CMT Level 2

Hook Reversal Day

- A hook reversal is a sudden loss after a series of upward bars, signaled by a narrow-range bar opening above the previous high and closing below the previous close. - Traders can also be "hooked" into believing a trend has reversed when prices open above the previous high but close down on a narrower bar. The action signal is when the price breaks back above the close of the first. - Both hook formations can occur in reverse.

Divergence Index

- A method similar to MACD but one that uses an interesting combination of generalized techniques is the divergence index, the volatility-adjusted difference between two moving averages - Bandt = stdev(DIt, slow period) Upper bandt = factor × Bandt Lower bandt = −factor × Bandt

Activity-Based: Tick Bars

- A tick chart uses a specific number of trades to create a new bar

STARC Band

- ATR over five periods added to and subtracted from a five-period SMA of prices - a band about prices that widens and shrinks with changes in the ATR or the volatility of the price

Net Momentum Oscillator

- Another variation on the RSI is the use of the difference between the sum of the up days and the sum of the down days, called a net momentum oscillator - CMO = 100 × (Su − Sd)/(Su + Sd)

VWAP

- Average price a security has traded at throughout the day, based on volume and price. - VWAP helps to move in and out of the market without much impact. - Also you can determine if the price you paid for a stock is overpaid or not - if price is > than VWAP, one may have overpaid and vice versa. I.E. may be best to buy below VWAP and sell above it.

Fractal

- Bar chart patterns are fractal. This means they can occur in any bar chart, regardless of the bar period. - A triangle formation, for example, can occur in hourly bars or weekly bars. The pattern is always the same type and will always have the same general characteristics.

Describe "The Greeks" (376)

- Delta: measures how much an option price changes for a one-point move in the underlying. Its value ranges between 0 and 1 for calls and between -1 and 0 for puts. - Gamma: measures the rate of change in delta. It is essentially the second derivative of price. Values are highest for at-the-money options and smallest for those far in- or out-of-the-money. - Vega: measures the risk from changes in implied volatility. Higher volatility makes options more expensive since there is a greater chance that the underlying security price will move above the strike price for a call, or below the strike price for a put. - Theta: Measures the rate of time value decay and is always a negative number - Rho: Measures the impact of changes in interest rates on an option's price. Since interest rates don't change frequently, this is less used.

Volume Indicator: Force Index (206)

- Devised by Alex Elder, the Force Index is the change in price multiplied by the daily volume, - Force Indext = (Closet - Closet-1) × Volumet - Purpose is to measure the strength of an asset's price change. If the indicator is rising, momentum is growing. - positive or negative if the price change was higher or lower - can use a 2-day ema for shorter term and 13 day ema longer term to smooth. - The 2-day smoothed Force Index buys when the value is low and sells short when high; the 13-day value smoothed Force Index is treated as a trend, Buy signal when crossing above 0 and vv

One Bar & 2 Bars Reversals

- One-bar reversal: trading bar high higher than previous bar high, close lower than previous bar close. - Two-bar reversal (pipe formation): occurs at end of trend, extends reversal over two bars. - More reliable when combined with other evidence and when close exceeds previous lows or highs. - Failure rates for two-bar reversal are low. - Good spot for initial protective stop is when bars hold their extreme within a small percentage during the test.

Outside Bar

- Outside bar occurs when the high is higher than the high of the previous bar and the low is lower than the low of the previous bar. - It is a wide-range bar that covers all the previous bar's price action. - The outside bar is longer than the previous bar and contains the entire price range of the previous bar. - An outside bar is considered a bar of increased volatility. Depending on the close, an outside bar can be the beginning of a trend.

Patterns with Rounded Edges

- Patterns with curved lines are more difficult to describe. Rounding tops and bottoms are formed by slow and gradual price action. - Volume decreases in bottoms and increases in tops. Rounding is a conceptual process with many short-term trends. - The cup-and-handle formation is a variation of the rounding bottom. - Rounded bottoms are common and tend to be longer-term patterns. - Rounded tops are less common and have a higher failure rate. - Rounded patterns are difficult to recognize and require weekly or monthly charts to identify. - They are difficult to trade due to slow development and undefined breakout levels.

Four Phases of Volume Analysis

- Phase 1: Strong Demand Price Trend Up—Volume Rising; Uptrend Confirmed; Implication: Bullish - Phase 2—Weak Demand Price Trend Up—Volume Falling; Uptrend Contradicted Implication: Bearish - Phase 3—Strong Supply Price Trend Down—Volume Rising; Downtrend Confirmed Implication: Bearish - Phase 4—Weak Supply Price Trend Down—Volume Falling; Downtrend Contradicted Implication: Bullish

Put-Call Parity

- Put and call prices are linked through put-call parity. - Arbitrage opportunities arise when this relationship gets out of line, and trading firms quickly buy and sell securities to take advantage of mispricing, pushing prices back into parity. - Put and call prices should remain within a certain price range, or arbitragers will enter the market, resulting in prices coming back into parity. - Increased demand for a call option raises its price, and the corresponding put price should also rise, or the result will be an arbitrage trade that pushes the options into line.

Breadth Indicators: Arms Index (TRIN)

- Richard Arms; relationship between the number of advancing and declining stocks, and the up and down volume - Divides ratio of NUMBER of advancing/declining stocks by the ratio of the VOLUME of advancing/declining stocks. - gauge sentiment of market, and serves as predictor of future price movements. It does this by generating overbought and oversold territory

Volume Indicator: Money Flow Index (210)

- Similar to the Volume Accumulator, by Marc Chaikin - compares the strength of the close compared to the open divided by the trading range. - AD(t) = AD(t-1) + [C(t) - O(t)]/ [H(t) - L(t)] x V(t)

Average-Modified or Average-Off Method

- Simple moving average (SMA) encounters end-off problem when new data is added - Average-off method is used to avoid end-off problem - In average-off method, previous average is dropped off each time new data is added - Average-off method is computationally convenient as only old average value needs to be kept - Average-off method only keeps track of old average value, not all data used to find the average.

Spikes

- Spikes are like gaps but with a solid line in a bar chart. If a breakaway gap happens intraday, the daily bar shows a long bar instead of a gap. - A spike's importance depends on context. - Spikes can happen at the start or end of a trend. - Last few bars of a trend can be spikes, representing enthusiasm or panic. - Climax is the last bar in an accelerated trend, often a spike. - Some stocks or commodities have wide-range bars that subside quickly, usually before a news announcement. - Such behavior is typical for stocks or commodities that don't follow technical rules.

List the major terms of an option contract (372)

- Strike Price - How much the buyer/seller can buy/sell the stock for - Implied Volatility - The calculated expectation of future volatility -

Breadth Indicators: Advance-Decline index

- Takes Advancing stocks - Declining stocks - Advance-Decline Oscillatort = Advancest − Declinest - Advance-Decline Indext = Advance-Decline Indext-1 + Advancest − Declinest

Breadth Indicators: McClellan Oscillator

- Takes Net advancing stocks (advances - declines) - then creates an oscillator by subtracting two smoothed trends (19 day and 39 day). Anything above 0 confirms a rise in the index and VV.

Volume Indicator: Intraday Intensity (211)

- Takes the low and high, sees which is closer to the close, then either adds to the value or decreases. - II(t) = II(t-1) + {[C(t) - L(t)] - [H(t) - C(t)]}/ [H(t) - L(t)] x V(t)

Knockout Pattern

- The KO pattern corrects trends and was created by David Landry. - The trend must be strong and persistent, and specific criteria apply to an upward trend. - The stock should have risen at least ten points in the past 20 trading days, and a trend line should touch almost all bars. - When the stock has a two to five-day throwback, a buy entry stop should be placed at the second low bar's high. - If the next bar is lower, move the buy stop to its high until the position is executed. - A protective stop should be placed below the last low or use any reasonable stop method. - Landry claims this method works equally well in a downtrend, using the criteria in reverse.

Price-Based: Point & Figure Chart

- The box size determines the minimum price movement that must occur for it to be plotted; price movements less than the box size are ignored - a common technique used by many point-and-figurterm-0e analysts is the three-box reversal method

2-Day RSI

- The effect of using combined 2 days instead of 1 is some smoothing and a general increase in volatility.

Breadth Indicators: Upside/Downside Ratio

- Upside/Downside Ratio (UDR) is similar to Sibbett's Demand Index but is not smoothed. - UDR = Advancing Volume/Declining Volume - High values of the UDR are expected to precede a bull market

Behavioral Finance: Inertia Effects

1. Endowment Effect 2. Status Quo Effect 3. Disposition Effect

Explain the purpose of options markets (371-372)

1. Leverage - ability to gain price exposure to a given amount of assets for a lower initial cost 2. Hedging

List the inputs to an option pricing model (384)

1. Price of the underlying security 2. Strike price of the option 3. The type of option 4. dividends 5. interest rates 6. and time to option expiration

Behavioral Finance: Perception Bias

1. Saliency 2. Framing 3. Anchoring 4. Sunk-cost biases

Categorize each of the four indicators in Zweig's original model as internal or external (586)

1. Short term slope of the Dow - Internal 2. Long Term slope of the Dow - Internal 3. Changes in the discount rate (it is not a half-point move of the Fed Funds rate) - External 4. Yield Curve - External

Double-Smoothed Stochastics

By Blau

Define and discuss data-snooping bias in testing trading rules (742)

Data snooping - refers to using the results of prior rules studies reported by other researchers. - Studies do not typically include amount of data mining that led to the discovery, hence there's not a way to properly evaluate its significance.

Volume Indicator: Volume Momentum (pg. 206)

Finding the change in volume over a specific time interval - Need to smooth this in order to have a useful indicator

Discuss behavioral finance as a theory of nonrandom price motion (710-

Human reaction can be studied and systematically expected in their response to market noise.. Theory on two pillars: 1. Limited ability of arbitrage to correct pricing errors - Abitrageurs are not able to perfectly move a stock's price back to its "efficient" price. I.E. Sometimes prices overreact and under react 2. Limits of human rationality - "By taking into account the systematic errors of human judgment, behavioral finance can predict the type of departure from market efficiencies that are most likely to occur in a given set of circumstances" 711

Demonstrate the use of hypothesis testing to frame statistical tests (451)

Hypothesis testing has two Hypothesis: 1. the Null hypothesis which is the opposite of what you're testing and 2. the alternate hypothesis is what you're trying to prove. In hypothesis testing one either rejects the null hypothesis (which means their hypothesis is true) or fails to reject the null hypothesis (which means they don't have enough conclusive evidence to prove their hypothesis true).

Analyze why the existence of nonrandom price motion is a premise of technical analysis (690-691)

If prices were random TA would be pointless.

Illustrate the use of linear regression for relative strength studies (495)

If using the same set of securities (all stocks etc..) then apply a rolling linear regression slope to each market using the same calculation period (60 days for example). See Page 495-496 figures. If securities are different one would need to index them.

Analyze the effect of outliers on a regression study (477)

It can change the slope of the regression line considerably.

Appraise the possibilities and challenges of applying the scientific method to traditional technical analysis

It is extremely difficult to objectively prove TA works...... This is put loosely

Explain the statistical challenges faced when back-testing (627-628)

It's much harder to actually live through the results than just seeing them historically.. Some investors make back testing look more favorable than they should. Some back testing has assumptions of normality (normal returns as opposed to multiple std deviations).

Volume Indicator: Average Volume (pg. 205)

Just averages the volume for the number of days one is looking at - most simplistic

Breadth Indicators: Schultz

Just looks at advancing stocks as a percentage of total stocks (0 to 100)

Volume Indicator: Normalizing the Volume (pg. 205)

Normalizing the volume allows one to compare the current volume to the past volume

Illustrate a general approach to a momentum strategy using relative strength (Chapter 29)

One could take the top performing stocks relative to the benchmark and formulate something where a system buys the top performing and sells once it begins to decrease, blah blah blah

EMH vs Behavioral Finance (just for my own clarification) (712)

Page 712 explains that both of these theories contend that the market eventually does get it right - that is, prices ultimately converge back to rational levels, its just the way they get there is different. EMH says they depart randomly and briefly; Behavioral Finance says some departures are systematic and last long enough to be exploited by certain investment strategies

Weighting by Group

Prices may also be weighted in groups. If every two consecutive data elements have the same weighting factor

Differentiate between Primary, Secondary, and Minor Trends (11-

Primary: Secondary: Number of clear downswings, Movement is more rapid in reversal, reaction lasts three weeks to three months Minor: Market noise, frequent up and down movement, usually under six days

Pullbacks and Throwbacks

Pullbacks occur when prices break out downward and then "pull back" to their breakout level. Throwbacks occur when prices break out upward and then "throw back" to their breakout level

Define an environmental Model (551)

Purpose is to keep risk at arm's lenght sacrificing too much on the long side. It's job is to measure the level of risk in the market. It does this by looking at external and internal factors such as the Fed, sentiment, inflation, primary trend of Market, etc..

Examine the use of regression analysis in technical studies (459)

Regression analysis - essentially predicting values for the future Can be used to help understand the relationship between two variables and used for quantifying trends. (Read pages 459-462 for in depth explanation)

Volume Indicator: Volume Count Indicator (210)

Resembles OBV - running total of days when volume increases minus the days when volume decreases (add 1 to the cumulative value when today's volume is greater than yesterday's and Subtract 1 when lowe)

Define robustness as it applies to trading systems (808-809)

Robust - "How strong and healthy our results are" (809) and refers to "the ability of the system to adjust to changing circumstances or market conditions" (808)

Volume Indicator: Volume Weighted MACD (214)

Same as MACD but uses volume. Signal is still the equivalent of about 9 days.

Describe the importance of linearity and normality to useful correlation studies (468-476)

This is for nerds.. Linearity - Normality -

Describe an efficient market (693)

" A market that cannot be beaten" AKA the absolute best strategy is to buy and hold because everything is efficient and already priced in

William's %R Method

- %R = Buying Power/ Range = (High - CLose)/ (High - Low)

Calculate single-day implied volatility (388)

- 1 Day Movement = Implied Volatility/Square root of 252 (15.87) - 30-Day Movement = VIX/Square Root of 12 (3.46)

Volume Indicator:Volume Weighted Moving Average

- Christian Fries - relationship between the number of outstanding shares, the current price, and the volume of the next period or the next trade, to create an Elastic Volume-Weighted Moving Average (eVWMA) - weighting factor causes the previous trend value to have more importance when fewer shares are traded and less weight when relatively more shares are traded. The net effect is that the weighted average is more responsive to change when relatively more shares are traded.

Proportionality

- The period of a cycle is proportionally related to its amplitude. - Longer cycles create the trend for smaller cycles to ride. - This principle fits with the fractal nature of technical analysis such as the Elliott Wave principle.

Why do trend systems work? (115)

1. Long-term trends capture large price moves caused by fundamental factor (such as interest rate cuts, etc.) 2. Prices are not normally distributed but have fat tails (allows one to catch these long term profits) 3. Money moves the markets (money pouring into the market causes short-term noise, but also moves the long term trend)

Optimization Method

1. One method of optimizing is to run an optimization of the parameters on the entire price sample. 2. To avoid curve-fitting, optimization should only be done on a portion of the data (in-sample data) and tested on another portion (out-of-sample data). 3. The selection of data should be diversified and have sufficient data to produce over 30 trades. 4. After determining the optimal parameter sets, the optimization period is divided into segments and tested for consistency. 5. Things to look for include drawdowns, number of signals, consecutive losses, net profit as a percentage of maximum drawdown, etc. 6. If the results are not consistent, the system has a major problem and should be optimized using other means or discarded.

Illustrate why log returns are often used in backtesting (629)

1. Time additivity - Automatically handles compounding 2. Able to use log-normal distributions which make the normality assumption 3. The weighted average of the individual security does not equal the portfolio's return

Mean Reversion System

1. based on the buy-low-sell-high philosophy within a trading range. 2. require volatility between peaks and valleys of ranges. 3. profit from fading small counter-trend moves and using oscillators. 4. Protective stops are necessary to avoid unlimited losses. 5. does not perform well and is used to dampen losses in trend-following systems during a trading range.

Analyze the concept behind the ARIMA method (484)

Essentially it is an automated regression model that recalculates every single time a new variable is added in order to find the best fit.

Illustrate the importance of measuring correlation for portfolio diversification and asset selection

Just the idea of not having all your eggs in one basket... Want to reduce risk yet still have the highest return. By measuring correlations of securities, one can see how they will affect each other

Volume Indicator: Percentage Change (pg. 206)

Measures the size of the volume change relative to the starting value

Strategies for Using Moving Averages

Technical analysts use moving averages in four basic ways. 1. moving averages are used as a measure of trend 2. Second, the moving average often acts as support or resistance; moving average often duplicates the trend line 3. an indicator of price extreme. Because the moving average is a mean, any reversion to the mean will tend to approach the moving average. 4. technical analysts use moving averages to give specific signals. These can occur when prices cross a moving average

Employ the results of the ARIMA forecast to generate trading signals (484-488)

The ARIMA process uses auto-correlation to determine what extent past prices will forecast future prices. (no idea how to calculate it) but Hold a long position if the forecast is for higher prices, and take a short position if the process is expecting lower prices. Can also be used as mean reversion, and buying through penetration of expected high and selling through penetration of expected low of ARIMA bands.

Indicator Scripting

When the creation of an indicator involves multiple steps, it is convenient to express it in terms of an indicator scripting language (ISL). An ISL expression succinctly depicts the set of transformations used to create the indicator from raw time series: Moving-Average Indicator = MA (input series, N) Where: MA is the moving-average operator N is the number of days in the moving average.

True Strength Index

- Blau combines double smoothing of momentum values - using the first differences, e calculations on values more sensitive than price and then slowed them down by smoothing - net result is that the final index value has less lag than normally expect, and the index line is much smoother than a standard moving average - First difference is a simple method of smoothing the data by taking the difference between consecutive prices or values in a time series. This difference represents the rate of change between the two data points and can be used to identify trends and momentum. - Blau missed an opportunity to improve the smoothing with only a minor increase in the lag. Instead of taking the 1-day differences, substitute the n-day differences in the first step. This smoothes the trendline even more at the cost of a slight additional lag

PVI and NVI Implications

- If the PVI trend is up there is a 79% chance that a bull market exists. - If the PVI trend is down there is a 67% chance that a bear market exists. - If the NVI trend is up there is a 96% chance that a bull market exists. If the NVI trend is down there is a 50% chance that a bear market exists.

Volume Indicator: Aspray's Demand Oscillator (212)

- Separates volume into buying pressure and selling pressure - - Demand Oscillatort = BPt − SPt

Price-Based: Range Bars

- a standard bar with a high, low, open, and close, but each bar "interval" is a particular price range rather than a specific time period

Stochastics

- created by George Lane, i - an oscillator that measures the relative position of the closing price within a past high-low range - uses the high, low, and close and unlike the other oscillators, there does not have to be any smoothing to introduce a lag. - 3 indicators that result from the stochastic measurement are called %K, %D, and %D-slow

Momentum as a Percentage

- momentum can be expressed as a percentage where a 1-day momentum is equivalent to the 1-day return - Using percentages does not work for futures markets because most data used for analysis are continuous, back-adjusted prices. - When using momentum with back-adjusted futures prices, it is best to use the price differences

Appraise four important statistical features of time-series price data (628-629)

1. Non-normality of Returns - Sometimes returns go outside their St.d Deviation 2. Path Dependence and Serial Correlation - Similar to Non-Normality of returns. Price returns are not independent and price returns in the past can affect the future (pg. 628 for better understanding) 3. Heteroscedasticity - Variances Change. I.E. if I make a portfolio and the risk is low, in five years from now that portfolio's risk may have changed higher 4. Self-Correcting - Market opportunities are self-correcting, I.E. if there is a undervalued stock and it's public then people will begin to buy to return it to the true value

Examine the cyclical explanation for rounded tops and "V-Bottoms" (347)

Typically in a market, gains take much longer to incur than losses. For the cyclical explanation: As a dominant cycle is falling into its trough, all smaller even harmonics are declining and adding downward pressure, which causes the "V-Bottom"

Volume Indicator: Accumulation Distribution (211)

Uses the concept of buying/selling pressure Compares strength of the close with the strength of the open price and dividing by trading range for the day (or high - low)

Review the process of selecting meaningful predictor variables for multiple regression studies (479-484)

Want to pick predictor variables that are highly correlated with the dependent variable but have low correlations among themselves. This may not be the full answer.

Describe methods of determining inter-market relationships (530-531)

"Simplest way is to simply put two assets on a chart and comparing them" (530) - Linear regression can also be used

Weighted Moving Average

- (WMA) at time t is the average of the previous n prices, with each price having its own weighting factor wi. - The weighting factors do not have to be percentages that total to 1, and front-loaded WMA is the most popular form. - Weighting factors can be determined by regression analysis, and step-weighting is a common modification to front-loading. - The most common 5-day front-loaded, step-weighted average has weighting factors increasing by 1 each day. - A percentage relationship a between wi elements can be used, with each older data item given a weight of 90% of the more recent value.

Bollinger Band

- 20-period simple moving average. Two standard deviations are added to the SMA to plot an upper band. The lower band is constructed by subtracting two standard deviations from the SMA - Theoretically, the plus or minus two standard deviations should account for approximately 95% of all the price action about the moving average.

Climax and Wedge

- A market climax occurs when prices accelerate. After a climax, prices settle down and a "test" occurs that attempts to rally back through climax extreme peak. - The pattern most often associated with the failure of that test is a rising wedge, and the declining wedge is the case of a climax low after a panic. - Wedges require at least five reversal points to qualify the pattern, and declining volume occurs during their formation. - Wedges' performance rank is in the lower quartile of all other classic patterns, and its failure rate is considerably lower for upward breakouts than for downward breakouts. - Trading wedges require waiting for the breakout and acting immediately on it. - A rising wedge invariably will break downward, and a declining wedge upward. - Whenever a climax has occurred, look for a wedge to form on the test, but ensure that the wedge as described previously is valid before taking any action.

Windows

- A window is a price zone where no trades take place or a price vacuum. - Rising windows are bullish signals and indicate that the bulls are in control. - Falling windows are bearish signals and suggest that the bears are driving the market down. - Japanese traders advise going in the direction of the window as they are continuation signals. Rising and falling windows often become support and resistance areas. - The entire space of a rising window is considered a support area and acts as support if the market pulls back. The entire price vacuum of a falling window establishes a resistance area. - The top of a falling window is its critical resistance area. Real bodies must not touch for a space between price levels to be a valid window. - Rising and falling windows often act as springboards of support and resistance.

Volume Indicator: Volume Oscillator (207)

- Addresses the issue of erratic data by using two MAs. - a fast MA (14) - a slower MA.(34) - 2 methods - Method 1: Calculate the difference between a short-term and long-term average of volume. Using 14 and 34 days gives -Method 2: Calculate the ratio of a short-term and long-term sum of volume. Again, using 14 and 34 days, - The theory behind it is if the indicator is rising, then there is enough conviction in the market (volume is growing) with the buying of stocks, etc.

Breadth Indicators: Bolton Tremblay

- BT = Advancing - Declining / Unchanges; - when there are large advancing or declining stocks, the indicator will be large. - if BT >0; BTI(t) = BTI(t-1) + sqr(BT(t)) - if BT <0; BTI(t) = BTI(t-1) - sqr(BT(t))

Differentiate between buy-and-hold, position, swing and day trading, and the use of technical analysis in each (500-

- Buy-and-hold: just buy and hold.. - Position trading: Watching stocks once per week or month to look for entry and exit signals - Swing Day trading: one could hold position for a day to several months but it involves daily looking at charts - Day trading: most time consuming, and is completely technical. Look at liquidity price, volatility, trends, etc. etc.. Technicals play a big part in all especially day trading. Essentially, one programs his or her computer to look for Highs, lows, volatility, crosses on MAs, etc. etc..

Keltner Band

- Calculate the "Typical Price" as (Close + High + Low) ÷ 3. - Calculate a ten-day Simple Moving Average (SMA) of the typical price. - Calculate the band size as a ten-day SMA of High minus Low or bar range. - The upper band is plotted as the ten-day SMA of the typical price plus the ten-day SMA of bar range. - The lower band is plotted as the ten-day SMA of the typical price minus the ten-day SMA of bar range. - These bands are sometimes referred to as ATR bands.

Breadth Indicators: Sibbett's Demand Index

- Calculates demand of stock in Market and also smoothed volume - smoothes volume by using the total activity of the past 10 days If Demand index diverges from Price, then it could be assume there's weakness - values for upside and downside volume can also be found in the Wall Street Journal under the heading "Trading Activity." - DI = Summation (upside volume)/ Summation (downside volume)

Fixed Cycle Tools(Phasing)

- Centered moving average (CMA) envelopes - Valid trend lines (VTLs)

Channel

- Channels can be drawn parallel to a trend line to encompass price action. - can be relaxed to not require parallel lines. - The Donchian channel method is an example of a channel that does not require parallel lines. - The Donchian channel method uses the highs and lows over some past period to generate signals. - The rule is to buy when the price exceeds the highest level over the past period and sell short when the price declines below the lowest low over the past period. - Such systems are usually "stop and reverse" systems that are always in the market, either long or short. - more commonly used in commodities markets where long and short positions are effortless and prices tend to trend much longer.

Herrick Payoff Index (HPI)

- Combines Price, Volume, and Open Interest to identify potential trends and reversals in future and options market. - Gauges the strength of the current trend and has been applied primarily to future prices. - Good indicator of crowd psychology. - Theoretically, when the indicator is above the center line the bulls are in control and VV.

Dead Cat Bounce (DCB)

- DCB is a failed rally after a sharp decline in the stock market. The term was first used in the 1980s by a reporter and a research analyst. - DCB is profitable and recognizable after a large downward breakaway gap or spike caused by an event such as bad news. It lasts for a few days (average of seven) and usually begins a longer-term downward price trend. - DCB's characteristics include a short rally of several days up to two weeks following the initial bottom from the sharp initial news event sell-off. - In more than 67% of DCBs, the price continues to lower after the DCB and breaks the earlier news event low an average of 18%. - To trade the DCB, wait for the initial sell-off volume to decline and then look for a rally on lesser volume, lasting only a few days. - For short-selling trading, require a topping of the bounce or a short-term top pattern and close protective stops above the entry with a longer time horizon. - For those wanting to purchase the stock, the odds are against profiting for at least six months, and most bullish chart patterns fail during this period.

Diamond Pattern

- Diamond pattern combines a broadening pattern and a symmetrical triangle. - It usually occurs at the top of a sharp upward rise in prices. - To establish a trend line, two extreme points must be identified. - The first reversal point in a diamond pattern depends on the entry direction. - Diamonds have a high probability of a downward breakout and poor performance history for upward breakouts. - Diamond bottoms have the same configuration as diamond tops and are the best patterns. - Volume usually declines during the formation of a diamond pattern. - Pullbacks are common in diamond patterns, occurring more than 53% of the time. T- he best combination for a profitable diamond pattern is a downward breakout on below-average breakout volume and no pullback. - Diamond pattern tends to have a fast-moving price run on the breakout, and the price objective is usually the distance that the entry price traveled to reach the diamond.

**Interpret the rotation of stocks, bonds, and commodities in the typical business cycle (529)**

- Economic slowing favors bonds over stocks and commodities - Near the end of the economic expansion, bonds usually turn down before stocks and commodities and Vice Versa for beginning of economic expansions. - Bonds are usually the first to peak and the first to bottom and can provide ample warning of the start or end of a recession. - Bonds are good for leading the stock market. - Commodities are usually the last to bottom during a recovery (however weakness in dollar can help boost commodities) - Weak dollar helps commodities

Flags and Pennants

- Flags and pennants are efficient trading patterns for using capital - They have rapid and reliable outcomes after a breakout in either direction - Some successful traders use only flags and pennants due to their advantages - Flags are short channels that slope in the opposite direction from the trend, while pennants are short triangles that do the same - Both are preceded by a steep, sharp price trend, best at 45 degrees rather than straight up - Flags have almost a zero failure rate and an average return of 69% when preceded by a rise of 90% or more - Both patterns occur over a short period and volume usually declines throughout their formation - Pennants differ from wedges in that they are shorter in time and require a sharp move preceding them - Two types of failures can occur: breakout in the opposite direction from the previous trend and failure after breakout - The measured rule is important for identifying and trading flags and pennants - The price target for these patterns is calculated by taking the distance from the beginning of the sharp trend to the first reversal in the pattern and adding it to the breakout price - The projection of a target is only partially accurate, but close trailing stops are the best manner of protecting profits

Gaps

- Gaps occur when the low/high of the current bar is above/below the high/low of the previous bar, creating a void in price history. - Gaps may or may not have significance, and gap types differ based on the context in which they occur. - Breakaway gaps occur at the beginning of a trend and signal that a pattern is completed and a boundary penetrated. Heavy volume usually accompanies upward gaps but not necessarily downward gaps. - Opening gaps occur when the opening price for the day is outside the range of the previous day, and the gap should be faded on large upward openings. - Runaway gaps occur along a trend and often occur at about the middle of a price run, allowing for projection above them for a target price. - Exhaustion gaps occur at the end of moves and signal a potential trend reversal, and immediate fill within a few bars of the gap indicates that it's not a runaway gap. - Other minor gaps, such as common, pattern, ex-dividend, and suspension gaps, are of no consequence and have no significance.

Implied Volatility

- Implied volatility estimates future price fluctuations and is vital in pricing options. - Implied volatility rises in bearish markets and falls in bullish ones, reflecting the perceived risk. - It forecasts potential price swings, but not market direction. - Historical volatility measures past changes in the underlying asset's price and differs from implied volatility. - Implied volatility may be denoted by "vol" or the Greek letter sigma (σ).

Estimating Price Movement by IV

- Implied volatility of an option projects the expected price movement over time. - This projection is based on statistics and the bell curve. - Implied volatility represents the annualized one standard deviation move in the underlying stock over the option's life. - According to statistics, the stock price should land between up and down one standard deviation at option expiration around 68.2% of the time. - Normal distribution also indicates that there is a 95.4% expectation of the stock landing between up two standard deviations and down two standard deviations. - At three standard deviations, the probability reaches 99.7%. Regenerate response

Inside Bar

- Inside bars show short-term congestion in a trend. - They provide useful short-term signals, but have little meaning during larger congestion patterns. - Toby Crabel found winning inside bar combinations. • The opening of a bar after an inside bar shows a strong bias toward the new price direction. - Inside bars on weekly bar charts signify a larger congestion area, useful for longer-term trading.

Relative Vigor Index

- John Ehlers, has created the Relative Vigor Index (RVI) - RVI = (Close − Open)/(High − Low - final RVI uses a 4-day symmetric weighting (similar to a triangular weighting) of the close − open in the numerator, and a similar symmetric weighting of the high − low in the denominator.

Oops!

- Larry Williams (1979) named an opening range pattern the "Oops!" that profits from sudden direction changes. - pattern occurs when today's opening price is outside yesterday's range. - If a stock opens below yesterday's range, a buy stop is placed inside yesterday's range in case the market reverses. - Other traders' actions in the direction of an opening gap are crucial for this pattern to work. - Larry Connors (1998) uses a 10% variation of the Oops! pattern that requires the first day to close within 10% of the low. - The second day must open on a downward gap. If the conditions are met, a buy stop is placed at the first day's low with a sell stop near the second day's opening. - A sell pattern is the opposite of this when the close is within 10% of its high.

Breadth Indicators: New High-Low Index (221)

- Looks at New highs to New Lows and when the index crosses above the threshold level it's a buy - HLX(t) = HLX(t-1) + NH(t) - NL(t) - Gerry Appel (2005) uses this High-Low Ratio, smoothed over 10 days, and generates a buy signal when the ratio crosses above a threshold of, for example, 0.80 or 0.90, and a sell signal when it crosses back below that level

On Balance Volume (OBV)

- Made famous by Joseph Granville - IF Today's price change (pt > pt−1) then OBVt = OBVt-1 + Volumet; - IF Today's price change (pt < pt−1) then OBVt = OBVt-1 − Volumet - Idea is volume flow can be used to predict price change.

Illustrate the causes of the "Mid-Cycle dip" and "3/4 Cycle High" (345-346)

- Normally, a dominant cycle develops its price high in between a 1/2 and 3/4 points of the cycle. - eg. a 100-day dominant cycle and its 50-day 2nd harmonic, creating a composite wave with a "mid-cycle dip" at the peak of the dominant cycle. - A dominant cycle typically reaches its price high between the ½ and ¾ points of the cycle due to the mid-cycle dip. - Cycles may "invert" when price develops a swing high at an expected cycle low, indicating a possible fracturing into a different harmonic. - Two high probability explanations for an inversion are: (1) decreasing amplitude of the 2nd harmonic and/or increasing amplitude of a larger harmonic, and (2) the presence of the dominant cycle's 3rd harmonic.

Island Reversals

- Occurs after a lengthy trend at a top or bottom - Requires two gaps: an exhaustion gap in the trend direction and a breakaway gap in the reverse direction at the same price - Infrequent in congestion areas; larger gap more significant - Low volatility trading may occur between gaps for days/weeks - Volume increases on second gap from island top, not necessarily from bottom - Extreme price must be higher/lower than previous highs/lows at top/bottom - Frequent pullbacks/throwbacks (65%-70%) and low failure rate (13%-17%) - Not a common pattern and has poor performance results (Bulkowski, 2010)

Rectangle

- Rectangle pattern has resistance and support lines with prices oscillating between them. - False and premature breakouts can occur. - Prices may fall short of zones, and volume trends have little effect on results. - Rectangles are often continuation patterns, but can occur as reversal patterns. - High false breakout rate, low failure rate after final breakout. - Trading within a rectangle is not recommended unless it is wide. - Target can be calculated by adding height of rectangle to breakout price.

Volume Indicator: Tick Volume Indicator (213)

- Similar to RSI in that the tick volume is double smoothed - Blau double-smoothes the tick volume as a way of confirming price direction. - TVI(r,s) = 100 x [DEMA(upticks,r,s) - DEMA(downticks,r,s)]/[DEMA(upticks,r,s) + DEMA(downticks,r,s)] - DEMA = Double EMA; EMA for period r then EMA of series r for period s

Synchronicity

- Synchronicity explains a characteristic found in markets. - Market bottoms produce aggressive V-shaped lows while market tops take more time to develop. - explained by the synchronizing of cycle lows. - Even harmonics always bottom in tandem with their next larger period cycle. - smaller harmonics add downward pressure as the dominant cycle falls into its trough. - commonly creates "V-bottom" capitulation price action at the dominant cycle low. - Cycle highs produce a rolling top phenomenon as price works through each of the harmonic crests within a dominant cycle.

Head & Shoulders Pattern

- The head-and-shoulders pattern is profitable and statistically significant, combining trend lines, support/resistance lines, and rounding. - It usually appears at the top or bottom of a trend, and should only be traded after it has fully formed to avoid premature action. - A head-and-shoulders top has three peaks: a higher middle peak (the head) and two lower peaks (the left and right shoulders). - The neckline is a trend line formed by the bottoms between the peaks, which can be horizontal or sloping. - Volume is usually highest on the rise into and at the peak of the left shoulder and decreases throughout the formation. - Breakout occurs when prices break below the neckline after completing the right shoulder, with the target price calculated by projecting the height of the formation up or down from the breakout price. - Pullbacks or throwbacks are frequent, and the failure rates for both top and bottom formations are low. - Breakout stops should be placed outside the right shoulder reversal point, with appropriate triangle statistics used if the breakout is a failed head-and-shoulders through the right shoulder extreme.

Hikkake

- The hikkake is an inside bar signal that fails and becomes a signal itself. - The conventional belief is that prices will continue in the same direction as the breakout. - The hikkake pattern occurs when the breakout fails and prices in the following bars return to break in the opposite direction through the previous inside bar extreme. - The reversal and opposite breakout must occur within three bars after the first breakout. - The open and close of each bar seem to be unimportant.

The VIX and Put-Call Parity

- The inverse relationship between stock prices and the VIX is due to the nature of purchasing options and put-call parity. - Put-call parity relates prices of put and call options that have the same strike price and expiration, and creates a possibility for an arbitrage trade. - The VIX index is impacted by the relationship between put and call prices, and historically has an inverse relationship with the S&P 500 index. - The VIX moves higher when there is more demand for S&P 500 options, which tends to increase during times of market nervousness and results in higher implied volatility of both put and call contracts. In rising market, investors won't rush to buy call options and hence low VIX. - Put-call parity is the reason for the implied volatility relationship, and higher demand for put options results in higher implied volatility and a move higher in the VIX.

Two-Bar Breakout

- The two-bar breakout is a simple pattern tested successfully for stocks and commodities. - For long positions, buy on a stop above today's high if today's low is less than yesterday's low, today's high is less than yesterday's high, and today's close is less than today's open. - For short positions, the rules are the opposite. - Exit on a stop at the then-current day's low.

Activity-Based: Volume-Scaled Charts, or Volume Bars

- This method creates one bar or candlestick for a particular number of shares or contracts rather than for a set time frame. - volume, rather than time, determines the horizontal axis.

Triangles

- Triangles are formed by nonparallel boundary lines crossing each other, with the apex or cradle being the point of intersection, and the base being the distance between the first high and low reversal points within the triangle. - Standard triangle patterns include descending, ascending, and symmetrical triangles, as well as wedges and broadening patterns. - Descending triangles have a lower horizontal support line and a declining upper trend line, while ascending triangles have a horizontal upper resistance line and an upward sloping lower support line. Symmetrical triangles have a downward-sloping upper trend line and an upward-sloping lower support line. - Breakouts from triangles must be chosen carefully due to many false breakouts, and a strict breakout system is required. - Trading triangles require a high trading range within the triangle, an upward-sloping volume trend during the formation of the triangle, and a gap on the breakout. - Protective stops should be used at the breakout level in case the breakout is false, and trailing stops should be placed at each preceding minor reversal. - Volume trend during the formation of a triangle generally declines, but in some cases, an upward-sloping volume trend gives better results. - The initial target for these patterns is calculated by adding the base distance to the price where the breakout occurred.

Breadth Indicators: Thrust Oscillator

- Tushar Chande's Thrust Oscillator (TO) - Similar to TRIN, by multiplying the number of advancing stocks by the volume of the advancing stocks and subtracting the comparable declining values, then dividing by the sum of the two. - [(Adv stocks X Vol of Adv stocks )- (Declining stocks X vol of declining stocks)] /[(Adv stocks X Vol of Adv stocks) - (Declining stocks X vol of declining stocks)] - used as an overbought/oversold indicator to complement another strategy that would decide on the major direction of the market. - Values of ±30 may be used to identify overbought and oversold levels

Tweezers

- Tweezers candle pattern: two or more candles with matching highs or lows. - Tweezers top: two or more consecutive highs match in a rising market, indicating a potential slakening of demand. - Tweezers bottom: two successive lows are equal in a declining market, indicating a potential reversal. - Ideal tweezers pattern: first session with a long real body, second with a small real body of different variations. - Tweezers tops and bottoms on weekly/monthly charts potentially indicate important reversal signals for long-term traders or investors.

Valid Trend Lines

- VTL is a concept from Hurst's book that aids in chart phasing. - There are two types of VTLs: valid up trend lines and valid down trend lines. - VTLs have three rules: not crossing through any price action, being drawn from two consecutive peaks or troughs, and not being drawn from two consecutive highs that contain a wave trough of a larger period cycle. - Rising VTLs identify when a cycle high has passed. - A future downside violation of a rising VTL suggests the highest high within the span of the VTL's period is associated with the crest of the cycle's larger harmonic. - Falling VTLs identify when a cycle low has passed. A rally above a valid down trend line suggests the lowest low within the span of the VTL's period is associated with the trough of the cycle's larger harmonic.

Volume Indicator:Positive Volume Index (PVI) & Negative Volume Index (NVI)

- Variation 1, the close as the determining factor: If Ct > Ct-1 then PVIt = PVIt-1 + Vt If Ct < Ct-1 then NVIt = NVIt-1 + Vt -Variation 2, the volume as the determining factor: If Vt > Vt-1 then PVI(t) = PVI(t-1) + C(t)/C(t-1) x V(t) If Vt < Vt-1 then NVI(t) = PVI(t-1) + C(t)/C(t-1) x V(t)

Pivot-Point Weighting

- Weighted moving average usually uses positive weighting factors, but it is not a requirement. - The pivot-point moving average uses reverse linear weights that decline even when they become negative. - The pivot point, where the weight is zero, is reached about through the data interval. - The intent is to reduce the lag by front-loading the prices. - A computer program and indicator called TSM Pivot Point Average calculate and display the pivot-point moving average. - Negative weighting factors reverse the impact of price moves for the oldest data points rather than just giving them less importance. - For a short interval, this can cause the trendline to be out of phase with prices. - This method seems best when used for longer-term cyclic markets

Directional Movement

- Welles Wilder (1978) developed - Positive directional movement (+DM) occurs when the high for a day exceeds the high of the previous day. The value of +DM is the day's high minus the previous day's high. - Negative directional movement (-DM) occurs when the low for the day is less than the previous day's low - Days on which the range is completely within the previous day's range are ignored and given a zero value. - If both a higher high and a lower low occur on one day, only the greater difference (+DM or -DM) is recorded for that day. - 2 indicators are calculated: positive directional movement indicator (DI+) and negative directional movement indicator (DI-). DI+ is calculated as the ratio between smoothed +DM and average trading range (ATR). DI- is calculated as the ratio between smoothed -DM and ATR.

Narrow-Range Bar (NR)

- Wide-range bars indicate high volatility; narrow-range bars indicate low volatility - Toby Crabel designed a method of defining and using narrow-range days, such as NR4 and NR7 - Linda Bradford Raschke adds a constraint by calculating historic volatility over 6 and 100 days - Buy and sell entry stops are placed at the high and low of the qualified NR4 or inside day - If the entry stop is executed, an additional exit stop is placed where the opposite entry stop currently exists - Exit the position at the close of the day if not already stopped out.

Ultimate Oscillator

- Williams seems to combine his original idea of the A/D Oscillator with a great deal of Wilder's RSI. - adds the unique feature of three concurrent time periods in order to offset the negative qualities of the short time period used for the %R, without slowing the system too much - Calculate today's buying pressure BPt by subtracting the true low from the closing price, BPt = Ct − TLt. The true low TLt = min(Lt, Ct-1). - Calculate today's true range, . - Total the buying pressure BPt separately over the 3 intervals 7, 14, and 28 days, designated as SB7, SB14, and SB28. - Total the true range TRt over the same three periods, SR7, SR14, and SR28. - Divide the sum of the buying pressures by the corresponding true range, that is, SB7/SR7 and scale by multiplying the 7-day value by 4 and the 14-day value by 2. All three calculations are now in the same scale.

TRIX

- a triple-smoothed exponential that is most often used as an oscillator. Introduced by Jack Hutson - steps similar to Blau except that there are three exponential smoothings and the differencing is done at the end - trend indicator by buying when the value of TRIX crosses above zero - buy and sell signals sooner by buying when the TRIX value is rising for two or three consecutive periods, and selling when TRIX is falling for two or three consecutive periods

Centered moving averages (CMAs)

- are used as a cycle filter in cycle analysis. - Creating a CMA involves a half-span moving average and centering it by displacing it ¼ period of the cycle backward in time. - Hurst used a channel, or envelope, to help visualize cycle peaks and troughs. - The envelope is constructed using a centered moving average as the centerline, with a fixed number of points added/subtracted to create the top/bottom of the envelope. - The CMA envelope identifies historical cycle crests and troughs.

Volume Indicator:Price and Volume Trend (PVT)

- cannot be used for back-adjusted futures prices, only for cash markets, stock prices, and indexes. - VPT(t) = VPT(t-1) +[C(t)/C(t-1) - 1]x V(t)

Activity-Based: Market Profile

- divided the trading day into a number of time periods and recorded in how many of the time periods each price level was observed. - CBOT began using the capital letters A to X to represent the first twenty-four 30-minute periods of the day from midnight through noon and lowercase letters a to x to denote the twenty-four 30-minute periods that occur from noon to midnight

Wide-Range Bar

- have considerably wider ranges than normal bars. - The definition of "wide" and the comparison timeframe are not definitive. - usually indicate increased volatility and can imply the beginning or end of a trend. - They are often seen at panic lows, emotional spikes, and two-bar reversals. - Not all wide-range bars are meaningful, and trend, support, resistance, patterns, and opens and closes need to be considered. - The exit is to sell on the close, or if the close is within 10% to 15% of the high, sell on the next day's opening.

MAR ratio

- objective function a ratio of net profit to maximum drawdown - account not only for profits but also for risk of loss

Triangular Weighting

- reduces noise in both front and back of the calculation window, with the greatest emphasis on the middle data point. - the formula for weighted average is modified to use linearly increasing and decreasing weighting factors. - often used for cycle analysis.

Momentum

- the difference between two prices taken over a fixed interval. - indicate change in prices, not speed or distance covered over time. - value increases as the change in price increases over the same interval. - The interval of calculation for momentum must always be stated. - The momentum value can range from the maximum upwards move to the maximum downwards move that the price can make in the fixed interval. - Momentum is not volatility. - Momentum can serve the same purpose as a trend and has the advantage of not lagging like a moving average. - Momentum lines are more sensitive than trendlines and show maximum price changes over a fixed period. - Momentum can be used as a trend indicator by selling when it crosses downward through the horizontal line at zero and buying when it crosses above the zero line. - Momentum crossing zero is essentially the same as the moving average turning up or down.

William's A/D Oscillator

- used a unique form of relative strength, defining buying power (BP) and selling power (SP) as BP = high − open SP = close − low - Daily Raw Figure (DRF) is calculated as (BP + SP)/2x(H-L) - max. of 1 is reached when a market opens trading at the low and then closes at the high: BPt − SPt = Ht − Lt - each day is treated independently, the cumulative values of the momentum index are not part of the results. - day-to-day evaluation has no memory and causes DRF to be very volatile

Volume Indicator: Volume Accumulator (210)

- variation on Granville's OBV system by Marc Chaikin's - Instead of assigning all the volume to either the buyers or the sellers, the Volume Accumulator uses a proportional amount of volume - the close is at the midrange, no volume is adde - corresponding to the relationship of the closing price to the intraday mean price.

Simple Moving Average (SMA) objection:

-Abrupt change in value when important old data is dropped off.Especially if only a few days are used in the calculation. - New data (pt) vs. oldest data (pt-n):If pt > pt-n, then the new average (MAt) will be greater than the previous average (MAt-1).

Differentiate between alpha and beta (593-594)

-Alpha is a percentage of outperforming or under performing the benchmark - Beta is a measure of risk that can apply to an individual stock or portfolio. It show's how much risk a stock will add to the portfolio/how risky it is compared to the benchmark

Shark

-By Walter Downs, a three-bar pattern with a fin-like shape. - recent bar high to be lower than the previous high and the recent low to be above the previous low, creating an inside bar. - The previous bar must also be an inside bar, resulting in a small triangle or pennant progression of bars. - The entry was to buy on the close of the first day after a day in which the close exceeded the widest point in the pattern, usually the base day. - The exit was a trailing stop or a reversal on the opposite signal.

Double Top/ Bottom

1. A double top pattern has two peaks and a trough in between, indicating a potential reversal. 2. The best performing double top pattern is the "Eve and Eve" pattern, with rounded and wide tops and some irregularity. 3. The pattern takes 2 to 6 weeks to form, and the longer it takes, the less reliable it is. 4. The failure rate for double tops is 11%, making it minimally risky for traders. 5. To be a valid double top, the intervening reaction reversal point must be penetrated. 6. Roughly 64% of double top patterns fail to penetrate the breakout level and instead continue on their original trend, so traders need to be cautious. 6. Bulkowski ranks the overall performance of the double top pattern at 2 out of 21, considering factors such as failure rate, average profit, pullback/throwback rate, and percent of trades reaching a price target.

Summary of Volume or Breadth Indicator. Which is better?

1. A successful indicator adds value to trading decisions and must be tested by programming it into a strategy over a reasonable historic time period. 2. Understanding what an increase or decrease in volume or breadth tells us is essential for trading decisions. 3. Volume and breadth indicators are more difficult to use than price indicators due to their higher variance. 4. If performance testing doesn't confirm expectations, the indicator needs to be applied differently. 5. Volume and breadth data provide valuable information for trading performance. 6. Small net changes in price can result in all volume being designated to one market direction in certain indicators, which may seem arbitrary on a single day but are sound over a long period of time. 6. Marc Chaikin's changes to indicators, such as taking a percentage of volume based on relative close of prices within the daily range, are sensible and avoid the all-or-nothing technique. 7. Sibbett's Demand Index, which uses the sum of 10 days' volume, avoids problems with highly variable volume and breadth values and smoothes out results. 8. Traditional technicians still advocate interpretation using trend lines, divergence, or new highs and lows instead of relying solely on volume and breadth indicators.

Behavioral Finance: Anchoring

1. Anchoring is a perception bias that affects guessing when there is limited information available. 2. An anchor biases a guess in the direction of the anchor. 3. Anchoring is an example of lazy thinking but can be useful when limited observations provide a reasonable basis for an estimate. 4. Anchoring is a cognitive bias that influences people's judgments and decisions based on an initial piece of information or "anchor". A famous example of anchoring involves attempting to guess the number of jellybeans in a jar. Without an anchor, it is difficult to estimate the number of jellybeans in the jar. However, if an anchor is provided, such as "there are 1,000 stars in the sky", it can influence people's guesses, with their estimates being closer to the anchor.

cycle principle

1. Cyclicality: All financial markets are composed of cycles. 2. Harmonicity: A cycle's harmonics are related by multiples of two and three. 3. Summation: Price is a composite wave of the sum of individual cycles 4. Synchronicity: Cycle lows tend to bottom in tandem 5. Proportionality: A cycle's period is proportional to its amplitude 6. Nominality: Some wave periods are more common than others 7. Variation: Financial markets will not obey theoretical perfection

Usage of DMI

1. DMI crossover is an important signal in analyzing trends. 2. standard divergence techniques are valid in the DMI 3. the DIs can be used to create a directional index (DX). This DX then is used to create the average DX called the ADX line; is calculated by taking the absolute difference between the values of the two DIs and dividing it by the sum of the two DIs 4. ADX peaks and troughs provide valuable information about the price trend. When the ADX peaks, it often signals a peak or trough in prices.

Analyze the three forms of the EMH as to their information content (666-667)

1. EMH Strong: not testable; If it was, any evidence of abnormal profits from any investment strategy whatsoever would be sufficient to refute 2. EMH Semistrong: Can be falsified with any evidence of market-beating returns produced by investing strategy based on public fundamental data or technical data 3. EMH Weak: Only way to falsify is to present evidence that shows excess returns generated by an investment strategy based on TA.

Critique the three consequences, articulated in this chapter (34), of adopting the scientific method in TA

1. Elimination of subjective approaches (would be great cause then TA would be entirely objective, however then everyone could know about it) 2. Elimination of Meaningless Forecasts: I.E. One could test whether one's forecasts has substance or not 3. Paradigm Shift: If I get my CMT certification based on learning all of these "subjective" trends and TA is able to be objectively measured, then all of these things I studied and got my certification for may become false. Therefore, is my certification also false?

Behavioral Finance: Status Quo Effect

1. Individuals tend to stick with the default option even when presented with other choices, a phenomenon known as the status quo bias. 2. This bias has been demonstrated in experiments, where individuals were more likely to choose an option presented as the default. 3. Thaler and Sunstein suggest that governments can take advantage of the status quo bias by using a "libertarian paternalism" approach where they offer a default option that is deemed the best for most people but still allow individuals to opt-out if they choose. 4. Prospect theory can help explain the status quo bias as individuals might consider the default option as their reference point and weigh the potential for losses more heavily than the potential for gains due to loss aversion. 5. Sticking with the default option can also help avoid regret, as individuals may feel that the choice was made for them and not their fault if things go wrong.

Problem in Trend Following System

1. Many traders receive the same signal at the same time and price, causing liquidity to become strained and increasing transaction costs. 2. Whipsaws are common in trend-following systems, especially during a trading range market. 3. often produce less than 50% wins due to many whipsaws during ranging markets. 4. will be late in the trend and will miss profit potential at both ends of the trend. 5. Losses occur primarily in the trading range preceding the establishment of a trend. - problem can be reduced with the use of confirmations or through filters and diversification into uncorrelated markets. - strategy to combat this is to use a countertrend system at the same time.

A Complete Trading System

1. Markets—What to buy or sell 2. Position Sizing—How much to buy or sell 3. Entries—When to buy or sell 4. Stops—When to get out of a losing position 5. Exits—When to get out of a winning position 6. Tactics—How to buy or sell

Risk Measures

1. Maximum cumulative drawdown: The largest single trade paper loss in a system. 2. Maximum drawdown (MDD): The maximum loss from an equity peak. 3. MAR ratio: The net profit percent as a ratio to maximum drawdown percent, also called the Recovery Ratio. 4. Maximum consecutive losses: A measure that suggests multiple losses in the future when the number is large. 5. Large losses due to price shocks: A measure of how the system reacts to price shocks. 6. Longest flat time: A measure of when money is not in use, freeing capital for other purposes. 7. Time to recovery from large drawdowns: A measure of how long it takes to recuperate losses. 8. Maximum favorable and adverse excursions: A measure of dispersion in trades that can be used to measure the smoothness of the equity curve and give hints as to where trailing stops should be placed. 9. Sharpe ratio: The ratio of excess return (portfolio return minus the risk-free rate) to portfolio standard deviation.

Analyze three statistical concerns in back-testing (632-635)

1. Multiple-Testing Fallacy: Essentially generating a ton of tests in hope of finding a positive alpha return; however, when you run 200 tests and find only one positive, it could just be a false positive (i.e. the portfolio got lucky, there's not actually significance to it) 2. Trading System Complexity: A trading system should be made as simple as possible to avoid overfitting, but not so simple that they fail to capture the moves of the market. When a trading system is too complex it is only fit for the historical backesting, I.E. it performs perfectly for historical data, but when one introduces new data to the trading system it does not perform as the backtest did. 3. Meta-Look-Ahead Bias: Look-Ahead bias is when a system has current data that it did not have three years ago (i.e. doing a 5 year analysis, the system knows now something that the current market 3 years ago did not know.) Meta-Look-Ahead Bias is when a human has an existing piece of knowledge that he or she did not know in the past. I.e. the crash of 2008. Often people ask how it performed there, but in reality that's just solving a problem that has already happened.

State the five stages of the hypothetico-deductive method (671-672)

1. Observation 2. Hypothesis 3. Prediction 4. Verification 5. Conclusion

Out-of-Sample Optimization

1. Out-of-Sample Optimization (OOS) is a method often used in neural network and regression studies. 2. One variation of OOS is to divide the entire price data series into in-sample (IS) data and out-of-sample (OOS) data. 3. The OOS data can include the first small portion and the last, or just the last, most recent data. 4. The sample must include bull, bear, and consolidation periods. 5. This method optimizes the IS data and tests it on the OOS data. 6. If the OOS results are unsatisfactory, the method can be repeated with different parameters.

Prospect Theory

1. Prospect theory has been tested in various experimental settings, including contexts outside of finance. 2. Bleichrodt and colleagues found that prospect theory explained their behavior better than traditional expected utility theory did. 3. Investors who consider paper gains and losses each time they check their portfolios will tend to be driven by loss aversion, which will affect their investment decisions. 4. The frequency with which investors check their portfolios will greatly affect the decisions they make and lead to different levels of utility.

Compare four methods for calculating relative strength

1. Ratio Method: ratio between two investments, sectors, groups, average, etc.. to see which is outperforming the other 2. Percentage Change Method: A lot of stocks were taken and then after six months, the highest performing stocks were grouped and studies showed they continued to be strong for the next three to ten months 3. Alpha Method: Shows how much better or worse a stock is performing compared to a benchmark 4. Trend Slope Method: Stocks have their slope of their price curve calculated in percentage terms then compared and ranked 5. Levy Method: Essentially ole boy decided relative strength should be calculated among 6 months and during the washout stage of a bear cycle, those with the most relative strength fell the most

Types of Moving Averages, MA

1. SMA: Simple Moving Average 2. LWMA: Linearly Weighted Moving Average: A ten-day linearly weighted moving average multiplies the tenth day observation by 10, the ninth day by 9, the eighth day by 8, and so forth. The total of these numbers is added up and divided by the sum of all the multipliers 3. EMA: Exponentially Smoothed Moving Average: WEIGHTcurrent = 2 ÷ (number of days in moving average + 1); WEIGHTma = 100% - WEIGHTcurrent --> WEIGHTma = 100% - WEIGHTcurrent 4. Wilder Method: MAday i = ((n − 1) × MAi−1 + Pricedayi) ÷ n; should be used in the average true range (ATR), the relative strength index (RSI), and the directional movement indicator (DMI) calculations that he invented rather than the SMA or EMA 5. GMA: Geometric Moving Average: sma of the %changes between the previous bar and the current bar over some past predetermined period 6. TMA:Triangular Moving Average: TMA begins with a Simple Moving Average (SMA) of a predetermined number of bars. Using the SMA results, TMA takes a moving average of half the original number of bars. 7. Variable EMAs:the same as an exponential moving average (EMA), but the weighting scheme is adjusted based on the volatility of the price data. 7a. Kaufman adaptive moving average (KAMA) involves an extremely complicated formula that adjusts an EMA for volatility and trend (Kaufman, 1998); volume-adjusted moving average (Arms, 1989) is a somewhat complicated moving average, but its essence is that it emphasizes those bars with higher volume

Behavioral Finance:: Saliency

1. Saliency is a phenomenon where events that have not occurred recently are perceived to have a low probability of happening in the future, while recent events are perceived as more likely to occur than they actually are. This can lead to people ignoring the importance of certain events, such as buying flood insurance or airplane accident insurance, unless there has been a recent occurrence of those events. 2. Gennaioli, Shleifer, and Vishny (GSV): people tend to underestimate the probability of "bad" economic states during times of economic prosperity, which leads to an overreaction when those events do occur. 3. This theory suggests that credit standards for commercial lending decline during economic booms and then tighten up during economic recovery, which is not optimal for the economy. 4. GSV concludes that agents involved in the crisis used incorrect investment models that assigned a zero probability to a potential financial crisis, whereas a correct model would assign a very low, yet nonzero, probability to the chances of a prospective financial collapse.

Behavioral Finance: Framing

1. Scenario: A country is preparing for an outbreak of a disease that is expected to kill 600 people. 2. Program A: Will save 200 people. Program B: Has a 1/3 chance of saving 600 people and a 2/3 chance of saving no one. 3. Most people prefer Program A as it is a risk-averse choice. 4. Program A guarantees saving 200 people while Program B is a gamble that can either save 600 or no one. 5. The phrasing of the problem affects people's choices. 6. Programs C and D are presented as options in Problem 2, with C resulting in certain death for 400 people, and D having a 1/3 chance of no deaths and a 2/3 chance of 600 people dying. 7. Despite Programs A and C being identical, and Programs B and D being identical, over 70% of respondents choose A over B, and nearly 80% choose D over C, indicating a violation of invariance. 8. attributed to the reference point used by respondents. In Problem 1, the focus is on saving lives, while in Problem 2, the focus is on people dying. 9. Respondents view saving lives as a gain in Problem 1, leading them to make the risk-averse choice, while in Problem 2, respondents view each death as a loss, leading them to make the risk-loving choice.

Behavioral Finance: Endowment Effect

1. The endowment effect is when people value things more highly when they own them. 2. This effect is not predicted by traditional economic theory, which assumes people have a fixed reservation price for buying and selling. 3. Experiments have shown that people with an endowment are more likely to demand a higher price to sell an item than buyers are willing to pay. 4. The magnitude of the discrepancy between sellers and buyers is consistent with the results of prospect theory research, which suggests that losses are more painful than gains are pleasurable. 5. Indifference curves can cross in behavioral finance, which contradicts traditional economic theory. 6. The endowment effect does not occur in all scenarios, such as when people trade a large bill for smaller ones or buy a product from a retail merchant in exchange for cash. 7. When people are instructed to "think like traders," many of the results of experiments where the endowment effect occurs disappear.

Profit Measures

1. Total profit to total loss (profit factor): A statistic used to initially screen for systems from optimization by comparing total profit to total loss. 2. Outlier-adjusted profit to loss: A profit factor that has been adjusted for the largest profit to account for anomalies. 3. Percentage winning trades: A measure used to estimate the risk of ruin by calculating the percentage of winning trades. 4. Annualized rate of return: A measure used to relate the results of a system against a market benchmark by calculating the annualized rate of return. 5. Payoff ratio: A calculation used in the risk of ruin estimate to compare the average profit of winning trades to the average loss of losing trades.

Behavioral Finance: Sunk-cost biases

1. Traditional economics assumes that a rational person's decision to attend a future event should not be influenced by the cost they paid for the ticket earlier. 2. The sunk-costs bias involves regret, which is left out of the utility function assumed by economists. People feel regret for things done and not done, but such things are in the past and should not influence a current choice. 3. Going to the concert despite not wanting to is an example of the sunk-cost bias because people wish to avoid the feeling of regret that comes with wasting a ticket they paid for. 4. Losing a ticket on the way to the concert and having to purchase another one is an example of mental accounting, but sunk costs are still involved in the decision-making process. 5. Sunk costs are similar to the bias shown by investors who are reluctant to purchase a stock after missing the opportunity to buy it at a cheaper price. Investors who sell out during a financial crisis may wait until their regret fades before investing again, often at much higher prices.

Distinguish between four types of technical trading systems (795)

1. Trend Following: Self-Explanatory; Examples include MAs and Breakout systems. - Problems involve Whipsaws, Trend systems are popular so many others will also use this system which leads to strained liquidity, wider spreads, slippage, etc. 2. Pattern Recognition: Using patterns requires considerable testing and overcoming the problem of defining patters 3. Range trading: AKA "Reversion to the Mean," trading when range is low and selling when high. Use bollinger bands, stochastics, etc.. This system seems to not nearly be as profitable as the actual breakouts and one needs a lot of volatility to trade in ranges. 4. Exogenous Signal Systems: Anything outside of that market. Examples: the VIX for S&P futures, volume, open interest, monetary policy, consumer prices, etc..

Diagram the steps to a comprehensive cycle analysis (355)

1. Visual Analysis: note the locations of significant swing lows. Use your eyes, or better yet your fingers, to see if there is a consistent pulse that can be observed. Look for sine wave type of structures. 2. Spectogram: work from the tallest spikes down, searching the spectrogram for harmonic confirmation. If a harmonic is present, the cycle is verified and should be included in a current cycle model. The more harmonics present, the stronger the cycle 3. Phasing Dominant Cycle: analyst needs to bring the cycle to light with a centered moving average (CMA) envelope 4. Phasing Harmonics: analyst can start to identify harmonics. The logic behind phasing smaller harmonics is simple. Per the Principle of Synchronicity, smaller harmonic cycle lows must match up with the dominant cycle lows. 5. Completed Phasing:

Walk forward optimization

1. Walk forward optimization is an Out-of-Sample (OOS) method that uses the same price data series as the previously described method. 2. The most common procedure is to optimize a small portion of the data and test it on a small period of subsequent data. 3. The resulting parameters are recorded and the window is moved forward until the test reaches the most recent data. 4. The results from all the recordings are analyzed for consistency, profit, and risk. 5. If some parameter set suddenly changes during the walk forward process, the system is unlikely to work in the future.

Data Problems for Futures Systems

1. limited life span that is short enough not to be useful in testing most systems. 2. difference in price between the price at expiration and the price of the nearest contract is difficult to splice into something realistic for longer-term price analysis. 3. 2 methods of splicing contract prices of different expirations together are perpetual contracts and continuous contracts. 4. Perpetual contracts are interpolations of the prices of the nearest two contracts, weighted based on proximity to expiration. 5. Continuous contracts are created by splicing together individual contract data to create a continuous price series.

Loss Aversion

1. refers to the phenomenon where people feel the psychological cost of losing money more acutely than the psychological gain of earning money. 2. This behavior cannot be explained by traditional wealth-based utility functions. 3. Matthew Rabin's theorem demonstrates that traditional decision theory yields ludicrous implications for human behavior in the face of gambles. 4. Loss aversion is path dependent, meaning that the order in which gains and losses occur affects an individual's overall happiness. 5. This path dependence complicates the task of modeling human behavior under prospect theory, as the econometrician would need to acquire a complete data set of every decision made by the individual and their thoughts on the distribution of possible returns at each time. 6. Acquiring such data is onerous, and traditional utility theory remains a more attractive modeling technique for finance theory due to its reliance on end-of-period data.

Pattern Recognition System

1. require testing and defining patterns. 2. Larger patterns are harder for computers to recognize. 3. System traders use short-term patterns and limit exposure with stops and targets. 4. These systems are partially discretionary.

Describe how to apply the 10-day MA rule in a trading system

10-day MA rule is created by a 10-day MA using the average of the daily high, low, and closing prices, with a band on each side formed from the 10-day MA of the high-low range. A buy occurs on penetration of the upper band and a sell when the lower band is broken. (trend is the 10-day MA of average daily high, low, and closing price and the band is the 10-day MA of the high-low range).

Categorize the additional indicator in the modified version as internal or external, trend following or mean reversion

Additional indicator being a 50-Day MA to the Dow 20 (now the Dow Jones Equal Weight U.S. Issued Corporate Bond Index) price. This is internal and mean reversion since if it goes above/below the MA by a percent it's buy/sell

Advantages and disadvantages of discretionary trading systems:

Advantages: 1. Flexibility: allow traders to adjust their strategies based on changing market conditions or new information. 2. Human judgment: allow traders to use their experience and intuition to make decisions that may not be captured by a mechanical system. 3. Emotional intelligence: help traders manage their emotions and avoid making impulsive decisions based on fear or greed. Disadvantages: 1. Emotional bias: can be influenced by emotions such as fear, greed, or overconfidence, which can lead to poor decision-making. 2. Lack of consistency: lack consistency in decision-making, which can make it difficult to evaluate performance or optimize strategies. 3. Subjectivity: Discretionary systems may be subject to personal biases or preferences that can affect decision-making and lead to suboptimal outcomes.

Illustrate the advantages and disadvantages of non discretionary trading systems (791)

Advantages: 1. Objectivity: based on objective rules that can be backtested and optimized for better performance. 2. Consistency: consistent in decision-making, which makes it easier to evaluate performance and optimize strategies. 3. Emotional control: remove emotional bias from trading decisions, which can lead to more rational decision-making. Disadvantages: 1. Lack of flexibility: may not be able to adjust to changing market conditions or new information as quickly as discretionary systems. 2. Over-optimization: may be over-optimized for past market conditions, which can lead to poor performance in future markets. 3. Complexity: Developing and maintaining a nondiscretionary system can be complex and time-consuming.

Demonstrate use of linear regression to generate trading signals (490-492)

An example is using closing prices. On a linear line, one can add all of the past closing prices of a stock and forecast the next days closing price, then trade on these signals: 1. Buy when tomorrow's closing prices moves above the forecasted value of tomorrow close 2. Sell short when tomorrow's closing price moves below the forecasted value of tomorrow's close One can also use bands to lessen the trading signals. One just uses 65% standard deviation (1.65X) or 95% (1.95X) etc..

Generalize how buy and sell signals are used with indicators and tools for measuring trends.. (119-

At the base of it all, trends smooth prices. Longer trends lag. The theory is to buy on price penetration (when price crosses above the trend and sell when it crosses below) or to buy the trendline (when the trendline is up and sell when it's down). This means in longer term, trading the trendline may be better and VV. To help slow trading and improve the reliability of signals, one forms channels and bands around the trend. One should also consider making trades after confirmation of the signal (pg. 132)

Describe the ARIMA Process (484-488)

Auto-regressive Integrated Moving Average - Created by a process of repeated regression analysis over a moving time window, resulting in a forecast value based on the new fit. - Used to recalculate the best fit each time a new piece of data appear.

Differentiate between signal testing and backtesting (631-632)

Backtesting is a validation tool while signal testing is a research tool Backtesting - Any analysis of historical data Signal testing - A signal is any event that is predictive of future prices

Broadening Pattern

Broadening pattern: Bound lines diverge, price range increases. Megaphone, funnel, reverse triangle, inverted triangle refer to broadening patterns. Broadening pattern has variations: horizontal and sloping bound lines, or bound lines trending in same direction but diverging (broadening wedge). Ascending broadening wedge has above-average performance statistics. Broadening formations are rare and difficult to identify. Difficult to profit from because breakout lines constantly move away from each other. In upward breaking broadening pattern, upper breakout level gets higher, using up potential gain after breakout and increasing risk. Broadening pattern has average performance and above-average failure rate. Combining broadening pattern with symmetrical triangle into diamond top can be profitable.

Failures in Patterns

Bulkowski's definition of a failure, which we use, is when a breakout occurs and the price fails to move at least 5% in the direction of the breakout.

Explain confidence intervals, statistical significance, and the base rate fallacy (452)

Confidence internal is simply how confident you are the hypothesis works based on previous testing. (i.e. if I flip a coin 100 times and it lands on heads 75 times, the confidence level is 75%) Statistical Significance - In the above scenario it would be 25%. The Stat Significance are simply the odds the hypothesis doesn't work as tested (i.e. If you flip a coin and land heads 75 out of 100 times, then the Stat. Significance is 25). Confidence Interval and Stat Significance must always = 1. Base Rate Fallacy is the tendency for people to incorrectly judge the likelihood of a situation by not taking into account all relevant data. (Don't quite understand this one)

Differentiate between correlation and causation (457)

Correlation - how two things are similar Causation - one event causing another

Compare coefficients of correlation and determination (455-456)

Correlation is how similar two things are while coefficient of determination (RSquared) tells us, for example, that price volatility of one stock being explained by the other stock

Describe data mining and data-mining bias in testing trading rules (741-

Data-mining bias is a type of bias that occurs when a large number of rules are compared to identify one or more superior rules. This selection process causes an upward bias in the performance of the selected rule(s), which means that the observed performance of the best rule(s) in the backtest overstates its (their) expected performance in the future. This bias complicates the evaluation of statistical significance and may lead a data miner to select a rule with no predictive power (i.e., past performance was pure luck).

Compare Descriptive and inferential statistics (450-451)

Descriptive - about describing or summarizing data using quantitative or visual tools Inferential - builds on descriptive statistics to draw conclusions or inferences based on that data

Differentiate between discretionary and non discretionary Systems (790)

Discretionary systems, entries and exits are determined by intuition; in other words, the trader or investor exercises some discretion in making trades Nondiscretionary systems are those in which entries and exits are determined mechanically by a computer.

Compare the Efficient Market Hypothesis with the general concepts in behavioral finance and with the Adaptive Markets Hypothesis (602-610)

EMH: Three Levels 1. Weak - Prices reflect all historical info but not current, publicly traded info 2. Semi-Strong - Market reflects both historical and current public info 3. Strong -Market reflects both historical, current publicly traded info, and private info Behavioral Finance - essentially people buying and selling on behavior and not just logic and fundamentals AMH - Tries to marry the two in which the market has both logical/fundamental efficiencies yet also those that buy based off of emotion

Contrast internal and external indicators (551)

External: Relates to anything outside the action of the stock, so sentiment, GDP, fed, inflation, etc.. Internal: Relate to the price action of a market or index and include things such as MAs, Momentum, advances and declines, and volume trends. There are two distinct types: Trend following and trend sensitive. Trend following indicators are just that - they can buy or sell by following the trend; trend sensitive determine if the market is overweight, sentiment, mean reversions, oscillations - things that can influence ones decisions based on the data reached. - Essentially Internal is within the stock market and external is out of the stock market (Fed, Inflation, GDP, sentiment etc..)

Sketch the Basic Components of Davis' Fab Five Model (553-

Four Components: (The Tape is given double the weight to make four and five) - The Tape: Seven Indicators 1. Golden Cross (50 and 200 Day MA) 2. Stochastic (looks back at a set number of days and gauges where the stock currently is compared to highs and lows and measures it between 0 and 100) 3. Breadth (Advancing volume vs Declining Volume; if a stock advances all day vs if it declines.. looks at the S&P 500 to see total Market Breadth) 4. Breadth Thrust - when advance/decline exceeds 1.9 5. 6. Diffusion Index - measures the number of stocks that have advanced in price or are showing positive momentum. It is useful for determining the underlying strength of the stock market overall, as lots of stocks advancing shows a strong market, while few(er) stocks advancing shows a weaker market 7. Big Mo - Essentially momentum in a stock. When momentum is above a 56 for a stock then it's a +1 for the tape and above 79 gets another + 1. Anything below 56 is 0. - The Sentiment Component: Essentially gauging the sentiment of the market. Too many bulls can mean a bad thing while too many bears can mean a good thing. When things are overoptimistic it could result it a decline and VV. One get's buy/sell signals through brackets (certain numbers on the 0-100 indicator) - The Monetary Component: View of monetary situations comes from 1. price of money (interest rates) and 2. supply of money. The +1 or 0 is determined by moving standard brackets in the indicator. Essentially this is just monetary policy. When there is a lot of cash in the economy, this could be negative for stocks since Fed tightening (raising interest rates may occur) and vice versa - The Combo Component: Composed of 6 stock market models, each with a different mix of indicators. 1. Don't fight the fed 2. Moving-Average cross. Anndd I didn't get the other four

Compare significant factors in trading stocks vs futures (501-503)

Futures market requires more risk due to more leverage. Futures normally are determined by simply finding a futures trade and comparing it to another basket of futures. Stocks use either top down or bottom up method Top-Down method: finding a good industry or favorable market and then deciding stocks to select out of there Bottom-Up: finding good stocks based on technicals (or sometimes fundamentals) and then determining whether the market is favorable through these.

Differentiate methods of optimization (805)

Optimization is simply changing the parameters of a system to achieve the best results Whole Sample: Take entire price sample and run an optimization of the parameters. Normally frowned upon because it is the closest to curve fitting Out-Of-Sample Optimization (OOS): Take entire price data and use 70% for In sample data and the rest for out of sample data........? Walk Forward Optimization: Most common variation is to optimize a small portion of the data and test it on a small period of subsequent data

Optimization

Optimizing involves changing the parameters of a system to achieve the best results. It can help eliminate useless rules and parameters by identifying those that do not work with past data and are therefore unlikely to work in the future.

Examine risk adjusted performance metrics such as Sharpe, Sterling, and Sortino ratios

Pages 810-811 for full list Examples: Return Retracement Ratio - Average annualized compounded return divided by MR (maximum of either decline from prior equity peak or worst loss at low point from any time prior Sterling Ratio: Arithmetic average of annual net profit divided by average annual maximum drawdown Max Loss - Worst possible loss from highest point Sortino Ratio - Similar to Sharpe but considers only drawdown volatility

Compare Pearson's and Spearman's methods (465-466)

Pearsons Method - measures statistical relationship between two continuous variables Spearmans method - Looks at ranks as opposed to values so it's not sensitive to outliers. When two variables appear to be normally distributed it is better to use Pearsons method.

Interpret feedback loops in price action (721-722)

Positive and Negative Feedback Negative feedback would be if a price is too high and arbitrage steps in to push it back to rational levels Positive feedback is if a stock has bad news comes out and every investors begins to sell their stock because they see headlines, see other's selling, and are fearful - and the loop continues

Interpret values generated by regression, multiple regression, and tolerance calculations (479-484)

Regression is a statistic measurement used to determine the strength of the relationship between one dependent variable and a changing variable (pretty sure Beta is a form of regression) Multiple regression simply uses multiple changing variables Tolerance Calculations ?

Contrast Secular and cyclical emphasis (505-507)

Secular is a term used for any cycle longer than the business cycle. Secular Emphasis: When hard assets rise (Gold, Silver, etc.) soft assets decline (stocks, currency, etc.). Once a trend has been set in place it usually remains for years. So this is a potential sign of whether to invest in hard or soft assets (though it doesn't hold true 100% of the time) Cyclical Emphasis:Not quite sure but I believe it has to do with business cycle. One should discover what business cycle they are in and then look for the next thing to invest in. I.E. if the current cycle has a strong dollar, then one may want to consider Gold, stocks, and bonds to invest in.. (See page 512)

Compare the phasing of smaller harmonics to larger harmonics (360-361)

Smaller Harmonics: Per the principle of Synchronicity, smaller harmonic cycle lows much match up with the dominant cycle lows. (Figure 14.7 pg 360) Larger Harmonics: (page 361 & 365) 1. Search for more significant lows on the chart 2. Search for a clean sine wave pattern emerging from that low that is the correct multiple of the dominant cycle

Explain the principles behind relative strength analysis

Stock is outperforming those of its peers.. Further idea is that once a stock proves to be strong, then it will continue to be strong until the trend reverses, which is a case against the Random Walk Hypothesis

Richard Arms' Equivolume (Pg. 204)

Substitutes volume for time along the bottom scale of a chart

Diagram the Three Phases of bull and bear markets (11-14)

The Bull Market: 1. Accumulation 2. Increasing Volume 3. Final Explosive Move The Bear Market: 1. Distribution 2. Panic 3. Lack of Buying Interest

Drop-Off Effect

The drop-off effect is an abrupt change in the current value when an older value is dropped from rolling trend calculations. It affects simple moving averages, linear regressions, and weighted averages. Front-weighted averages and exponential smoothing reduce the drop-off effect.

Distinguish between bottom-up and top-down approaches (504; 515)

Top-Down Analysis: First studies markets such as interest rates, commodities, futures, stocks - to determine which market has highest profitability potential, then goes downwards from there. Bottom-Up Analysis: Essentially using relative strength to find a single stock that is outperforming the market and its peers

Interpret the implications of left and right translation (350)

Translation refers to price bottoming early (left) or late (right) relative to an unexpected cycle low. Left translation is often a result of larger harmonic bottoming early, while right translation is often a sign of a larger harmonic bottoming late.

Analyze the use of hedging and non-correlated assets in a long-only relative strength model (Chapter 29)

Turnover and drawdown would be really high if you follow a relative strength strategy, so hedging could help reduce some of that drawdown

Explain Null Hypothesis as used in the Scientific Method (667)

When a hypothesis is made then the null hypothesis is the opposite.. I.e. if I claim that toxic emissions cause cancer, this is my hypothesis. The null hypothesis would be that toxic emission do not cause cancer. So let's say we take away all toxic emissions and cancer is eradicated; the null hypothesis is falsified which means my hypothesis is true (or if cancer wasn't cured than the null hypothesis would stand and be proven true)

Horn Pattern

horn pattern as being almost identical in behavior to the pipe except a smaller bar separates the two lengthy bars.