction; the smaller the
more changes will be seen; for longer term trends use a larger box
Size refers to what increment you use on the y axis; (I.E. if you're charting Microsoft
and want to make each both a change of 50 cents)
Also often related to current volatility of the market
o Reversal
Price must reverse direction by an amount that fills 3 boxes from the most extreme box
of the last column before a new column can begin (according to traditional PandF
charting)
,• Define "fractal" as used in describing price action - ANSWER-Fractal - Ability for
trends to act similarly over different periods
• Define "fungibility" in the context of financial markets - ANSWER-o Where two assets
are exactly the same besides a name or something that is not noticeably different
• Define "noise Trader" - ANSWER-o An irrational trader with no knowledge of finance
theory
-I.E. anyone who buys a stock just cause they like the company or want to, etc..
• Define "rule" as used in trading systems - ANSWER-o Function that transforms one or
more items of information, referred to as the rule's input, into the rule's output, which is
a recommended market position (short, long, neutral)
• Define "sentiment" as it relates to financial markets - ANSWER-o Sentiment is what
people think; i.e. if people think that Netflix is cheap and buy it, the stock will go up
o It explains whether the market price is above or below the estimated fair value
• Define "survivorship bias" - ANSWER-If a stock is doing bad or doesn't meet a criteria,
it is removed from an index and replaced
• Define "yield curve" - ANSWER-o A listing of a country's interest rates across the
spectrum of maturities in which it issues debt
• Define a composite wave - ANSWER-o A summation of individual cycles as well as
the trend
• Define an exchange-traded product - ANSWER-o A security that trades on an
exchange
• Define equity securities and primary data types - ANSWER-o Ownership share or
portion of the value of a company
o Price & volume
• Define Implied Volatility - ANSWER-o Estimated volatility of a security's price and is
critical in the pricing of options.
• Define Market Breadth - ANSWER-o Advance/Decline data of the Market is called
Breadth of the stock market.
(Advance - if closing price is above its previous close; VV for Decline; Unchanged is
self-explanatory)
• Define motive waves and corrective waves - ANSWER-Motive waves
, The basic pattern consists of five individual waves that are linked together and achieve
progress as market prices move up or down - this is called the motive wave because it
propels the market in the direction of the main wave
These run in a sequence of 5 and then are interrupted by a correction wave
(On the large trend - Motive waves are 1, 3, and 5; Corrective Waves are 2 and 4 - see
pg. 282 Figure 12.2 for clarification)
Corrective Waves
These interrupt the main trend and travel in the opposite direction
• Define open interest in futures - ANSWER-o Outstanding contracts in each month
• Define Probability - ANSWER-Measures the extent to which an event is likely to occur
• Define random variable and the phrase "independent and identically distributed" -
ANSWER-o Random variable - dictated by random phenomenon; it's completely
random
o Phrase means that the previous coin flips do not affect the probability of future coin
flips
• Define relative strength - ANSWER-o Compares an individual security or fund to that
of the overall market
• Define retracements, pullbacks, and throwbacks - ANSWER-o Retracements
Smaller countertrends to a primary trend
o Throwback
Retracing down on an upward trend
o Pullback
Retracing up on a downward trend
• Define short interest - ANSWER-o Total number of shares of a security that have been
sold short by customers and securities firms that have not yet been repurchased to
settle outstanding short positions in the Market.
• Define terms including overbought, oversold, failure swings, divergence, and reversal -
ANSWER-Overbought
- Upper Zone in a range that is close to the extreme bound (pg. 202)
Oversold
- Lower zone in a range that is close to the extreme bound
Failure Swings
- Specific type of breakout from an overbought or oversold zone
Divergence
- Not acting in concert with each other
Reversal
- Same as divergence except price leads the way instead of the oscillator
Indexes
, - Cumulative sums of data, usually some variation of volume and price that
continuously measure supply and demand over time rather than a specific
period
Oscillators
- Same but often bounded and limited to a specific past period
• Define the general concept of value investing - ANSWER-o Buying out of favor stocks
with strong fundamentals
• Define what is meant by "Chart Patterns" - ANSWER-o A configuration of price action
that is bounded, above and below, by some form of either a line or a curve.
• Describe "internal" and "external" indicators - ANSWER-o Internal
-Based on the market itself
-Includes price trend, momentum, corollary indicators such as # of rising stocks vs.
falling stocks on a given day
-Goal is to keep the eye on the market we are trying to predict the future of
o External
-Known to significantly influence the market
-Interest rates is example
• Describe "noise" vs. "information" - ANSWER-o Noise
- Any other reason of buying a stock besides Information
o Information
- Relevant and true information such as might be useful In predicting the future
earnings of a publicly traded company.
• Describe "the Greeks" used in Options - ANSWER-o Delta
-Measures how much an option price changes for a one point move in the underlying
asset. Range is 1-0 for calls and 0-1 for puts
o Gamma
- Measures the rate of change in delta
o Vega
- Measures the risk from changes in implied volatility.
o Theta
- Measures the rate of time-value decay
o Rho
- Measures the impact of changes in interest rates on option's price
