CMT Level III key terms

A price move beyond a defined support or resistance level, often on increased volume. Confirmation matters: many traders wait for a close beyond the level or a retest before acting, since false breaks are common.

A price zone where buying pressure has previously halted declines, creating a floor. Analysts watch whether price holds, undercuts, or retests the zone, since a decisive break often signals a shift in the balance of supply and demand.

A price zone where selling pressure has previously capped advances, creating a ceiling. Repeated tests that fail to push through can signal a strong seller base, while a decisive close above may mark a trend change.

A straight line drawn along successive higher lows (uptrend) or lower highs (downtrend). Its validity depends on how many times price touches it and whether it is drawn on closing or intraday data; a break can warn of trend exhaustion.

A persistent directional bias in price, commonly classified as up, down, or sideways. Practitioners judge trend by higher highs and higher lows (or the reverse) and by moving-average slope, distinguishing primary, intermediate, and short-term degrees.

A continuously updated mean of the last N closing prices (simple) or a weighted version that emphasizes recent data (exponential). It smooths noise and serves as a dynamic support/resistance reference and a trend filter in crossover systems.

A signal generated when a faster moving average crosses a slower one, such as a 50-day crossing above a 200-day. Crossovers lag price by design, so they trade timeliness for reduced whipsaw, and sideways markets produce many false signals.

Current volume compared with an average for the same time of day or recent period. It helps distinguish meaningful participation from routine activity, since price moves backed by above-average volume are generally considered more reliable.

The number of shares, contracts, or units traded in a period. Analysts read it as a measure of conviction: rising volume in the direction of the trend supports it, while rallies on shrinking volume can signal weakening demand.

A cumulative indicator that adds volume on up-closing days and subtracts it on down-closing days. Divergence between the running total and price is used as an early warning of weakening buying or selling pressure.

A disagreement between price and an indicator, such as price making a higher high while momentum makes a lower high. It suggests the prevailing move is losing force, but it is a warning rather than a timing signal and can persist for long stretches.

A bounded momentum oscillator scaled from 0 to 100 that compares average gains with average losses over a lookback period. Readings above 70 or below 30 are conventionally labeled overbought or oversold, though strong trends can hold those zones for weeks.

A condition in which price has advanced sharply enough that an oscillator sits in its upper extreme. It describes the speed of a move, not an imminent reversal; in a strong uptrend, overbought readings often persist and should not be treated as sell signals alone.

A momentum tool built from the difference between two exponential moving averages, plotted with a signal line and a histogram. Traders watch line crossovers, histogram shrinkage, and divergence from price to gauge the direction and strength of momentum.

Envelopes plotted a set number of standard deviations above and below a moving average. Band width reflects volatility; squeezes often precede expansion, and price riding a band signals trend strength rather than automatic reversal.

A short-term formation built from the open, high, low, and close of one or more sessions, such as a doji or engulfing pattern. Context matters: the same shape carries different weight depending on trend, location, and confirming volume.

A technique that plots horizontal levels at ratios such as 38.2%, 50%, and 61.8% of a prior swing, in search of potential pullback stopping points. The levels are descriptive of common behavior, not causal, and work best when they coincide with other references.

A chart that records only price, using columns of Xs and Os with a fixed box size and reversal amount. By ignoring time and small fluctuations, it isolates sustained supply and demand shifts and produces clear objective support and resistance levels.

Measures of how widely a move is shared across a universe, such as the advance-decline line or percentage of stocks above a moving average. Narrow breadth, where few names drive an index higher, is read as a warning of fragile participation.

A gauge of crowd positioning or mood, such as put-call ratios, survey bullishness, or short interest. Extremes are often read contrarianly, on the logic that when nearly everyone is positioned one way, the marginal buyer or seller is scarce.

An approach that leans against prevailing crowd positioning at extremes, buying when sentiment is overwhelmingly bearish and reducing exposure when it is euphoric. It requires a measurable sentiment gauge and works poorly in the middle of the range.

The study of relationships among asset classes such as bonds, commodities, currencies, and equities to infer the economic backdrop and confirm or question a trend. Shifting correlations mean relationships must be re-examined rather than assumed permanent.

A series of quick, alternating signals that trigger entries and exits at a loss, typical of range-bound markets and short-lookback systems. It is the main practical argument for trend filters, longer timeframes, and disciplined position sizing.

The interval represented by each bar or the horizon a strategy targets. Signals on daily and weekly charts frequently conflict, so analysts define a hierarchy in which the longer timeframe sets direction and the shorter one refines entry timing.

The process of deciding how much capital to commit to a trade, often by risking a fixed small percentage of equity per idea and setting the stop from technical structure. It is the main lever connecting analysis to survivable outcomes.

A predetermined exit level that caps loss on a position, placed from technical structure such as below support or at a volatility multiple. Its distance, combined with the capital at risk, determines the permitted position size.

The peak-to-trough decline in portfolio value, usually expressed as a percentage. Maximum drawdown describes the worst historical episode and is often more relevant to an investor's ability to stay invested than volatility alone.

The largest unrealized loss a trade experiences before it is closed. Studying its distribution helps traders judge whether stops are placed too tight or too loose relative to how their entries typically behave.

The degree of variation in returns or prices over time, often measured by standard deviation or average true range. It scales risk estimates, position sizes, and stop distances, and it clusters, so calm and turbulent periods tend to persist.

A smoothed average of the largest of several session ranges, capturing typical bar-to-bar movement including gaps. Traders use it to set stops and targets at a volatility-scaled distance rather than an arbitrary fixed number.

An estimate of the loss a portfolio could exceed with a stated probability over a stated horizon. It compresses risk into one number but says nothing about the size of losses beyond the threshold, so it is often paired with stress testing.

Evaluating a portfolio under severe but plausible scenarios, such as a sharp rate move or a liquidity freeze, rather than relying on normal-period statistics. It exposes concentration and hidden correlation that everyday risk measures can miss.

A measure from -1 to +1 of how closely two return series move together. Diversification depends on it, and correlations often rise during crises, so historical averages can understate the risk of holdings falling at the same time.

Spreading capital across holdings whose risks are not perfectly aligned, so that no single position or factor dominates results. It reduces specific risk efficiently but cannot remove broad market risk, which remains in any long-biased portfolio.

Risk that affects the whole market or economy, such as recessions, rate shifts, or geopolitical shocks, and cannot be diversified away. It is the reason equity portfolios carry a risk premium and why hedging requires offsetting exposures.

A measure of how much a security or strategy tends to move relative to a benchmark. A beta above one implies amplified market sensitivity; near zero suggests returns driven by something other than the benchmark.

The probability that a sequence of losses depletes capital to a level from which recovery is impractical. It rises sharply with position size and with the gap between win rate and payoff ratio, making it a core argument for conservative sizing.

The average result per trade implied by a system's win rate and average win versus average loss. A positive expectancy is necessary but not sufficient, since it must survive realistic costs, slippage, and enough trades to matter.

The difference between the price a trade was expected to get and the price actually filled, caused by spread, size, and speed of market movement. It erodes backtested edge, especially in fast or thin markets, and must be modeled honestly.

The danger that a position cannot be exited quickly near its quoted price without moving the market. It widens in stress, when bids thin out, so seemingly liquid holdings can become costly to sell exactly when selling is most needed.