Technical Analysis: Trend Identification and Moving Averages, Exams of Business Economics

Download Technical Analysis: Trend Identification and Moving Averages and more Exams Business Economics in PDF only on Docsity! CMT Level 1| 214 Questions| With Complete Solutions 2023/2024 Latest Update 1. Define what is meant by a trend in technical analysis - ✔✔️-️ Uptrend is when prices reach higher peaks and higher troughs (VV for Downtrend) - Flat trend (sideways trend) is when a price trades in a range without significant underlying upward or downward movement 2. Explain why determining the trend is important to analysts - ✔✔️o️ From a technical analysts perspective "a trend is a directional movement of prices that remains in effect long enough to be identified and still be profitable." • Identify Primary, Secondary, short-term, and intraday trends - ✔✔️o️ Primary Trend - measured in months or years  Secondary Trend - Measured in weeks or months • Describe the history of Dow Theory - ✔✔️o️ Charles Dow started it. Made an index to measure overall price movement in U.S. stocks. He died. Journalist coined "Dow Theory." Friend took over and attempted to beat Market. People analyzed it and determined he failed. Later on, more people analyzed it and determined he beat it according to risk adjustment and timing market. • Discuss the basic principles of Dow Theory - ✔✔️o️ 1. Ideal Market picture consists of an uptrend, top, downtrend, and bottom, interspersed with retracements and consolidations.  2. Economic rationale should be used to explain stock market action  3. Prices trend • Identify the three basic types of trend identified in Dow Theory as defined by time: primary, secondary and minor (Refer to pg 20 for picture) - ✔✔️o️ Primary - Can be several years, longest of the three, represents the overall broad long-term movement of security prices.  Secondary - intermediate trend that runs counter to the primary. Generally last a few weeks to a few months. Price movement generally retraces from 33% to 66% of the primary price change.  Minor - Check pg. 21 for clarity - A line is two to three weeks of horizontal price movement in an average within a 5% range. and confirmation overrode any consideration of volume. • List advantages of reviewing price information in chart format - ✔✔️o️ 1. Provide price history  2. Provide good sense of Market's volatility  3. Useful for the fundamental analyst - Analyst can find big price move on chart, determine what fundamentals were changed at this time, and then construct a price behavioral model  4. Serve as a timing tool for those who base their decisions on other info  5. Used as a money management tool by defining meaningful stop points  6. Reflects market behavior that is subject to certain repetitive patterns • Review the data points required to construct the line, bar, and candlestick charts - ✔✔️o️ Line - Price and Time  Bar - High, low, and closing price for each time interval (some contain the opening price, as well)  Candlestick - High, Low, Closing, and Opening, • Describe how to construct line, bar, and candlestick charts - ✔✔️o️ Line - Price data is on the vertical axis, time data is on the horizontal  Bar - Each bar represents a certain time period (for example one bar may represent one day of data). Price is on the vertical and time is on the horizontal • Explain why trend identification is important to achieve profits - ✔✔️o️ (Besides the obvious of without identifying a trend you won't be able to ride the trend and make money) 3. Determine, with min. risk of error, when a trend has begun at its earliest time and price 4. Select and enter a position in the trend that is appropriate to the existing trend 5. Close those positions when the trend is ending • Recognize an uptrend, a downtrend, and a trading range - ✔✔️o️ Uptrend - peaks tend to be higher than earlier peaks, and the troughs tend to be higher than the previous troughs  Downtrend - VV  Trading range - Peaks and troughs are scattered, the trend is undeterminable, and if the peaks and troughs occur at the same relative levels • Describe the concept of support and resistance - ✔✔️o️ Support and resistance points are a single peak or trough; zones are multiple points  Believed to occur due to human reactions • Identify trends using most common methods - ✔✔️o️ Using a regression line  Using a trend line 6. Need two support reversal points or VV  Scale and Trend Lines 7. Shorter time frame uses algorithmic; longer uses logarithmic  Accelerating Trend Lines (pg. 66) more significant it is when the line is finally broken  The steeper the trend line, the sooner it will be broken  Sometimes a trend line is broken slightly by intraday price action  Trend lines should be never be considered exact because price can be influenced by exogenous factors 12. Describe and identify breakouts - ✔✔️o️ When a price "breakouts" through support or resistance  Usually (not always) signals that a significant change in supply and demand has occurred and that a new price trend is beginning  Requires penetration of a trend line, support, or resistance & confirmation that the breakout is real • List methods for confirming and filtering breakouts - ✔✔️C️lose Filter 13. Point or Percent Filter 14. Time 15. Volume 16. Volatility 17. Pivot Point Technique • List methods for confirming and filtering breakouts: Close Filter - ✔✔️W️aits for the closing price to see if it breaks out of the breakout zone or recedes back in (receding back in is a false breakout probs and VV) • List methods for confirming and filtering breakouts: Point or Percent Filter - ✔✔️E️stablishing a breakout zone a certain number of 21. St.Dev 22. Average True Range • Average of each bar high and low over some past period • Explain the purpose of entry and exit stops - ✔✔️o️ Exit stops - To protect capital from further losses or to protect profits from deteriorating back into a loss  Entry stops - Used to sell short once a specific level has been breached • Describe methods for setting entry and exit stops - ✔✔️P️rotective stops 23. Trailing stops 24. Trailing Stops using Parabolic SAR (Stop-and-Reverse) 25. Trailing Stops using Percentage of Gain 26. Time Stops 27. Money Stops 28. Stops when Gaps occur 29. Describe methods for setting entry and exit stops: Protective stops - ✔✔️I️nvestor analyses previous support trend lines, etc.. investor determines a point in which to place the protective stop 30. Protects Capital 31. Necessary to determine what capital risk the trade or investor is accepting in the trade 32. Describe methods for setting entry and exit stops: Trailing stops - ✔✔️E️ssentially moving a stop with gains 33. Describe methods for setting entry and exit stops:Trailing Stops using Parabolic SAR (Stop-and-Reverse) - ✔✔️U️ses an accelerations factor that • Define retracements, pullbacks, and throwbacks - ✔✔️o️ Retracements 39. Smaller countertrends to a primary trend  Throwback 40. Retracing down on an upward trend  Pullback 41. Retracing up on a downward trend • Describe the basics principle of moving averages - ✔✔️o️ Used to smooth out daily fluctuations and better focus on the trend that fits the investor's time horizon • Explain how to calculate simple, linearly weighted and exponentially smoothed moving averages: SMA - ✔✔️F️or a 10 day - take the first ten days, sum, and divide by 10. As time continues, only take the latest 10 days 42. Explain how to calculate simple, linearly weighted and exponentially smoothed moving averages: EMA - ✔✔️L️ooks to solve the problem of dropping off the previous days 43. Take the SMA and then make the most recent day have double the weight. Then plug into Weight = 2 / (# of days in MA +1 ) (pg. 106) • Identify trends and signals with moving averages - ✔✔️o️ If a stock or market average is above its 200 MA, it is considered an upward trend  MAs can act as support and resistance  Can be used to determined price extremes 44. -Since the MA is a mean, any reversion to the mean will tend to approach the MA. Therefore, if a 49. These indicators can provide signals; i.e. if the +DI crosses over the -DI, this can indicate an uptrend • List common envelope, channel, and band indicators: - ✔✔️-️ Percentage Envelope - Bollinger Bands - Keltner Bands - STARC Band 50. -Channel 51. List common envelope, channel, and band indicators: Percentage Envelope - ✔✔️S️upposed to reduce the numerous amounts of unprofitable signals from crossing a MA when the trend is sideways 52. Calculated by taking a percentage of the MA and plotting it above and below the MAs 53. List common envelope, channel, and band indicators: Bollinger Band - ✔✔️-️ Account for Volatility 54. These Bands are calculated by using a SMA and then using St.Dev. above and below the SMA 55. Most often seen as a 20 day MA 56. List common envelope, channel, and band indicators: Keltner Band - ✔✔️F️irst calculate the Typical Price - (Close + High + low) / 3; next calculate a 10 day SMA of the typical price; Now to calculate the band size - create a ten day SMA of High - Low. The upper band is plotted as the 10 day SMA of the typical price + the 10 day SMA of bar range. The lower band is plotted as the 10 day SMA to the typical price - the 10 day SMA of bar range (pg. 119). 57. Sometimes referred to as ATR band 58. I.E. Take SMA of Typical price + SMA of highs - lows to get Top band; for action (I.E. if it's an uptrend, the entry will by going upward)  Fractal  Pullbacks and Throwbacks  Failures 64. "When a breakout occurs and the price fails to move at least 5% in the direction of the breakout" (pg. 128) • Discuss opposing viewpoints over whether patterns exist - ✔✔️o️ Those who don't believe they exist 65. Price action is completely random or, at least, indecipherable  Even if order in price markets do exist, it is possible that it cannot be recognized with present math models because it is so complex (pg. 128) • Describe the influence of computer technology on price- pattern study - ✔✔️o️ Able to see minute-to-minute transactions, in which one can form patterns  Less of a "feel" than personally drawing the charts  Less people on the trading floor  Lower commission costs and less slippage • Identify classic chart patterns such as triangles, and double and triple tops and bottoms - ✔✔️o️ Double top and bottom (pg. 127)  Rectangle ("Trading Range" or "Box") (pg. 135)  Triple Top and Bottom (pg. 138)  Standard Triangles  Wedge - (pg. 146)  Broadening Pattern - (pg. 144) 72. Identify classic chart patterns such as triangles, and double and triple tops and bottoms: Triple Top and Bottom (pg. 138) - ✔✔️R️ectangle formation but number of touches to the support or resistance line being three 73. Identify classic chart patterns such as triangles, and double and triple tops and bottoms: Standard Triangles - ✔✔️S️imilar to rectangle but the lines are not parallel; they will cross each other at some point 74. Apex - point at which the lines cross 75. Base - Distance between first high reversal point and first low reversal point 76. Identify classic chart patterns such as triangles, and double and triple tops and bottoms: Wedge - (pg. 146) - ✔✔️U️pper and lower bound are slanting in the same direction and converging 77. Identify classic chart patterns such as triangles, and double and triple tops and bottoms: Broadening Pattern (pg. 144) - ✔✔️W️hen lines are diverging regardless of slope 78. Identify classic chart patterns such as triangles, and double and triple tops and bottoms: Descending Triangle - ✔✔️P️g. 139 79. Identify classic chart patterns such as triangles, and double and triple tops and bottoms: Symmetrical Triangle (Coil or Isosceles Triangle) - ✔✔️W️hen the upper bound is declining and lower bound is rising Opening Gaps, Runaway Gaps, Exhaustion Gaps - ✔✔️o️ Some are meaningful, in which they can demonstrate the beginning of a new trend 83. Describe the types of gaps that occur on price charts and their significance: Breakaway Gaps - ✔✔️a️re most profitable - these occur at the beginning of a trend 84. These breakthrough a pattern; they signal that a trend has been completed; the space between the gaps seems to be proportional to its strength 85. Landry mentions to use a pivot as a signal the breakaway is solid; pivot is the lowest low after the breakaway surrounded by bars with higher lows. 86. Describe the types of gaps that occur on price charts and their significance: Opening Gaps - ✔✔️O️pening price is outside the range of the previous day's trade 87. Sometimes useful in determining a short term trend reversal 88. Describe the types of gaps that occur on price charts and their significance: Runaway Gaps - ✔✔️(️AKA Measuring Gaps) - Gaps that occur along the trend 89. Often in the middle of the trend, and can occur in strong trends, which continue to run without retracement or interruptions 90. Describe the types of gaps that occur on price charts and their significance: Exhaustion Gaps - ✔✔️-️ Occur at the end of a move but have the same characteristics of a runaway gap. 91. These are normally represented by latecomers; they normally are at the end of a trend, in which anxious buyers or people who want to jump within a trend - ✔✔️D️oji - (pg. 189) 98. Open and Close are identical  Windows 99. Same as Gap 100. Harami - (pg. 190) 101. Two day pattern consisting of a large body of either color followed by a small body of either color that is within the first body 102. Hammer and Hanging Man - (pg. 191) 103. Where the body is at the top and below wick is much longer than body • Identify common candlestick patterns and their significance within a trend (Cont.) - ✔✔️S️hooting Star and Inverted Hammer 104. Opposite of Hammer and Hanging Man 105. Engulfing 106. Where second body engulfs the first 107. Dark Cloud Cover and Piercing Line - (Pg. 193) 108. Two body pattern at a top 109. First body is large and white; second is large and dark 110. The second open should be above the upper shadow of the first bar, an opening gap upward, and the close well within the first bar's white body • Define terms including overbought, oversold, failure swings, divergence, and reversal - ✔✔️O️verbought - Upper Zone in a range that is close to the extreme bound (pg. 202) 111. Oversold - Lower zone in a range that is close to the extreme bound 112. Failure Swings - Specific type of breakout from an overbought or oversold zone 113. Divergence - Not acting in concert with each other 114. Reversal data - ✔✔️o️ When prices are rising: 122. Volume increasing is impressive 123. Volume decreasing is questionable  When prices are declining: 124. Volume increasing is impressive 125. Volume decreasing is questionable  When a price advance halts with high volume, it is potentially a top  When a price decline halts with high volume, it is potentially a bottom • List the major indexes and oscillators designed to use volume as confirmation: Indexes - ✔✔️O️n-Balance- Volume • Main volume index • Pg. 211 126. Price and Volume Trend • Total price change up or down * total volume for the day 127. Williams Variable Accumulation Distribution • Takes difference between close and open and makes it a percentage. Then multiply it by the daily volume to estimate the amount of volume traded between the open and close 128. Chaikin Accumulation Distribution 129. Williams Accumulation Distribution 130. List the major indexes and oscillators designed to use volume as confirmation: Oscillators - ✔✔️V️olume Oscillator • Ratio between two MA of volume 131. Chaikin Money Flow 132. Twiggs Money Flow 133. Money Flow Index (Oscillator) 134. Chaikin Oscillator 135. Elder Force Index 137. Signal Line - Exponential MA of the MACD; a nine-period EMA is most common. 138. Useful in trending markets because it is unbounded. Example - When the MACD is above 0 a buy signal occurs when the MACD crosses from below to above the signal line. Downward crossings aren't reliable while the trend is upward. (pg. 228 for in depth on MACD)  Identify characteristics and applications of indexes and oscillators such as MACD, RSI, and stochastics: Rate of Change - ✔✔️M️easure of the amount a security's price has changed over a given number of past periods 139. Identify characteristics and applications of indexes and oscillators such as MACD, RSI, and stochastics: RSI - ✔✔️M️easures the strength of an issue against its history of price change by comparing up days to down days. 140. 14 day is normally used 141. When RSI is above 50 it generally is an uptrend; below 50 is downtrend 142. Wilder used above 70 to signal overbought and below 30 to signal under bought; this number changes based on underlying trends 143. Identify characteristics and applications of indexes and oscillators such as MACD, RSI, and stochastics: Stochastic Oscillator - ✔✔️L️ooks at most recent close price as a percentage of the price range (high to low) over a specified past window of time 144. Used for investing when the closing price is the most important data point • Identify candle confirmations of support and resistance - ✔✔️o️ Pg 250 for clarity  Resistance and support may be a prior high or low, or a western trend such as trend line or MA • Define "box Size" and "reversal" - ✔✔️o️ Box size 148. Makes the chart more or less sensitive to changes in price direction; the smaller the more changes will be seen; for longer term trends use a larger box 149. Size refers to what increment you use on the y axis; (I.E. if you're charting Microsoft and want to make each both a change of 50 cents) 150. Also often related to current volatility of the market  Reversal 151. Price must reverse direction by an amount that fills 3 boxes from the most extreme box of the last column before a new column can begin (according to traditional PandF charting) • Describe how point and figure charts are constructed - ✔✔️o️ Determine what security; then determine box size; then start charting (Pg. 255 shows step by step of PandF Charting) • Explain the importance of box size to the sensitivity of point and figure charts - ✔✔️o️ The smaller the box the more sensitive to price changes (i.e. a smaller box means a smaller increment, in which securities break these increments more often) • Define motive waves and corrective waves - ✔✔️M️otive waves 152. The basic pattern consists of five individual waves that are linked together and achieve progress as market prices move up or down - this is called the motive wave because it propels the market in the direction of the main wave 153. These run in a sequence of 5 and then are interrupted by a correction wave 154. (On the large trend - Motive waves are 1, 3, and 5; Corrective Waves are 2 and 4 - see pg. 282 Figure 12.2 for clarification) 155. Corrective Waves 156. These interrupt the main trend and travel in the opposite direction • Identify types of motive waves such as impulse, extension and diagonal: Impulse - ✔✔️S️trongest form of wave follows these three rules • Wave 2 never moves beyond the start of wave 1 • Wave 3 is never the shortest motive subwave • Wave 4 never enters the price territory of wave 1 • Also a guideline: Wave 4 should not enter the price territory of wave 2 • (See Figure 12.4 pg. 283)* 157. Identify types of motive waves such as impulse, extension and diagonal: Extension - ✔✔️E️longated impulse wave whose motive subwaves at next lower degree are as large as or larger than the nonextended motive wave of the same impulse wave 163. A and B are always corrective and C is motive 164. Pg. 289 165. Identify types of corrective waves such as zigzag, flat and triangle: Triangle - ✔✔️S️ideways corrective wave with subwaves labeled ABCDE (pg. 290 fig. 12.15) • Label waves using standard Elliot Wave notation - ✔✔️o️ Ouch.. Study over the figures in this chapter • Describe Fibonacci relationships as applied to Elliot Wave analysis - ✔✔️o️ These are used to estimate the length of certain waves with respect to price, as well as, estimate the length of waves with respect to time  Retracements, multiples, and dividers are the key types of Fib. Retracements • Match the waves as labeled on a chart to the description in the text - ✔✔️A️round pg 302 • List the waves considered the most advantageous to trade - ✔✔️o️ Waves 3, 5, A, and C (pg. 303) • Describe trade signals associated with various wave patterns - ✔✔️1️. Impulse Waves 166. Enter on a break below the extreme of wave IV of 5 (fig. 13.8 pg 306) 167. 2. Ending Diagonal 168. Wait for the break of the extreme of wave 4 (fig 13.9) 169. Zigzag • Identify signals of change in market breadth using the advance-decline line - ✔✔️o️ Cumulative sum of advance - decline  When stock market averages rise and the breath line rise; it means the majority of stocks in the market are rising; when a stock market averages rise, but the breadth line falls - it means that only a few stocks are fueling the rise. The others are either declining or not participating. This is a divergence. • Describe other measures of internal stock-market strength such as McClellan's calculations: McClellan Oscillator - ✔✔️D️ifference between two exponential MAs of advances minus declines 177. Rationale is that in intermediate- term overbought and oversold periods, shorter MAs tend to rise faster than longer-term MAs. 178. Trend lines can be drawn between successive lows and highs that, when penetrated, give excellent signals 179. Describe other measures of internal stock-market strength such as McClellan's calculations: McClellan Ratio-Adjusted Oscillator - ✔✔️S️ame as the above except it is adjusted to account for the number of issues traded 180. Describe other measures of internal stock-market strength such as McClellan's calculations: McClellan Summation Index - ✔✔️M️easure of the area under the curve of the Mc Oscillator 186. Breadth Thrust - ✔✔️o️ A Thrust is a Deviation from the norm that is sufficiently large enough to be noticeable and that deviation signals either the end of an old trend or beginning of a new. 187. The Breadth Thrust invented my Martin Zweig is just a 10 day SMA of advances divided by the sum of advances and declines 188. Explain the use of volume in measuring stock-market strength - ✔✔️o️ Up volume is the volume traded in all advancing stocks, and down volume is the total volume traded in declining stocks  Considering the volume rather than number of shares traded (which is what Breadth does) places more emphasis on stocks that are actively trading • Identify measures of stock- market strength from new high and new low data - ✔✔️o️ New Highs and New Lows are based on the previous 52wks  New Highs versus New Lows 189. Most useful index is to buy when the number of new highs exceeds the number of new lows on a daily basis and VV  High Low Logic Index 190. Defined as the lesser of two ratios - # of weekly new highs to total issues or - The # of weekly new lows to total issues 191. Low index level indicate a strongly trending market 192. High Index levels implies mixed markets 197. oPhase 198. The position of a cycle relative to its most recent trough • List and define Hurst's seven Principles of Commonality - ✔✔️1️. Cyclicality 199. All financial markets are composed of cycles 200. 2. Harmonicity 201. A cycle's harmonics are related by multiples of two and threes 202. 3. Summation 203. Price is a composite wave of the sum of individual cycles 204. Synchronicity 205. Cycle lows tend to bottom in tandem 206. Proportionality 207. A cycle's period is proportional to its amplitude 208. Nominality 209. Some wave periods are more common than others 210. Variation 211. Financial markets will not obey theoretical perfection • Define a composite wave - ✔✔️o️ A summation of individual cycles as well as the trend • Identify left and right translation - ✔✔️R️ight translation 212. Implies price bottoming later than expectation 213. Left Translation