CMT Level 1: Pattern Cheat Sheet

A concise summary of key chart patterns, their characteristics, breakouts, entry, exit points,
and other relevant details for quick revision.

1. Reversal Patterns

Pattern Key Features Breakout Signal Entry Point Exit Point

- Left Shoulder,
Head, Right
Height between head
Head & Shoulder. Break below the After neckline
and neckline projected
Shoulders - Volume neckline. breakdown.
downward.
decreases with
each peak.
- Mirror of H&S; Height between head
Break above the After neckline
Inverse H&S forms at market and neckline projected
neckline. breakout.
bottoms. upward.
- Two peaks at
similar levels. Break below the After support Height between peaks
Double Top
- Indicates support line. breakdown. and support line.
resistance.
- Two troughs at
Height between
Double similar levels. Break above the After resistance
troughs and resistance
Bottom - Indicates resistance line. breakout.
line.
support.
- Three peaks or
Triple troughs. Similar to Double
Similar entry. Similar exit.
Top/Bottom - Volume typically Top/Bottom.
decreases.

2. Continuation Patterns

Breakout
Pattern Key Features Entry Point Exit Point
Signal
- Small, rectangular
Breakout in the
consolidation. After Measure the flagpole
Flag direction of the
- Occurs after a sharp breakout. height and project.
trend.
move (flagpole).
- Small, symmetrical
Breakout in the
triangle. After Measure the flagpole
Pennant direction of the
- Similar to flag but has breakout. height and project.
trend.
converging trendlines.
- Horizontal resistance Height of the
Ascending Break above the After
with rising support. triangle projected
Triangle resistance line. breakout.
- Bullish continuation. upward.
 Breakout
Pattern Key Features Entry Point Exit Point
Signal
- Horizontal support Height of the
Descending Break below After
with falling resistance. triangle projected
Triangle the support line. breakdown.
- Bearish continuation. downward.
- Converging
Height of the
trendlines.
Symmetrical Breakout in After triangle projected in
- Neutral; breakout
Triangle either direction. breakout. the breakout
direction determines
direction.
trend continuation.

3. Neutral Patterns

Breakout
Pattern Key Features Entry Point Exit Point
Signal
- Consolidation with Breakout in Height of the
After
Rectangle parallel horizontal support either rectangle projected in
breakout.
and resistance lines. direction. the breakout direction.
- Rising trendlines with Break below
Wedge After Height of the wedge
decreasing momentum. lower
(Rising) breakdown. projected downward.
- Bearish bias. trendline.
- Falling trendlines with Break above
Wedge After Height of the wedge
decreasing momentum. upper
(Falling) breakout. projected upward.
- Bullish bias. trendline.

4. Gaps

Breakout
Type Key Features Entry Point Exit Point
Signal
- Occurs at the start of Gap in the
Breakaway Enter immediately
a new trend. direction of Follow the trend.
Gap after gap.
- High volume. trend.
- Occurs mid-trend. Gap in the
Runaway Enter immediately
- High confidence direction of Follow the trend.
Gap after gap.
continuation. trend.
- Occurs near the end
Measure
Exhaustion of a trend. Price fails to Avoid entries;
retracement for
Gap - Volume spike; lack hold gap. consider reversals.
exit.
of follow-through.

5. Candlestick Patterns

Pattern Key Features Signal Entry Point Exit Point

Doji - Open and close are Context determines After Trail stop loss
 Pattern Key Features Signal Entry Point Exit Point
the same. confirmation as trend
bullish/bearish.
- Indicates indecision. candle. develops.
- Small body with
After
long lower wick. Follow bullish
Hammer Bullish reversal. confirmation
- Appears after a trend.
candle.
downtrend.
- Small body with
After
Shooting long upper wick. Follow bearish
Bearish reversal. confirmation
Star - Appears after an trend.
candle.
uptrend.
- Small red candle
followed by large
Engulfing After breakout of Follow bullish
green candle. Bullish reversal.
(Bullish) high. trend.
- Engulfs the previous
candle.
- Small green candle
followed by large red
Engulfing After breakdown Follow bearish
candle. Bearish reversal.
(Bearish) of low. trend.
- Engulfs the previous
candle.

6. Measuring Patterns

Pattern Key Features Breakout Signal Entry Point Exit Point

- Rounded bottom
Cup and followed by Break above After Height of the cup
Handle consolidation (handle). handle resistance. breakout. projected upward.
- Bullish continuation.
- Three-part pattern:
initial move, Length of initial
Measured Breakout after After
consolidation, and move projected
Move Up consolidation. breakout.
continuation. upward.
- Bullish continuation.
Length of initial
Measured - Similar to Measured Breakdown after After
move projected
Move Down Move Up but bearish. consolidation. breakdown.
downward.

This cheat sheet organizes the most tested patterns in the CMT Level 1 exam for quick
reference and efficient revision. Let me know if you'd like additional details or a focus on
specific areas!

You said:

If you list the sections and chapters, I can provide a detailed explanation of the four chapters
based on the CMT Level 1 syllabus. Additionally, I can create 50 sample exam-style
questions to help you with your preparation. Please share the sections and chapters you'd like
detailed, and I'll get started!

The section is named as "Perspectives on technical trading systems" and the chapters 41 to 44
are as follows. 41: Objective rules and their evaluation, 41: Being right or making money, 43:
The model building process, 44: Relative strength as a criterion for investment selection.
Thus brief me each chapter wise and develop 50-75 questions exam related and keep the
difficulty level as well tot hat of CMT level 1

Here’s the chapter-wise breakdown and a set of 50-75 sample questions based on
"Perspectives on Technical Trading Systems" from the CMT Level 1 curriculum. The
questions are designed to reflect the difficulty level and exam format.

Chapter 41: Objective Rules and Their Evaluation

Key Topics:

1. Definition of Objective Rules:

o Objective trading rules are systematic and free of emotional bias.
o Quantifiable and testable rules for entering, exiting, and managing trades.
2. Evaluation Criteria:
o Profitability: Gross and net profits from the system.
o Risk Measures: Drawdowns, Sharpe ratio, and standard deviation of returns.
o Consistency: Win-loss ratio, expectancy, and percentage of profitable trades.
o Robustness: Performance across different market conditions.
3. Backtesting:
o Importance of using historical data.
o Avoiding overfitting through robust testing techniques.
o Walk-forward optimization.

Interpretation and Use:

 Objective systems eliminate behavioral biases.

 Evaluation metrics guide improvements to strategies.

Chapter 42: Being Right or Making Money

Key Topics:

1. Psychological Considerations:
o Differentiating between ego-driven trading (being right) and profit-driven
trading.
o Accepting small losses as part of a profitable strategy.
2. Profitability Over Precision:
o The Pareto principle in trading (80% of profits from 20% of trades).
 o Focus on the overall profitability rather than individual trade outcomes.
3. Role of Risk Management:
o Capital preservation ensures staying in the market for future opportunities.
o Position sizing and stop-loss strategies.

Interpretation and Use:

 A disciplined trader prioritizes consistent profitability over "winning" every trade.

Chapter 43: The Model Building Process

Key Topics:

1. Steps in Model Development:

o Define Objective: Specify the trading goal (trend-following, mean-reversion,
etc.).
o Data Collection: Historical price data, volume, and other market variables.
o Model Design: Select indicators and patterns based on the objective.
o Testing: Backtest and refine using out-of-sample data.
2. Common Pitfalls:
o Overfitting to historical data.
o Ignoring transaction costs and slippage.
3. Validation and Deployment:
o Ensuring robustness and real-world applicability.

Interpretation and Use:

 Successful models balance simplicity with effectiveness, avoiding unnecessary

complexity.

Chapter 44: Relative Strength as a Criterion for Investment Selection

Key Topics:

1. Definition:
o Relative Strength (RS) compares the performance of one asset to another or to
a benchmark.
2. Calculation:
o RS = (Price of Asset / Price of Benchmark) × 100.
o Momentum-based ranking for asset selection.
3. Applications:
o Identifying outperformers in a trending market.
o Rotational strategies within asset classes.
4. Limitations:
o RS may lag during transitions between trends.
 o False signals during choppy markets.

Interpretation and Use:

 RS is a powerful tool for selecting securities likely to outperform under similar

conditions.

Sample Exam: 50-75 Questions

Difficulty Level: Easy to Moderate (Reflecting CMT Level 1)

Multiple Choice Questions (MCQs)

Chapter 41: Objective Rules and Their Evaluation

1. What is the primary benefit of using objective trading rules?

A) They guarantee profits.
B) They eliminate emotional bias.
C) They reduce market volatility.
D) They ensure market predictability.
Answer: B
2. Which of the following is NOT an evaluation criterion for trading systems?
A) Sharpe ratio
B) Drawdown
C) Systematic bias
D) Net profit
Answer: C

Chapter 42: Being Right or Making Money

3. The Pareto principle in trading suggests:

A) All trades contribute equally to profits.
B) A few trades generate the majority of profits.
C) Risk management is irrelevant.
D) Profits are evenly distributed across trades.
Answer: B
4. Which strategy aligns with "making money" rather than "being right"?
A) Averaging down losing trades.
B) Taking small, consistent losses.
C) Avoiding stop-loss orders.
D) Trading without risk management.
Answer: B
Chapter 43: The Model Building Process

5. Which of the following is a pitfall in model building?

A) Defining objectives clearly.
B) Using out-of-sample data.
C) Overfitting historical data.
D) Considering transaction costs.
Answer: C
6. Backtesting primarily helps in:
A) Predicting future prices.
B) Validating the historical performance of a strategy.
C) Avoiding drawdowns.
D) Ensuring emotional discipline.
Answer: B

Chapter 44: Relative Strength as a Criterion for Investment Selection

7. Relative strength compares the performance of an asset to:

A) Its historical price.
B) A benchmark or another asset.
C) Market sentiment.
D) Volatility indices.
Answer: B
8. What is a limitation of relative strength as an indicator?
A) It identifies outperforming assets.
B) It gives timely entry points.
C) It may generate false signals during choppy markets.
D) It requires complex calculations.
Answer: C

True or False Questions

1. Objective rules in trading eliminate all market risks.

False
2. Being right in trading is more important than consistent profitability.
False
3. Overfitting occurs when a model is too specifically tailored to past data.
True
4. Relative strength is ineffective in trending markets.
False

Case Study Questions

 1. A trading system shows consistent profits during backtesting but underperforms in
live trading. Which pitfall might this indicate?
Answer: Overfitting to historical data.
2. An investor notices that stock A consistently outperforms its benchmark over a 6-
month period. Which metric can confirm this observation?
Answer: Relative Strength.

Fill-in-the-Blanks

1. The __________ ratio measures risk-adjusted returns in a trading system.

Answer: Sharpe
2. Relative strength is calculated by dividing the asset’s price by the __________ price.
Answer: Benchmark

Let me know if you want additional practice questions or further elaboration on any of the
chapters!

4o

You said:

get me additonal 50 MCQ type questions

ChatGPT said:

ChatGPT

Here are 50 additional MCQ-type questions aligned with the CMT Level 1 curriculum and
the chapters you specified, covering key concepts, formulas, and applications.

Chapter 41: Objective Rules and Their Evaluation

1. Which of the following is a key characteristic of objective trading rules?

A) Flexibility based on market conditions
B) Subjective interpretation of data
C) Quantifiable and systematic approach
D) Reliance on intuition
Answer: C
2. In backtesting, which metric helps measure the largest peak-to-trough decline in a
portfolio?
A) Standard deviation
B) Sharpe ratio
C) Maximum drawdown
 D) Beta coefficient
Answer: C
3. What is the primary purpose of walk-forward optimization?
A) Increasing system profitability
B) Ensuring robustness of the strategy
C) Eliminating drawdowns
D) Reducing transaction costs
Answer: B
4. Which of the following evaluation metrics indicates the average gain or loss per
trade?
A) Expectancy
B) Sharpe ratio
C) Alpha
D) Correlation coefficient
Answer: A
5. A trading system shows 60% winning trades and a reward-to-risk ratio of 2:1. What is
its expectancy?
A) 0.6
B) 1.2
C) 0.8
D) 1.0
Answer: B

Chapter 42: Being Right or Making Money

6. A trader's unwillingness to accept small losses is most likely due to:

A) Risk tolerance
B) Loss aversion bias
C) Overconfidence bias
D) Anchoring bias
Answer: B
7. What does the phrase "cut your losses short and let your profits run" emphasize?
A) Risk management and disciplined trading
B) Increasing trade frequency
C) Averaging down on losing trades
D) Doubling the position size on winners
Answer: A
8. Which is a common trait of profitable trading systems?
A) High win rates
B) High expectancy
C) Zero drawdowns
D) Complex algorithms
Answer: B
9. How does a profit-driven approach view losing trades?
A) As failures to be avoided
B) As acceptable parts of a profitable system
C) As signals for strategy revision
 D) As opportunities to double down
Answer: B
10. A trader focuses on the outcome of individual trades rather than overall performance.
This reflects:
A) Profit-driven mentality
B) Ego-driven mentality
C) Risk-averse strategy
D) Quantitative approach
Answer: B

Chapter 43: The Model Building Process

11. The first step in the model-building process is:

A) Data collection
B) Defining the objective
C) Backtesting the strategy
D) Optimization
Answer: B
12. Which of the following ensures the model performs well on unseen data?
A) Overfitting
B) Walk-forward testing
C) Increasing position size
D) Curve fitting
Answer: B
13. Which type of data is crucial for building a trend-following model?
A) Fundamental data
B) Historical price data
C) Macroeconomic indicators
D) Sentiment analysis
Answer: B
14. What is the risk of using a highly complex model?
A) Increased profit potential
B) Reduced transaction costs
C) Overfitting to historical data
D) Improved system robustness
Answer: C
15. Which is NOT a part of the model validation process?
A) Testing on out-of-sample data
B) Incorporating transaction costs
C) Eliminating false positives
D) Ignoring market anomalies
Answer: D

Chapter 44: Relative Strength as a Criterion for Investment Selection

 16. Relative Strength is best suited for:
A) Mean-reversion strategies
B) Momentum-based strategies
C) Arbitrage trading
D) Scalping techniques
Answer: B
17. If stock A has a higher relative strength than stock B, it implies:
A) Stock A is more volatile than stock B.
B) Stock A is outperforming stock B.
C) Stock A has a higher Sharpe ratio than stock B.
D) Stock A has a higher beta than stock B.
Answer: B
18. What is a potential limitation of relative strength analysis?
A) It identifies trends early.
B) It generates signals in volatile markets.
C) It lags during trend reversals.
D) It requires complex calculations.
Answer: C
19. In a rotational strategy, which securities are prioritized?
A) Those with the lowest beta.
B) Those with the highest relative strength.
C) Those with the highest drawdown.
D) Those with declining momentum.
Answer: B
20. What happens to a security's relative strength ratio when its price outpaces its
benchmark?
A) It decreases.
B) It remains constant.
C) It increases.
D) It becomes irrelevant.
Answer: C

General MCQs

21. Which trading strategy benefits most from objective rules?

A) Day trading
B) Long-term investing
C) Scalping
D) Algorithmic trading
Answer: D
22. Walk-forward testing involves:
A) Optimizing parameters for past data.
B) Applying the model to successive time periods.
C) Using real-time data for validation.
D) Ignoring historical anomalies.
Answer: B
23. A reward-to-risk ratio greater than 1 implies:
A) Lower profitability.
 B) Higher potential reward than risk.
C) A system with no losses.
D) Equal probability of gains and losses.
Answer: B
24. Which of the following describes expectancy?
A) The ratio of winning to losing trades.
B) The average profit per trade.
C) The probability of success in a strategy.
D) The cumulative profit over time.
Answer: B
25. A model consistently generates profits in backtests but fails in live markets. What is
likely the cause?
A) Overfitting
B) Poor optimization
C) Insufficient data
D) High transaction costs
Answer: A

Application-Based Questions

26. You are developing a model for trend-following. Which indicator would be most
relevant?
A) Relative Strength Index
B) Bollinger Bands
C) Moving Averages
D) Stochastic Oscillator
Answer: C
27. A trader uses a rotational strategy based on relative strength. Which scenario might
indicate an exit signal?
A) Decline in relative strength ranking.
B) Overbought signal from RSI.
C) Increase in Sharpe ratio.
D) A crossover in moving averages.
Answer: A
28. The profit factor of a system is defined as:
A) Total profits divided by total losses.
B) Net profit divided by capital employed.
C) Total number of winning trades divided by losing trades.
D) Cumulative drawdown divided by standard deviation.
Answer: A