CMT Level 1 Exam Guide ( Update) An Introduction to Technical Analysis | Questions and Verified Answers| Grade A| 100% Correct

CMT Level 1 Exam Guide ( Update) An Introduction to Technical Analysis | Questions and Verified Answers| Grade A| 100% Correct Q: • List advantages of reviewing price information in chart format Answer: • 1. Provide price history • 2. Provide good sense of Market's volatility • 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 • 4. Serve as a timing tool for those who base their decisions on other info • 5. Used as a money management tool by defining meaningful stop points • 6. Reflects market behavior that is subject to certain repetitive patterns Q: • Review the data points required to construct the line, bar, and candlestick charts Answer: • Line - Price and Time • Bar - High, low, and closing price for each time interval (some contain the opening price, as well) • Candlestick - High, Low, Closing, and Opening, Q: • Describe how to construct line, bar, and candlestick charts Answer: • Line - Price data is on the vertical axis, time data is on the horizontal • Bar - Each bar represents a certain time period (for example one bar may represent one day of data). Price is on the vertical and time is on the horizontal • Candlestick - Low and High prices are plotted on a thin bar and a box represents opening and closing prices. Box is called the Real Body; if the security closed at a higher price than it opened, the body is white or open; VV = black or closed. Q: • Explain the differences between arithmetic and logarithmic scales and their uses Answer: • Arithmetic shows price units at the same price intervals ($1 - $2 movement looks same as $100 - $101 movement) • Log Scale - Represents the same percentage price (I.e. $1 - $2 movement is much greater than a $100 - $101 Movement) • Rule of thumb: When a security's price range is greater than 20% a log scale is more accurate and useful. Q: • Difference between the high and low of a bar is the Answer: Range Q: • Explain why trend identification is important to achieve profits Answer: • (Besides the obvious of without identifying a trend you won't be able to ride the trend and make money) 1. Determine, with min. risk of error, when a trend has begun at its earliest time and price 2. Select and enter a position in the trend that is appropriate to the existing trend 3. Close those positions when the trend is ending Q: • Recognize an uptrend, a downtrend, and a trading range Answer: • Uptrend - peaks tend to be higher than earlier peaks, and the troughs tend to be higher than the previous troughs • Downtrend - VV • Trading range - Peaks and troughs are scattered, the trend is undeterminable, and if the peaks and troughs occur at the same relative levels Q: • Describe the concept of support and resistance Answer: • Support and resistance points are a single peak or trough; zones are multiple points • Believed to occur due to human reactions Q: • Identify trends using most common methods Answer: • Using a regression line • Using a trend line Need two support reversal points or VV • Scale and Trend Lines Shorter time frame uses algorithmic; longer uses logarithmic • Accelerating Trend Lines (pg. 66) • Decelerating Trend Lines (pg.66) Q: • Recall how significant reversal points are identified Answer: • DeMark or Williams Method A bar with a low that is surrounded by two bars with higher lows (VV for resistance) • Percentage Method Deciding on a percentage to use. In determining a trough - any time the price declines more than 1%, makes a low, then rallies up 1%, would define a trough (VV for Peak). The larger the percentage used the more important but less frequent the reversal point • Gann Two-Day Swing Method Same as Demark or Williams, but two days are given after a low, in which one watches to see if these two days have higher highs than the low (pg. 58) • High Volume Method Associating the use of high volume with a reversal Q: • List general rules for trendlines Answer: • The longer and the more times that the drawn line is touched by prices, the more significant it is when the line is finally broken • The steeper the trend line, the sooner it will be broken • Sometimes a trend line is broken slightly by intraday price action • Trend lines should be never be considered exact because price can be influenced by exogenous factors Q: Describe and identify breakouts Answer: • When a price "breakouts" through support or resistance • Usually (not always) signals that a significant change in supply and demand has occurred and that a new price trend is beginning • Requires penetration of a trend line, support, or resistance & confirmation that the breakout is real Q: • List methods for confirming and filtering breakouts Answer: Close Filter Point or Percent Filter Time Volume Volatility Pivot Point Technique Q: • List methods for confirming and filtering breakouts: Close Filter Answer: Waits for the closing price to see if it breaks out of the breakout zone or recedes back in (receding back in is a false breakout probs and VV)