NCFM Technical Analysis flashcards

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 market movement lasting months to years. It is the dominant direction that secondary reactions and minor fluctuations move against, and it persists until a clear reversal signal appears.

Dow Theory confirmation

The principle that two market averages, historically Industrials and Transports, must move in the same direction to validate a trend signal. Divergence between them weakens the signal.

Accumulation phase

The first trend phase where informed buyers accumulate positions near lows despite public indifference or pessimism. Prices stabilize before the public participation phase begins.

Open interest

The total number of outstanding futures or options contracts not yet closed. It rises when new positions are created and falls when positions are closed out.

Volume confirmation

The rule that a price move is more reliable when volume expands in its direction. Rising price on falling volume suggests weakening participation and raises reversal risk.

Candlestick chart

A chart showing open, high, low, and close for each period as a body with upper and lower shadows. Body color indicates whether the close was above or below the open.

Head and shoulders

A reversal pattern with a left shoulder, higher head, and right shoulder above a neckline. A close below the neckline confirms it, with a target equal to head-to-neckline height.

Double top

A bearish reversal with two peaks at similar prices separated by a trough. Confirmation is a close below the trough, and the target equals the peak-to-trough distance projected lower.

Symmetrical triangle

A continuation pattern with converging trend lines and declining volume. The breakout direction is undetermined until price closes beyond a boundary, ideally with volume expansion.

Flag and pennant

Short consolidations after a sharp price move. The measured move projects the length of the prior pole from the breakout point, giving an estimated target.

Exhaustion gap

A gap that appears near the end of an extended trend and signals fading momentum. It is often filled quickly as the trend reverses, unlike breakaway gaps.

Higher highs and higher lows

The structural definition of an uptrend. Each successive rally peak exceeds the prior peak and each pullback low stays above the prior low until the sequence breaks.

Trend line validation

A trend line requires at least two touch points to be drawn, and three or more touches increase its significance. A close beyond the line with volume confirms a break.

Channel line

A line drawn parallel to the trend line through the opposite swing points, forming a channel. Price typically oscillates between the two boundaries during a trend.

Role reversal of trend line

After a trend line breaks, it often acts as support or resistance in the opposite role. Retests of the broken line are common entry or exit points.

Support zone

A price area where buying interest is strong enough to halt a decline. It is a zone rather than an exact price, and its strength grows with repeated touches.

Resistance zone

A price area where selling interest halts a rally. Former resistance becomes support after a confirmed breakout, and vice versa when support fails.

Fibonacci retracement

Levels at 23.6%, 38.2%, 50%, 61.8%, and 78.6% of a swing, projected between a high and low. They often coincide with support or resistance during pullbacks.

Breakout retest

After price closes beyond support or resistance, it often returns to test the broken level. The retest offers a lower-risk entry with a stop just beyond the level.

Simple moving average

The arithmetic mean of closing prices over N periods, with each price weighted equally. It smooths noise and defines trend direction when price is above or below it.

Exponential moving average

A moving average weighting recent prices more heavily using k = 2/(N+1). It reacts faster to price changes than a simple moving average of the same length.

Golden cross

A bullish signal when a shorter moving average crosses above a longer one, such as the 50-period above the 200-period. It lags price and whipsaws in ranges.

Bollinger Bands

Bands plotted at an N-period moving average plus and minus k standard deviations, typically 20 and 2. Narrow bands signal low volatility before a sharp move.

Average True Range

The average of true ranges over N periods, where true range is the greatest of high minus low, high minus prior close, or low minus prior close. It measures volatility.

RSI formula

RSI = 100 − [100/(1 + RS)], where RS is average gain divided by average loss over N periods, usually 14. Readings above 70 are overbought and below 30 oversold.

RSI divergence

A signal where price makes a new high while RSI makes a lower high, or price makes a new low while RSI makes a higher low. It warns of weakening momentum.

Stochastic oscillator

%K = 100 × (Close − Lowest low)/(Highest high − Lowest low) over N periods, with %D as its moving average. Above 80 is overbought and below 20 oversold.

MACD

The difference between the 12-period and 26-period exponential moving averages, with a 9-period signal line. The histogram is MACD minus the signal line.

Oscillator in strong trend

Bounded oscillators can remain overbought or oversold for extended periods during strong trends. They work best in range-bound markets and need trend filters.

Position sizing formula

Position size = (account equity × risk %) / (entry price − stop price). It fixes the dollar amount risked per trade regardless of the instrument's price.

Risk/reward ratio

Potential profit divided by potential loss on a trade, measured from entry to target versus entry to stop. A minimum of 2:1 is a common threshold.

Expectancy

Expectancy = (win rate × average win) − (loss rate × average loss). A positive value indicates the system should be profitable over many trades.