CMT flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Dow Theory confirmation
- A primary trend signal requires both the Dow Jones Industrial Average and Dow Jones Transportation Average to confirm each other's direction.
- Higher highs and higher lows
- An uptrend is defined by a sequence of higher swing highs and higher swing lows; a downtrend shows lower highs and lower lows.
- Moving average crossover
- A shorter moving average crossing above a longer one is bullish; crossing below is bearish, though whipsaws occur in sideways markets.
- RSI overbought threshold
- RSI(14) above 70 is commonly called overbought, while below 30 is oversold; strong trends can keep RSI extended for long periods.
- MACD histogram
- The MACD histogram equals the MACD line minus its signal line; widening bars indicate strengthening momentum and shrinking bars indicate weakening momentum.
- Fibonacci 61.8% retracement
- A golden-ratio retracement level often watched as support or resistance after a swing; it equals 61.8% of the prior move.
- Volume breakout confirmation
- A price breakout accompanied by above-average volume is considered more reliable than one on low volume, which may fail.
- Head-and-shoulders target
- Measure the height from head to neckline and project that distance from the neckline breakout point to estimate a price target.
- Prospect theory
- Behavioral model where people evaluate gains and losses relative to a reference point and are loss averse, with diminishing sensitivity away from that point.
- Loss aversion
- The tendency for losses to feel more painful than equivalent gains feel pleasurable; commonly modeled with a loss-aversion coefficient near two.
- Disposition effect
- The tendency to sell winning positions too early and hold losing positions too long, often to avoid regret from realizing a loss.
- Anchoring bias
- Over-reliance on an initial reference value, such as a purchase price or prior forecast, when making subsequent estimates or decisions.
- Confirmation bias
- Seeking and overweighting information that supports an existing belief while ignoring or discounting evidence that contradicts it.
- Overconfidence bias
- Overestimating the accuracy of one's forecasts or skill; it can increase trading frequency, concentration, and underestimation of risk.
- Herding behavior
- Following the actions of a larger group rather than independent analysis; it can amplify price momentum and contribute to bubbles.
- Mental accounting
- Treating money as belonging to separate mental buckets by source or purpose, which violates fungibility and can distort risk choices.
- Position sizing formula
- Position size equals account equity times risk per trade percentage, divided by the difference between entry price and stop price.
- Value at Risk
- A statistical estimate of the loss that will not be exceeded with a stated confidence over a specified horizon, excluding losses beyond that threshold.
- Sharpe ratio
- Excess portfolio return over the risk-free rate divided by the standard deviation of returns; it measures return per unit of total risk.
- Sortino ratio
- Excess return divided by downside deviation; unlike the Sharpe ratio, it penalizes only volatility that falls below a target return.
- Maximum drawdown
- The largest peak-to-trough percentage decline in portfolio value before a new peak is reached; it measures worst-case historical loss.
- Risk of ruin
- The probability that a trading account falls to a level from which it cannot recover; it rises with larger per-trade risk and lower edge.
- Diversification correlation
- Combining assets with correlation less than positive one can reduce portfolio volatility when both assets have positive weights.
- Fractional Kelly
- Betting a fraction such as half of the full Kelly-optimal size to reduce drawdowns and sensitivity to estimation error in edge.
- Look-ahead bias
- Using data in a backtest that would not have been available at the decision time, which overstates the strategy's historical performance.
- Survivorship bias
- Backtesting only on securities that still exist today, excluding delisted or failed firms, which overstates returns and understates risk.
- Data snooping bias
- Repeatedly testing many rules on the same data until one appears significant, inflating the chance of a false discovery.
- Walk-forward testing
- Optimizing a strategy on a rolling in-sample window and testing on the next out-of-sample window to approximate live performance.
- Transaction cost modeling
- Including commissions, slippage, and market impact in backtests; high-turnover strategies are especially sensitive to these costs.
- Momentum strategy
- Buying recent winners and selling recent losers; it can earn persistent returns but may suffer sharp reversals during market stress.
- Mean-reversion strategy
- Assuming prices return toward an average or equilibrium level; it can fail during sustained trends or structural breaks.
- Monte Carlo simulation
- Resampling returns or trades to generate many possible outcome paths, estimating a distribution of results rather than one historical path.