Book Review: Chartered Market Techinician (CMT) – Level I 2017

If you want to read only one book about trading, that summarizes the best of the best of the academic trading and investment books, you shall read the 619 pages of this master piece of a book.

Let me tell you why did I buy this book in the first place. In my usual scanning of trading books I saw this thick and plain-looking book with a big price tag, actually the price was more than the double than the average of any other trading book. I first didn’t buy as I wasn’t sure about the contents of the book. I did a bit of research on the Internet and I couldn’t find much feedback on it. So, I then decided to go and buy it to see if that price tag was worth it… and I’m so glad to tell you that it is worth it. Actually is even cheap!

I haven’t learned more about trading with any other book. I haven’t added more notes to any other book. I haven’t been more grateful to read a trading book before. This book shall be mandatory to every one interested in trading and it shall be the very first book to read. Yes, the very first.

The book introduces the reader to all the basic concepts of trading by selected chapters of other books (which I detailed later in this post). The authors have made an outstanding work on compiling the contents and place them in a smooth learning curve throughout the book.

The book will, as well, prepare you to attain the CMT Level I certification issued by the Market Technicians Association. You can find more information about this certification here.

In my book reviews normally I include some of the key learnings extracted from the book. But in this case, there are so much knowledge that I prefer to include you the learning objectives of each chapter in the book as well as the book where the contents are extracted. I try in this way to answer for you the question that I had when I wanted to buy this book. What is it inside? What will I learn?

Finally, simply don’t doubt about this book. Just go and buy it either the electronic version or the paper version and realize how much knowledge this book contains. I hope you enjoy it as much as I did.

Contents:

Chapter 1: The Basic Principle of Technical Analysis – The Trend: From Charles D. Kirkpatrick II and Julie R. Dahlquist, Technical Analysis: The Complete Resource for Financial Market Technicians, 3rd edition (2016), Chapter 2

Learning objectives:

  • Define what is meant by a trend in technical analysis
  • Explain why determining the trend is important to analysts
  • Identify primary, secondary, short-term, and intraday trends
  • Describe the basic beliefs behind the art of technical analysis

 

Chapter 2: Dow Theory: From Charles D. Kirkpatrick II and Julie R. Dahlquist, Technical Analysis: The Complete Resource for Financial Market Technicians, 3rd edition (2016), Chapter 6

Learning objectives:

  • Describe the history of the development of Dow Theory
  • Identify the basic principles of Dow Theory
  • Recognize three types of trends identified in Dow Theory: primary, secondary, and minor
  • Explain the concept of confirmation in Dow Theory
  • Explain the role of volume in Dow Theory

 

Chapter 3: History and Construction of Charts: From Charles D. Kirkpatrick II and Julie R. Dahlquist, Technical Analysis: The Complete Resource for Financial Market Technicians, 3rd edition (2016), Chapter 11

Learning objectives:

  • Explain the advantages of reviewing price information in chart format
  • Identify how to construct several types of charts including line, bar, candlestick, and point-and-figure charts
  • Identify the differences between arithmetic and logarithmic scales

 

Chapter 4: Trends – The Basics: From Charles D. Kirkpatrick II and Julie R. Dahlquist, Technical Analysis: The Complete Resource for Financial Market Technicians, 3rd edition (2016), Chapter 12

Learning objectives:

  • Explain why trend identification is important to achieve profits
  • Recognize an uptrend, a downtrend, and a trading range
  • Describe the concept of support and resistance
  • Identify trends using most common methods
  • Identify significant reversal points

 

Chapter 5: Breakouts, Stops, and Retracements: From Charles D. Kirkpatrick II and Julie R. Dahlquist, Technical Analysis: The Complete Resource for Financial Market Technicians, 3rd edition (2016), Chapter 13

Learning objectives:

  • Describe and identify a breakout
  • Recognize the signals that identify breakouts
  • Explain the purpose of entry and exit stops
  • Describe methods for setting entry and exit stops

 

Chapter 6: Moving Averages: From Charles D. Kirkpatrick II and Julie R. Dahlquist, Technical Analysis: The Complete Resource for Financial Market Technicians, 3rd edition (2016), Chapter 14

Learning objectives:

  • Identify trends with moving averages
  • Recognize methods for calculating simple and exponential moving averages
  • Describe and interpret directional movement indicators
  • Identify characteristics of envelopes, channels, and bands

 

Chapter 7: Bar Chart Patterns: From Charles D. Kirkpatrick II and Julie R. Dahlquist, Technical Analysis: The Complete Resource for Financial Market Technicians, 3rd edition (2016), Chapter 15

Learning objectives:

  • Explain opposing viewpoints over whether patterns exist
  • Describe the influence of computer technology on price-pattern study
  • Identify chart patterns such as triangles, flags, pennants, double tops, triple tops, double bottoms, triple bottoms, head-and-shoulders formations, and inverse head-and-shoulders formations
  • Compare historical performance measures of chart patterns

 

Chapter 8: Short-Term Patterns: From Charles D. Kirkpatrick II and Julie R. Dahlquist, Technical Analysis: The Complete Resource for Financial Market Technicians, 3rd edition (2016), Chapter 17

Learning objectives:

  • Identify reversals in longer-term trends using short-term price returns
  • Recognize the types of gaps that occur on price charts
  • Identify the significance of various types of gaps
  • Recognize wide-range and narrow-range days
  • Describe the implications for volatility based on the appearance of wide-range and narrow-range days
  • Identify the formation and interpretation of common candlestick patterns

 

Chapter 9: Confirmation: From Charles D. Kirkpatrick II and Julie R. Dahlquist, Technical Analysis: The Complete Resource for Financial Market Technicians, 3rd edition (2016), Chapter 18

Learning objectives:

  • Identify the methods of plotting volume information on price charts
  • Explain traditional general rules for interpreting volume data
  • Identify the major indexes and oscillators designed to use volume as confirmation
  • Explain open interest and how it might be used for confirmation
  • Explain the concept of momentum in price action
  • Identify characteristics of the most commonly used indexes and oscillators

 

Chapter 10: Point-and-Figure charting: From Perry Kaufman, Trading systems and Methods +Website, 5th edition (2013), Chapter 5

Learning objectives:

  • Describe how point and figure charts are constructed
  • Describe the importance of box size on the sensitivity of point and figure charts
  • Construct various box size reversal point and figure charts
  • Interpret reversal signals on a point and figure chart
  • Describe the concept of price targets attained by using a horizontal or vertical count on a point and figure chart

 

Chapter 11: Introduction to the Wave Principle: From Wayne Gorman, Jeffrey Kennedy, and Robert R. Prechter, Jr., Visual Guide to Elliot Wave Trading (2013), Appendix A

Learning objectives:

  • Describe the important elements of the Elliot Wave Theory
  • Differentiate between impulse waves and corrective waves

 

Chapter 12: The Anatomy of Elliot Wave Trading: From Wayne Gorman, Jeffrey Kennedy, and Robert R. Prechter, Jr., Visual Guide to Elliot Wave Trading (2013), Chapter 1

Learning objectives:

  • Differentiate between impulse waves and corrective waves
  • Identify the count of a given wave in a defined structure
  • Identify whether a technical study falls into one of three categories: trend-following indicators, oscillators, and sentiment indicators

 

Chapter 13: Overview: From David Wilson, Visual Guide to Financial Markets (2012), Chapter 1

Learning objectives:

  • Identify the basic definition, concepts and key points of the following:
    • Debt vs. Equity
    • Quotations
    • Returns, Risk and Relative Value

 

Chapter 14: Government: From David Wilson, Visual Guide to Financial Markets (2012), Chapter 2

Learning objectives:

  • Recognize the differences between the forex market and other markets
  • Recognize relative values between various currencies
  • Identify the basic definition, concepts and key points of the following:
    • Government securities
    • Currencies
    • Notes
    • Bills
    • Bonds
    • Quotations
    • Returns, Risk and Relative Value
    • Yield Curve

 

Chapter 15: Companies: From David Wilson, Visual Guide to Financial Markets (2012), Chapter 3

Learning objectives:

  • Describe how market prices are quoted and how they change in various market conditions
  • Identify the basic definition, concepts and key points of the following:
    • Company securities (stocks and bonds)
    • Money markets
    • Quotations
    • Returns, Risks and Relative Value

 

Chapter 16: Hard Assets: From David Wilson, Visual Guide to Financial Markets (2012), Chapter 4

Learning objectives:

  • Describe how commodity market prices are quoted and how they change in various market conditions
  • Describe leverage in the context of futures markets versus cash markets
  • Identify the basic definition, concepts and key points of the following:
    • Commodities and Futures
    • Gold
    • Oil
    • Real Estate
    • Quotations
    • Returns, Risks and Relative Value

 

Chapter 17: Indexes: From David Wilson, Visual Guide to Financial Markets (2012), Chapter 5

Learning objectives:

  • Identify the different weightings that may be used in an Index
  • Identify the specific weightings used for commonly followed indexes
  • Explain how stock price changes impact price weighted, market capitalization-weighted and equally weighted indexes

 

Chapter 18: Options Pricing Basics: From Edwin J. Elton, Martin J. Gruber, Stephen J. Brown, and William N. Goetzmann, Modern Portfolio Theory and Investment Analysis, 9th edition (2014), Chapter 23

Learning objectives:

  • Identify the basic characteristics of options
  • Explain the differences between call and put options

 

Chapter 19: Understanding Implied Volatility: From Russell Rhoads, Trading VIX Derivatives: Trading and Hedging Strategies Using VIX Futures, Options, and Exchange Traded Notes (2007), Chapter 1

Learning objectives:

  • Describe the difference between historical and implied volatility
  • Identify the concept of put-call parity
  • Calculate single-day implied volatility

 

Chapter 20: About the VIX Index: From Russell Rhoads, Trading VIX Derivatives: Trading and Hedging Strategies Using VIX Futures, Options, and Exchange Traded Notes (2007) Chapter 2

Learning objectives:

  • Describe the VIX index
  • Explain the implications of a rising or falling VIX index

 

Chapter 21: Consensus and Commitment Indicators: From Dr. Alexander Elder, The New Trading for a Living (2014), Chapter 2

Learning objectives:

  • Recognize signals from a Commitment of Traders report
  • Describe how to interpret short interest data, advisory opinions, advertisements and news headlines in a way that helps an analyst confirm or contrast investor sentiment readings

 

Chapter 22: Measuring Market Strength: From Charles D. Kirkpatrick II and Julie R. Dahlquist, Technical Analysis: The Complete Resource for Financial Market Technicians, 3rd edition (2016), Chapter 8

Learning objectives:

  • Identify basic measures of internal market strength
  • Explain measures of market breadth
  • Recognize signals of changes in market breadth using the advance-decline line
  • Interpret signals of changing market strength from volume data
  • Identify measures of market strength from new high and new low data
  • Recognize measures of market strength based on the number of stocks prices above their moving average

 

Chapter 23: Seasonality and Calendar Patterns: From Perry Kaufman, Trading systems and Methods +Website, 5th edition (2013), Chapter 9 and 10

Learning objectives:

  • Describe market cycles and how they differ from mathematical cycles
  • Describe the basic principles of cycles
  • Describe seasonal patterns in the markets

 

Chapter 24: What is the Efficient Market Hypothesis?: From Edwin T. Burton and Sunit N. Shah, Behavioral Finance, (2013), Chapter 1

Learning objectives:

  • Describe how point and figure charts are constructed
  • Describe the importance of box size on the sensitivity of point and figure charts
  • Construct various box size reversal point and figure charts
  • Interpret reversal signals on a point and figure chart
  • Describe the concept of price targets attained by using a horizontal or vertical count on a point and figure chart

 

Chapter 25: The Efficient Market Hypothesis and the “Market Model”: From Edwin T. Burton and Sunit N. Shah, Behavioral Finance, (2013), Chapter 2

Learning objectives:

  • Describe the basic components of the CAPM model
  • Identify valid criticisms of the CAPM model

 

Chapter 26: The Forerunners to Behavioral Finance: From Edwin T. Burton and Sunit N. Shah, Behavioral Finance, (2013), Chapter 3

Learning objectives:

  • Contrast Momentum strategies and Mean Reversion strategies
  • Define the general concept of value investing
  • Describe why value investing is similar to mean reversion strategy

 

Chapter 27: Noise Traders and the Law of One Price: From Edwin T. Burton and Sunit N. Shah, Behavioral Finance, (2013), Chapter 4

Learning objectives:

  • Describe the concept of Fungibility
  • Identify what defines a “noise trader”

 

Chapter 28: Noise Traders as Technical Traders: From Edwin T. Burton and Sunit N. Shah, Behavioral Finance, (2013), Chapter 7

Learning objectives:

  • Explain why Technical Traders are considered a specific type of noise trader
  • Explain the implications of Technical Traders in the market

 

Chapter 29: Academic Approaches to Technical Analysis: From Andrew W. Lo and Jasmina Hasanhodzic, The Evolution of Technical Analysis: Financial Prediction from Babylonian Tablets to Bloomberg Terminals, (2010), Chapter 8

Learning objectives:

  • Contrast Efficient Market Hypothesis with Adaptive Market Hypothesis
  • Describe how technical analysis remains relevant despite the EMH

 

Chapter 30: Basic Concepts and Calculations: From Perry Kaufman, Trading systems and Methods +Website, 5th edition (2013), Chapter 2

Learning objectives:

  • Identify statistical measures that need to be reviewed when back testing, or conducting quantitative, statistical analysis of trading systems
  • Identify the characteristics of a statistically normal distribution
  • Define variance, skewness and kurtosis
  • Recognize standard measurements of performance such as: Information ratio, Sharpe Ratio, Treynor Ratio, Calmar Ratio, Sortino Ratio

 

Chapter 31: Objective Rules and Their Evaluation: From David Aronson, Evidence-Based Technical Analysis, (2006), Chapter 1

Learning objectives:

  • Identify how to distinguish an objective from a subjective rule in technical analysis
  • Describe the use of binary rules and individual or multiple thresholds
  • Recognize the difference between traditional rules and inverse rules
  • Recognize the difference between regular prices and detrended prices

 

Chapter 32: Being Right or Making Money: From Ned Davis, Being Right or Making Money, (2014), Chapter 1

Learning objectives:

  • Identify the four key characteristics Ned Davis claims are common to successful investors
  • Identify nine rules to consider when building a timing model
  • Explain the logic of using moving averages as trend indicators

 

Chapter 33: The Model-Building Process: From Ned Davis, Being Right or Making Money, (2014), Chapter 2

Learning objectives:

  • Describe the use of advisory service opinion as a sentiment indicator
  • Recognize the difference between sentiment and valuation indicators
  • Describe the main tools that the Federal Reserve uses to adjust the money supply
  • Interpret the likely results of changes in Fed monetary policy tools on market conditions
  • Identify the outcome of good economic indicator readings and the likely influence of this news on stock prices
  • Recognize how moving averages of stock prices can be included in a forecasting model
  • Recognize how momentum indicators can be included in a forecasting model

 

Chapter 34: Relative Strength as a Criterion for Investment Selection: From Robert A. Levy, “Relative Strength as a Criterion for Investment Selection” – The Journal of Finance 22, Issue 4, (1967), 595-610

Learning objectives:

  • Define relative strength (RS)
  • Describe how relative strength (RS) is used
  • Describe the value of relative strength study
  • Identify the correlation coefficient

 

And my copy…

CMT 1 Book 01

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