CMT Level I flashcards
CMT Level I · Build recall with a focused review session.
32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Dow Theory primary trend
- The long-term directional movement of prices lasting months to years, composed of three phases and interrupted only by secondary reactions; it remains in force until reversed by confirmed evidence.
- Secondary reaction
- An intermediate counter-trend move lasting weeks to months that typically retraces one-third to two-thirds of the preceding primary advance or decline, after which the primary trend resumes.
- Support and resistance
- Price zones where buying (support) or selling (resistance) previously halted a move. Once broken, support often becomes resistance and resistance becomes support, reflecting trapped traders exiting.
- Trendline validity
- A trendline requires at least two touch points to draw and a third touch to confirm. The more times price respects the line without breaking it, the more significant the line becomes.
- Simple moving average
- The arithmetic mean of the last n closing prices, recalculated each period. It lags price and smooths noise; the longer the period, the smoother and slower the signal.
- Exponential moving average
- A moving average that weights the newest price most heavily using multiplier k = 2/(n+1), making it respond faster to recent price changes than a simple moving average of equal length.
- Moving average crossover
- A signal generated when a short-period average crosses a long-period average. A fast average crossing above a slow one is bullish; crossing below is bearish, though whipsaws occur in ranges.
- Relative Strength Index
- A 0-100 oscillator comparing average gains to average losses over a set period, default 14. Readings above 70 are overbought and below 30 oversold, though strong trends can hold extremes.
- Stochastic oscillator
- An oscillator measuring where the close sits within the high-low range over n periods. Readings above 80 indicate overbought conditions and below 20 oversold, best applied in ranging markets.
- MACD construction
- The 12-period EMA minus the 26-period EMA forms the MACD line; a 9-period EMA of that line is the signal line. Crossovers and divergences generate trading signals.
- MACD histogram
- The difference between the MACD line and its signal line, plotted as bars. Growing bars show accelerating momentum; shrinking bars warn that the current move is losing strength.
- Volume confirmation
- The principle that price moves accompanied by above-average volume are more trustworthy. Breakouts on heavy volume are more likely valid; rallies on shrinking volume often fail.
- Head-and-shoulders pattern
- A reversal formation with three peaks, the middle highest. A close below the line connecting the two intervening troughs (the neckline) confirms the reversal, with the target set by the head-to-neckline height.
- Double top and bottom
- Reversal patterns where price tests a level twice and fails. Confirmation requires a break of the trough between the two tops, or the peak between the two bottoms.
- Triangle continuation pattern
- A converging range where price makes lower highs and higher lows. The pattern resolves with a breakout, usually in the direction of the prior trend, and is measured from the widest part.
- Breakout confirmation
- A decisive move beyond a pattern boundary or prior extreme, ideally on expanding volume. Traders often require a close beyond the level to avoid false breaks.
- Divergence
- A disagreement between price and an indicator: price makes a higher high while momentum makes a lower high (bearish), or price makes a lower low while momentum makes a higher low (bullish).
- Overbought and oversold
- Oscillator extremes suggesting a move is stretched. Overbought readings do not by themselves signal a short entry, because prices can remain overbought throughout a strong uptrend.
- Point and figure chart
- A chart plotting only price changes of a set box size, using X columns for rises and O columns for declines. Time is ignored, filtering minor noise and clarifying support and resistance.
- Candlestick doji
- A candle whose open and close are nearly equal, producing a very small body. It signals indecision and carries more weight for reversal when it appears after an extended trend.
- Fibonacci retracement
- Horizontal levels at 23.6, 38.2, 50, 61.8 and 78.6 percent of a prior move, used to estimate where a counter-trend pullback may end and the trend resume.
- Bollinger Bands
- Bands placed a set number of standard deviations (typically two) above and below a moving average. Band width contracts in low volatility and expands when volatility rises.
- Average True Range
- A volatility measure averaging the greatest of the current high-low range, the high minus the prior close, and the prior close minus the low, commonly over 14 periods.
- Relative strength comparison
- Dividing one instrument's price by a benchmark's price to produce a ratio line. A rising ratio means the instrument is outperforming the benchmark regardless of absolute direction.
- Market breadth
- Measures how many issues participate in a move, such as the advance-decline line or percentage of stocks above a moving average. Narrow breadth warns a rally is fragile.
- Advance-decline line
- A running total of advancing minus declining issues each day. Divergence between a rising index and a falling advance-decline line suggests participation is narrowing.
- Sentiment indicators
- Measures of crowd positioning such as put-call ratios, short interest, and investor surveys. Extreme bullish readings are contrarian bearish signals, and vice versa.
- Contrarian interpretation
- The principle that when nearly all participants are positioned one way, few buyers or sellers remain to sustain the move, so extremes favor the opposite direction.
- Cycle analysis
- Studying recurring periodicities in price, such as seasonal or multi-year cycles. Cycles are combined with trend to time entries, never used alone as a forecast.
- Multiple timeframe analysis
- Reading a higher timeframe to establish the dominant trend and a lower timeframe to time entries. Signals aligned across timeframes carry more weight than isolated ones.
- Confirmation versus divergence
- Confirmation is agreement between price and a secondary indicator; divergence is disagreement. Divergence is a warning to tighten risk, not an automatic reversal signal.
- Risk-reward ratio
- The distance from entry to target divided by the distance from entry to stop. A ratio of 3:1 means the potential gain is three times the amount risked on the trade.