CMT Level 1 Part 2 Flash Card

What should be checked regarding time during a breakout?

• At least 5 bars or candlesticks have passed

• At least 2 bars or candlesticks have passed

• At least 10 bars or candlesticks have passed

• At least 1 bar or candlestick has passed

Answer explanation

In breakout trading, it's important to wait for at least 2 bars or candlesticks to pass to confirm the breakout's validity. This helps avoid false signals and ensures that the price movement is more reliable.

Why should trend lines not be regarded as precise?

• They are always accurate.

• They are influenced by external factors.

• They are never influenced by external factors.

• They are always stable.

Answer explanation

Trend lines are influenced by external factors such as market conditions, economic changes, and data variability, making them not entirely precise. This highlights the importance of considering these influences when interpreting trend lines.

What is channel trading in the context of range trading?

• Trading based on moving averages

• Trading within a horizontal upper and lower boundary

• Trading using candlestick patterns

• Trading based on Fibonacci retracements

Answer explanation

Channel trading refers to trading within a defined range, characterized by a horizontal upper and lower boundary. This strategy focuses on buying at the lower boundary and selling at the upper boundary, making it the correct choice.

How is the first resistance (R1) level calculated in pivot point techniques?

• (2*P) - previous period high

• (2*P) - previous period low

• (P + previous period high)

• (P + previous period low)

Answer explanation

The first resistance level (R1) is calculated using the formula (2*P) - previous period low. This reflects the pivot point (P) and adjusts for the previous low, providing a key resistance level for traders.

How many fan lines generally form before a reversal in direction is anticipated in decelerating trend lines?

• One

• Two

• Three

• Four

Answer explanation

In decelerating trend lines, three fan lines typically form before a reversal is anticipated. This pattern indicates a weakening trend, making 'Three' the correct answer.

What is a pullback?

• A) A price increase after a break

• B) A price retracement after a break downward

• C) A price stabilization after a break

• D) A price reversal after a break

Answer explanation

A pullback refers to a price retracement after a downward break, indicating a temporary reversal before the trend continues. Thus, the correct choice is B, as it accurately describes this market behavior.

What is the purpose of a protective stop in trading?

• To guarantee profits

• To establish maximum risk

• To ensure a trade is always successful

• To increase trading volume

Answer explanation

A protective stop is used to establish maximum risk in trading. It helps limit potential losses by automatically closing a position when it reaches a predetermined price, ensuring traders do not exceed their risk tolerance.

What is the formula for calculating a pivot point?

• (High + Low + Close) / 3

• (High + Low + Open) / 3

• (High + Close + Open) / 3

• (Low + Close + Open) / 3

Answer explanation

The correct formula for calculating a pivot point is (High + Low + Close) / 3. This formula averages the highest, lowest, and closing prices to determine a central point for price movement.

What is the purpose of a channel in price movement analysis?

• To identify significant highs and lows

• To establish a line through resistance reversal points

• To highlight subtle trends and patterns

• To connect less significant price points

Answer explanation

A channel in price movement analysis serves to establish a line through resistance reversal points, helping traders identify potential areas of price reversal and trend continuation.

What does beta measure in relation to a market benchmark?

• The liquidity of a security

• The volatility of a security

• The profitability of a security

• The growth rate of a security

Answer explanation

Beta measures the volatility of a security in relation to a market benchmark. A higher beta indicates greater volatility compared to the market, while a lower beta indicates less volatility.