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CMT Level I study materials
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CMT Level I practice questions

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Question 1Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

In classical Dow theory, which statement best describes the role of volume?

  1. Volume should expand in the direction of the prevailing primary trend and confirm price movement. Correct answer.
  2. Volume is irrelevant because Dow theory relies only on closing price data.
  3. Volume peaks always mark the exact end of a primary bull market.
  4. Volume must contract during every secondary reaction regardless of trend direction.

Explanation

Dow theory treats volume as a secondary but important confirmation of trend. In an advancing primary trend, rallies should be accompanied by heavier volume than the corrective declines. Volume that fails to confirm price action is a warning signal rather than a precise timing tool.

Question 2Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A trendline drawn under a series of rising lows on a daily chart is broken to the downside on heavy volume. According to standard trendline practice, what is the most appropriate interpretation?

  1. The uptrend may be ending and the break warrants reassessment of long positions. Correct answer.
  2. The break should be ignored until the trendline is redrawn at a steeper angle.
  3. The trendline break guarantees a new downtrend will persist for months.
  4. The break is only valid if it occurs on a Friday close.

Explanation

A valid trendline break, especially accompanied by increased volume, signals that the supply/demand balance may have shifted and the prevailing trend is in question. It is a warning to reassess, not a guarantee of a sustained reversal. Traders typically wait for confirmation such as a lower high or a retest failure.

Question 3Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

Which price pattern is generally classified as a continuation pattern rather than a reversal pattern?

  1. Ascending triangle Correct answer.
  2. Head and shoulders top
  3. Double top
  4. Rounded bottom

Explanation

An ascending triangle, formed by a flat resistance line and rising support, typically resolves in the direction of the prior trend and is treated as a continuation pattern. Head and shoulders, double tops, and rounded bottoms are classic reversal formations. Classification depends on context, but the standard textbook grouping places triangles among continuation structures.

Question 4Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A candlestick with a long lower shadow, a small real body near the top of the range, and little or no upper shadow appears after an extended decline. This formation is best described as which of the following?

  1. Hammer Correct answer.
  2. Marubozu
  3. Shooting star
  4. Doji

Explanation

A hammer has a small real body near the top of the range with a long lower shadow at least twice the body length, appearing after a decline and suggesting rejection of lower prices. A shooting star has the long shadow above the body and appears after an advance. Doji and marubozu describe different body configurations.

Question 5Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

Which of the following best defines a simple moving average of a closing price series?

  1. The difference between the highest and lowest close over the lookback window.
  2. The arithmetic mean of the closing prices over a fixed number of most recent periods. Correct answer.
  3. The median closing price over all available historical periods.
  4. The most recent closing price weighted by trading volume.

Explanation

A simple moving average assigns equal weight to each of the last N closing prices and averages them. As new data arrives, the oldest observation drops out of the window. This differs from weighted, exponential, and volume-weighted averages, which apply unequal weights.

Question 6Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

The relative strength index (RSI) is computed primarily from which inputs?

  1. Cumulative volume and open interest
  2. Average gains and average losses over a specified lookback period Correct answer.
  3. The difference between two moving averages of price
  4. The high, low, and close of the current bar only

Explanation

RSI compares the average magnitude of up closes to the average magnitude of down closes over a chosen period, then scales the ratio to a 0-100 range. It is a bounded momentum oscillator. Volume, open interest, and moving-average spreads feed other indicators.

Question 7Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

In point-and-figure charting, what does a reversal setting of three boxes mean?

  1. The chart plots three data points per trading day.
  2. Price must move three box sizes in the opposite direction before a new column is plotted. Correct answer.
  3. Only three trades per session are recorded.
  4. Each column contains exactly three X's or three O's.

Explanation

Point-and-figure charts ignore time and plot only price movement. The reversal parameter specifies how far price must move against the current column before the analyst switches from X's to O's or vice versa. A three-box reversal filters minor fluctuations and produces fewer, larger signals.

Question 8Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

Which statement correctly describes the relationship between support and resistance?

  1. Support levels apply only to futures markets, while resistance applies only to equities.
  2. Resistance lies below the current price while support lies above it.
  3. Support and resistance levels are permanent once established and never change roles.
  4. A broken resistance level often becomes support, and a broken support level often becomes resistance. Correct answer.

Explanation

Support and resistance are zones where buying or selling interest has previously emerged. When price decisively breaks through one, the roles commonly reverse because traders who acted at that level now have positions to defend. This role reversal is a core tenet of horizontal support/resistance analysis.

Question 9Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A stock trades at 48 after a decline. It then rallies to 55, pulls back to 50, and advances to 58. Using a simple 50% retracement of the 55-to-50 pullback, which price level would be the first upside objective?

  1. 52.50 Correct answer.
  2. 50.00
  3. 57.50
  4. 55.00

Explanation

A 50% retracement of the 5-point decline from 55 to 50 equals 2.5 points, which added to the 50 low gives 52.50. Retracement objectives are measured from the swing endpoint. Reaching that level does not imply the larger trend is confirmed.

Question 10Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

An analyst notes that a market has made a higher high and a higher low on the weekly chart while the daily chart shows a series of lower highs. What is the most reasonable reading?

  1. The daily chart should be ignored because weekly data always overrides it.
  2. The primary trend has reversed to down and the weekly chart is lagging.
  3. The primary trend is up while a shorter-term corrective phase is underway. Correct answer.
  4. Both timeframes agree that the market is range-bound with no trend.

Explanation

Trend is timeframe-dependent, and the longer timeframe generally carries more weight for the primary direction. A higher high and higher low on the weekly chart indicate an intact uptrend, while lower daily highs suggest a pullback within it. Multiple-timeframe analysis is used to align entries with the dominant trend.

Question 11Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A stock breaks above a symmetrical triangle on above-average volume, then pulls back to the apex area and holds. This behavior is best characterized as which of the following?

  1. An exhaustion gap that should be faded
  2. A head and shoulders top in formation
  3. A failed breakout requiring immediate reversal of the position
  4. A successful breakout with a retest confirming the pattern Correct answer.

Explanation

Breakouts are often followed by a return move toward the breakout point. When price holds the apex or breakout level on lighter volume, the retest supports the validity of the pattern. Failure would require price to fall back decisively inside the triangle.

Question 12Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

The moving average convergence divergence (MACD) line is calculated as which of the following?

  1. The ratio of average gains to average losses over 14 periods
  2. The 9-period exponential moving average of price
  3. The 12-period exponential moving average minus the 26-period exponential moving average Correct answer.
  4. The 26-period simple moving average minus the 12-period simple moving average

Explanation

Standard MACD subtracts the longer exponential moving average from the shorter one, conventionally 26 and 12 periods. A 9-period EMA of the MACD line forms the signal line. The indicator measures the spread between two trend measures rather than price itself.

Question 13Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A market is trading at 105 after a rally. The prior swing low was 90 and the prior swing high was 110. Using a 61.8% retracement of the 90-to-110 advance, which price is the nearest support objective?

  1. 97.64 Correct answer.
  2. 100.00
  3. 92.36
  4. 102.36

Explanation

The advance spans 20 points, and 61.8% of that is 12.36 points. Subtracting from the 110 high gives 97.64 as the retracement support level. Retracement levels are measured from the swing extreme back toward the origin of the move.

Question 14Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

On-balance volume (OBV) is constructed by which procedure?

  1. Averaging volume over 30 periods and comparing it with price
  2. Multiplying price by volume and cumulating the result
  3. Adding the day's volume when the close rises and subtracting it when the close falls Correct answer.
  4. Dividing volume by the day's true range

Explanation

OBV is a cumulative volume line that adds volume on up closes and subtracts it on down closes, with unchanged closes typically leaving the total as is. Divergence between OBV and price can warn of weakening participation. It is a volume-based confirmation tool rather than a price overlay.

Question 15Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A trader observes that a 14-period RSI has risen above 70 while price is making a new high but the oscillator is lower than at the previous price peak. What does this divergence most likely suggest?

  1. The trend has already reversed and a short position is risk-free.
  2. The RSI calculation is invalid because it exceeds 70.
  3. Momentum is weakening even though price is still advancing. Correct answer.
  4. Volume must be declining, since RSI incorporates volume.

Explanation

Bearish divergence occurs when price sets a higher high while a momentum oscillator sets a lower high, indicating the rate of advance is fading. It is a caution signal, not a reversal confirmation, and can persist for some time in strong trends. Confirmation from price structure or volume is normally required.

Question 16Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A gap opens above the prior day's high and the price continues higher on strong volume without filling the gap for several sessions. This gap is best classified as which type?

  1. Island reversal gap
  2. Exhaustion gap
  3. Breakaway gap Correct answer.
  4. Common gap

Explanation

A breakaway gap occurs as price exits a consolidation or crosses a significant level, and it often remains unfilled because it reflects a genuine shift in supply and demand. Heavy volume and follow-through support that interpretation. Exhaustion gaps appear late in a move and are more likely to be filled quickly.

Question 17Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

Which of the following is the primary purpose of a relative strength (ratio) line comparing a sector index to a broad market index?

  1. To show whether the sector is outperforming or underperforming the market over time Correct answer.
  2. To calculate the sector's dividend yield
  3. To estimate the sector's earnings growth rate
  4. To measure the sector's absolute price volatility

Explanation

A relative strength line divides one series by another, so a rising line means the numerator is outperforming the denominator. It tracks comparative performance rather than absolute direction, which means both series can fall while the ratio still rises. Analysts use it to identify leadership rotation among sectors.

Question 18Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A trader uses a 20-period moving average and a 50-period moving average. The 20-period crosses above the 50-period after an extended decline. How is this event conventionally described?

  1. A bullish moving average crossover Correct answer.
  2. A bearish moving average crossover
  3. A volume climax
  4. A death cross

Explanation

When a shorter moving average crosses above a longer one, the shorter average is reflecting more recent strength and the event is labeled bullish. The opposite crossing, short below long, is bearish and is often called a death cross. Crossovers are lagging signals because averages respond to past prices.

Question 19Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

In Elliott wave theory, which sequence describes a complete motive wave?

  1. Two waves followed by a triangle
  2. Four waves alternating in direction with no net progress
  3. Five waves in the direction of the larger trend Correct answer.
  4. Three waves in the direction of the larger trend

Explanation

Elliott's motive wave subdivides into five waves labeled 1 through 5, with waves 1, 3, and 5 advancing and waves 2 and 4 correcting. The subsequent corrective wave typically subdivides into three waves. The framework is descriptive and requires careful rule checking, such as wave 3 never being the shortest.

Question 20Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A market has spent weeks in a narrow range with declining volume and then breaks out on a sharp volume expansion. Which interpretation is most consistent with technical analysis principles?

  1. The volume expansion supports the breakout's validity. Correct answer.
  2. Volume has no diagnostic value for range breakouts.
  3. Declining volume during the range guarantees the breakout will fail.
  4. The breakout is suspect because volume rose.

Explanation

Volume is used to gauge conviction behind price movement, and a breakout accompanied by a sharp increase in activity is more likely to be genuine. Low volume during consolidation often reflects equilibrium before a resolution. Volume is confirmatory rather than deterministic.

Question 21Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A stock has a beta of 1.4 relative to a broad index, and the index is expected to return 10% while the risk-free rate is 3%. Using the capital asset pricing model, what is the expected return on the stock?

  1. 13.0%
  2. 12.8% Correct answer.
  3. 17.0%
  4. 11.4%

Explanation

CAPM expected return equals the risk-free rate plus beta times the market risk premium. The premium is 10% minus 3%, or 7%, and 1.4 times 7% is 9.8%, which added to 3% gives 12.8%. Beta scales exposure to systematic market risk only.

Question 22Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

An analyst compares the current price to a rising 200-day moving average and notes the price is 25% above it while the average slope has flattened. Which reading is most defensible?

  1. A price far above the average guarantees continued acceleration.
  2. The 200-day average should be replaced because it lags too much to be useful.
  3. The flattening average proves a new downtrend has begun.
  4. The extension above the average raises the risk of mean reversion even though the long-term trend is intact. Correct answer.

Explanation

Large deviations from a long-term moving average indicate stretched conditions that historically tend to revert toward the mean, though timing is uncertain. A still-rising average suggests the long-term trend has not broken. Flattening slope is a caution, not proof of reversal.

Question 23Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A market makes a new high on strong volume, but breadth measured by the advance-decline line fails to confirm and instead makes a lower high. How should this divergence be weighted?

  1. As a caution that participation is narrowing, requiring confirmation before assuming trend continuation Correct answer.
  2. As irrelevant, because breadth measures are only useful in bear markets
  3. As conclusive evidence that the high will fail within days
  4. As proof that volume data are unreliable

Explanation

Breadth divergence indicates that fewer issues are participating in the advance, which can precede a loss of momentum. It is a warning rather than a timing signal, and markets can continue higher for extended periods while breadth lags. Analysts typically combine it with price structure and volume for confirmation.

Question 24Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A trader evaluates a breakout system and finds that 40% of signals are winners with an average gain of 3R and average loss of 1R. What is the expectancy per trade in R units?

  1. 1.2R
  2. 0.2R
  3. 0.6R Correct answer.
  4. 0.4R

Explanation

Expectancy equals the win rate times average win minus the loss rate times average loss. That is 0.4 times 3R minus 0.6 times 1R, which equals 1.2R minus 0.6R, or 0.6R per trade. A positive expectancy can coexist with a losing majority because payoff size matters.

Question 25Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

In a Wyckoff accumulation schematic, which phase typically follows the spring and is characterized by rising volume and higher lows?

  1. The distribution phase following the markdown
  2. The public participation phase at the prior high
  3. Phase D, the markup phase leading toward the sign of strength Correct answer.
  4. Phase A, where the trading range begins

Explanation

After a spring tests support and shakes out weak holders, Phase D shows increasing demand, higher lows, and a move toward the upper range, often culminating in a sign of strength. Phase A merely establishes the range and stopping action. Distribution and markdown occur later in the cycle.

Question 26Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

Which price is used to construct a candlestick chart's real body?

  1. The prior close and the current open
  2. The volume-weighted average price and the close
  3. The open and the close of the period Correct answer.
  4. The high and the low of the period

Explanation

The real body of a candlestick spans the distance between the period's opening and closing prices, so its height and color reflect the net gain or loss within that period. The high and low are shown separately as the upper and lower shadows.

Question 27Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A bar chart shows a long upper shadow with a small body near the low of the range. This pattern most directly signals which of the following?

  1. Volume was unusually light during the session
  2. The instrument gapped up from the previous close
  3. Buyers pushed price up but sellers rejected the advance by the close Correct answer.
  4. Sellers dominated from the open and closed at the low

Explanation

A long upper shadow means price traded well above the body but could not hold those levels, indicating supply appeared and pushed price back down before the close. The small body near the low confirms that sellers regained control by the end of the period.

Question 28Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

In Dow theory, which condition is required to confirm a primary trend reversal?

  1. The primary average alone must make a new extreme
  2. Both industrial and transportation averages must confirm each other Correct answer.
  3. Volume must expand for at least ten consecutive sessions
  4. The 200-day moving average must cross the 50-day moving average

Explanation

Dow theory holds that the industrial and transportation averages must confirm one another before a change in the primary trend is accepted. A new extreme in one average without confirmation from the other is treated as a warning rather than a signal.

Question 29Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

Which chart type plots only price changes and ignores time entirely, using columns of X and O?

  1. Line chart
  2. Point-and-figure chart Correct answer.
  3. Heikin-Ashi chart
  4. Renko chart

Explanation

Point-and-figure charts record only price movement, adding X columns for rising prices and O columns for falling prices, with no time axis. This makes them useful for filtering minor noise and highlighting support and resistance levels.

Question 30Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A trendline drawn under successive rising lows is most useful for which purpose?

  1. Guaranteeing the exact top of the trend
  2. Determining the fundamental value of the asset
  3. Identifying a level where the uptrend may be tested or broken Correct answer.
  4. Measuring the volume of trading in the trend

Explanation

An upward trendline connects rising reaction lows and serves as a dynamic support level that can be tested by later pullbacks. A decisive close below it is one of the standard signals that the trend may be changing.

Question 31Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

Which term describes the price level at which a declining market has previously found buying interest and stopped falling?

  1. Support Correct answer.
  2. Breakout
  3. Resistance
  4. Retracement

Explanation

Support is the price area where demand has historically been strong enough to halt a decline. Resistance is the mirror concept, where supply has halted advances.

Question 32Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A simple moving average of length 10 is computed by which method?

  1. Averaging all historical closes since the instrument listed
  2. Summing the last 10 closing prices and dividing by 10 Correct answer.
  3. Weighting the most recent close twice as heavily as the others
  4. Averaging the last 10 highs and lows separately

Explanation

A simple moving average gives equal weight to each of the most recent n observations, so a 10-period SMA is the arithmetic mean of the last 10 closes. It rolls forward as each new period is added and the oldest is dropped.

Question 33Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

In a head-and-shoulders top, which line is drawn horizontally through the two intervening lows to define the pattern's completion level?

  1. The trend channel
  2. The apex line
  3. The neckline Correct answer.
  4. The median line

Explanation

The neckline connects the troughs between the left shoulder and head and between the head and right shoulder. A decisive close below it is the classic confirmation that the topping pattern has completed.

Question 34Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A stock closes at 40, then 44, then 42, then 48 over four sessions. Using a 3-period simple moving average, what is the value on the fourth session?

  1. 43.50
  2. 42.00
  3. 44.67 Correct answer.
  4. 46.00

Explanation

The three most recent closes are 44, 42, and 48, which sum to 134; dividing by 3 gives 44.67. The earliest close of 40 is dropped once the window rolls forward.

Question 35Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A market rises from 20 to 40 over several weeks and then retraces to 30 before resuming higher. Using a 50% retracement, where would the pullback be expected to find support?

  1. 20
  2. 30 Correct answer.
  3. 35
  4. 25

Explanation

A 50% retracement of the 20-to-40 advance removes half of the 20-point move, placing the level at 30. Retracement levels are measured from the end of the move back toward its origin.

Question 36Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A stock trades at 50. It gaps up to open at 56 and never trades below 55 during the session, closing at 58. Which description of the gap is correct?

  1. An exhaustion gap that was filled the same day
  2. A runaway gap that closed below its open
  3. A common gap within the prior day's range
  4. A breakaway gap that left the entire prior range untouched Correct answer.

Explanation

Because the session's low of 55 remained above the prior close of 50, the gap was never filled and represents a clean break away from the previous trading range. Gaps of this kind often accompany the start of a new move rather than the end of one.

Question 37Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A trader wants an oscillator that measures the position of the close within the recent high-low range on a scale from 0 to 100. Which indicator fits this description?

  1. Parabolic SAR
  2. Accumulation/distribution line
  3. Stochastic oscillator Correct answer.
  4. Rate of change

Explanation

The stochastic oscillator compares the latest close with the high-low range over a lookback period and expresses the result as a percentage between 0 and 100. Readings near the extremes are used to gauge whether price is stretched within its recent range.

Question 38Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A 12-day exponential moving average is being updated. Which input receives the greatest weight in the calculation?

  1. All closes in the window equally
  2. The highest high of the window
  3. The oldest closing price in the window
  4. The most recent closing price Correct answer.

Explanation

An exponential moving average applies a smoothing factor that gives the latest observation the largest weight, with earlier observations decaying geometrically. This makes it more responsive to recent price changes than a simple moving average of the same length.

Question 39Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A stock breaks below a rising trendline, then rallies back to touch that same line from below and fails. This behavior most directly illustrates which concept?

  1. A dead-cat bounce within an intact uptrend
  2. Polarity, in which broken support becomes resistance Correct answer.
  3. A volume climax marking an intermediate low
  4. Divergence between price and momentum

Explanation

When a support line is decisively broken, it often later acts as resistance, a role reversal known as polarity. The failed retest from below is the practical demonstration of that shift.

Question 40Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

An analyst sees price make a new high while the 14-period stochastic makes a lower high. What does this configuration most commonly suggest?

  1. The downtrend has already resumed and price will fall immediately
  2. Momentum is weakening even though price is still rising Correct answer.
  3. The oscillator is being calculated incorrectly
  4. Volume has been rising steadily through the advance

Explanation

A bearish divergence occurs when price sets a higher high but the momentum oscillator sets a lower high, signaling that the strength behind the advance is fading. It is a warning of possible deterioration rather than a guarantee of immediate reversal.

Question 41Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

The average true range (ATR) is most appropriately used for which purpose?

  1. Measuring the direction of the prevailing trend
  2. Sizing stop distances relative to recent volatility Correct answer.
  3. Identifying overbought and oversold extremes
  4. Counting the number of advancing versus declining issues

Explanation

ATR measures the average magnitude of price movement, including gaps, over a lookback period, so it describes volatility rather than direction. Traders commonly use multiples of ATR to set stops that adapt to current market conditions.

Question 42Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A market is described as being in a trading range. Which behavior would most likely confirm that the range has ended?

  1. Repeated touches of the upper boundary on declining volume
  2. A return to the midpoint of the range after a failed probe
  3. A close beyond the range boundary accompanied by an expansion in volume Correct answer.
  4. A narrowing of the range's high-low spread over several sessions

Explanation

A range ends when price closes decisively outside its boundary, and volume expansion supports the idea that genuine demand or supply has entered. Without follow-through and volume, a probe outside the range is more likely to fail.

Question 43Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

Which of the following best describes the purpose of a relative strength ratio line that divides a sector index by a broad market index?

  1. To measure the volatility of the sector relative to its own history
  2. To show whether the sector is outperforming or underperforming the market over time Correct answer.
  3. To estimate the sector's fundamental earnings growth
  4. To determine the absolute direction of the broad market

Explanation

Dividing the sector index by the market index produces a ratio whose trend reflects relative performance: a rising line means the sector is outperforming. The ratio says nothing about absolute direction, only about relative strength.

Question 44Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A trader's breakout system wins 45% of the time, with average winners of 2.5R and average losers of 1R. What is the expectancy per trade?

  1. -0.10R
  2. +0.45R
  3. +0.575R Correct answer.
  4. +1.25R

Explanation

Expectancy equals the win rate times the average win minus the loss rate times the average loss: 0.45 × 2.5 − 0.55 × 1 = 1.125 − 0.55 = 0.575R. A positive expectancy means the system should be profitable over many trades despite losing more often than it wins.

Question 45Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

In Elliott wave theory, which rule must hold true for a valid impulsive wave?

  1. Wave 4 must overlap the territory of wave 1
  2. Wave 5 must always exceed the end of wave 3
  3. Wave 3 can never be the shortest of waves 1, 3, and 5 Correct answer.
  4. Wave 2 must retrace more than 100% of wave 1

Explanation

One of the three inviolable rules of Elliott wave counting is that wave 3 cannot be the shortest among the three impulsive waves. This constraint, along with the prohibition on wave 4 overlapping wave 1 and on wave 2 exceeding the start of wave 1, helps validate a count.

Question 46Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A market makes a series of higher highs and higher lows, but the advance has occurred on steadily falling volume. Which interpretation is most consistent with classical technical analysis?

  1. The market must be in an accumulation phase
  2. Falling volume confirms the trend and strengthens the continuation case
  3. Volume is irrelevant to trend analysis and should be ignored
  4. The trend is intact but its participation is weakening, raising the risk of a reversal Correct answer.

Explanation

Classical volume analysis expects volume to expand in the direction of the trend, so a rising market on shrinking volume suggests diminishing participation. The trend is not yet broken, but the divergence between price and volume is a caution flag.

Question 47Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A trader combines a 10-day and a 30-day moving average. The 10-day crosses below the 30-day after an extended advance, and both averages then slope downward. Which description of the signal is most accurate?

  1. A bearish crossover that suggests the intermediate trend has turned lower Correct answer.
  2. A neutral event with no interpretive value
  3. A divergence signal between price and momentum
  4. A bullish crossover that suggests the advance will resume

Explanation

When a shorter moving average crosses below a longer one and both subsequently slope down, the crossover is read as a bearish trend signal. The downward slope of the averages provides confirmation that the shift is more than a brief whipsaw.

Question 48Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

An analyst notes that the advance-decline line is making lower highs while a broad index makes higher highs. Which conclusion is best supported?

  1. Market breadth is deteriorating and the index advance may be narrowly based Correct answer.
  2. Volume must be declining across all issues in the index
  3. The advance-decline line is calculated from price rather than issue counts
  4. The index is guaranteed to continue rising because price leads breadth

Explanation

The advance-decline line is a breadth measure, and its failure to confirm a new index high indicates that fewer issues are participating in the advance. Narrow leadership is a classic warning that a rally may be vulnerable, though it is not a precise timing tool.

Question 49Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A trader places a stop-loss order to sell at 95 while the stock is trading at 100. Which statement correctly describes the order's behavior?

  1. It guarantees a fill at exactly 95 regardless of gaps
  2. It executes immediately at 95 as a limit order
  3. It becomes a market order once the stop price is reached Correct answer.
  4. It cancels automatically if price rises above 100

Explanation

A stop-loss order rests until the stop price trades, at which point it is triggered and becomes a market order. Because it then executes at the best available price, the actual fill can be worse than the stop price, especially in a gap.

Question 50Technical Analysis of Financial Markets (curriculum domain not enumerated in source)

A daily bar shows an open at 30, a high at 37, a low at 28, and a close at 35. What is the real body of this bar, expressed in price units?

  1. 9 points
  2. 7 points
  3. 5 points Correct answer.
  4. 2 points

Explanation

The real body is the distance between the open and the close, regardless of where the extremes fall. Here the close of 35 minus the open of 30 gives a body of 5 points.