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CMT Level 1

Part IV: Chart Pattern Analysis

Chapter 15: Bar Chart Patterns

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  • Chapter Objectives
  • What Is a Pattern?
    • Common Pattern Characteristics
      • Entry and Exit
      • Fractal
      • Pullbacks and Throwbacks
      • Failures
  • Do Patterns Exist?
  • Behavioral Finance and Pattern Recognition
  • Computers and Pattern Recognition
  • Market Structure and Pattern Recognition
    • Further Reading
      • Bar Chart Patterns
        • Encyclopedia of Chart Patterns by Thomas N. Bulkowski
        • How Charts Can Help You in the Stock Market by WIlliam Jiler
        • How Technical Analysis Works by Bruce Kamich
        • Profits in the Stock Market by H. M. Gartley
        • Technical Analysis by Jack Schwager
        • Technical Analysis Explained by Martin Pring
        • Technical Analysis of Stock Trends by Robert Edwards and John Magee
        • Technical Analysis of the Financial Markets by John Murphy
      • Point-and-Figure Patterns
        • Point and Figure Charting by Thomas J. Dorsey
        • Study Helps in Point & Figure Technique by Alexander Wheelan
        • The Chartcraft Method of Point and Figure Trading by Abe Cohen, Earl Blumenthal, and Michael Burke
        • The Definitive Guide to Point and Figure by Jeremy du Plessis
      • Trading–Short-Term Patterns
        • Connors on Advanced Trading Strategies by Laurence Connors
        • Dave Landry’s 10 Best Swing Trading Patterns and Strategies by David Landry
        • Encyclopedia of Candlestick Charts by Thomas N. Bulkowski
        • Japanese Candlestick Charting Techniques by Steve Nison
        • Long-Term Secrets to Short-Term Trading by Larry Williams
        • Market Wizards by Jack Schwager
        • New Concepts in Technical Trading Systems by J. Welles Wilder, Jr.
        • Street Smarts by Laurence Connors and Linda Bradford Rashke
        • Trading Systems and Methods by Perry J. Kaufman
  • Bar Charts and Patterns
    • Intro
    • How Profitable Are Patterns?
      • Using Breakout Price to Set Price Targets
    • Classic Bar Chart Patterns
      • Double Top and Double Bottom
        • Trading Double Formations
      • Rectangle (Also “Trading Range” or “Box”)
        • False and Premature Breakouts
        • Trading Rectangles
      • Triple Top and Triple Bottom
      • Standard Triangles
        • Statistics on Triangles
        • Descending Triangle
          • Descending triangle with breakout down
          • Descending triangle with breakout up
        • Ascending Triangle
          • Ascending triangle with breakout down
        • Symmetrical Triangle (Also “Coil” or “Isosceles Triangle”)
          • Symmetrical triangle with breakout up
          • Trading Triangles
      • Broadening Patterns
        • Other names for broadening patterns
          • megaphone
          • funnel
          • reverse triangle
          • inverted triangle
        • Broadening formation with breakout up
      • Diamond Top
        • Diamond pattern with breakout down
      • Wedge and Climax
        • Rising wedge with breakout down from a climax peak
        • Declining wedge with breakout up from climax trough
        • Trading Wedges
      • Patterns with Rounded Edges– Rounding and Head-and-Shoulders
        • Rounding Top, Rounding Bottom (Also “Saucer,” “Bowl,” or “Cup”)
          • Cup or bowl and handle variety of a rounding bottom with breakout up
          • Head-and-Shoulders
            • Head-and-shoulders top with breakout down
            • Head-and-shoulders bottom with breakout up
            • Trading Head-and-Shoulders Patterns
      • Shorter Continuation Trading Patterns– Flags and Pennants (Also “Half-Mast Formation”)
        • Flag and pennant in upward trend
        • Trading Flags and Pennants– Measured Rule
      • Long-Term Bar Chart Patterns with the Best Performance and the Lowest Risk of Failure
        • Comparative Results in Most Favorable Classic Bar Chart Patterns (Table)
  • Conclusion
  • Review Questions


Proceed to Chapter 22: System Design and Testing (in Kirkpatrick and Dahlquist)

Chapter list for Kirkpatrick and Dahlquist

Davis, CMT1 Chapter 4

Chapter 4: A Simple Model for Bonds

  • Intro
  • A Slight Modification
  • Summary

Davis, CMT1 Chapter 3

Chapter 3: A Stock Market Model

  • A Stock Market Model
  • Overview of the Fab Five
  • Tape Component
  • The Final Tape Component
  • The Sentiment Component
  • Sentiment Summary
  • The Monetary Component
  • Monetary Component Summary
  • Fab Five Combo Component
  • Combo Model Summary
  • Summing Up the Fab Five
  • How We Use the Fab Five

Davis, CMT1 Chapter 2

Chapter 2: The Model-Building Process

  • Intro
  • The Model-Building Process
  • Where to Start: Model Inputs
  • Sentiment and Valuation Indicators
  • Monetary Indicators
  • Economic Indicators
  • Internal Indicators
  • Moving Averages
  • Crossings and Slopes
  • Momentum
  • Putting Indicators Together
  • Conclusion
    • Gather as much objective, quantitative data as possible
    • Make certain the information is accurate and can be updated in a timely manner
    • Test data against the market to determine if they have any potential predictive value, making sure not to over-fit the data to historical prices
    • Use different types of indicators (trend, monetary, sentiment, etc) based on historical reliability and ability to complement each other
    • Combine the indicators into a model that gives a single composite reading.  Weight them equally or by relative importance or historical accuracy
    • Test the model to see if it provides reliable results
    • use the model as the basis for disciplined investing

Davis, CMT1 Chapter 1

Chapter 1: Being Right or Making Money

  • Bad News about Forecasting (Being Right)
  • Good News about Making Money
  • Being Right and Other Investment Techniques Are Overrated and Are Not the Keys to Success
  • The Four Real Keys to Making Money
    • Objective Indicators
    • Discipline
    • Flexibility
    • Risk Management
  • The Battle for Investment Survival and Handling Mistakes
  • Stories of Five Successful Winners
    • Marty Zweig
    • Paul Tudor Jones
    • Dan Sullivan
      • Four negative behaviors and attitudes that can lead to poor investment returns (The Chartist 9/12/2013):
        • Failing to take losses
        • Being overly fearful at market bottoms and overly optimistic at market tops
        • Failing to take responsibility for your own money
        • Not following a disciplined strategy
    • Chris Cadbury
    • Jim Stack
  • Making Our Own Reality
  • The Ned Davis Research Response to All This
  • Timing Models
    • Davis’ Law
    • Rule No 1: Don’t fight the tape
    • Rule No 2: Don’t fight the Fed
    • Rule No 3: Be wary of the crowd at extremes
  • What Is Contrary Opinion and How to Use It
  • History and Risk Management
  • The Rest of the Book
  • The Nine Rules of Ned Davis Research
    1. Don’t Fight the Tape
    2. Don’t Fight the Fed
    3. Beware of the Crowd at Extremes
    4. Rely on Objective Indicators
    5. Be Disciplined
    6. Practice Risk Management
    7. Remain Flexible
    8. Money Management Rules
    9. Those Who Do Not Study History Are Condemned to Repeat Its Mistakes

Davis, CMT1 Summary

Davis, Ned: Being Right or Making Money, John Wiley & Sons, Inc., c. 2014, ISBN: 978-1-118-99206-7

Chapters: 1-5







Chapter 1: Being Right or Making Money
Chapter 2: The Model-Building Process
Chapter 3: A Stock Market Model
Chapter 4: A Simple Model for Bonds
Chapter 5: Potential Bear Market in 2014; Bearish Secular Residue and Then Buying Opportunity




Burton and Shah, CMT1 Chapter 7

Behavioral Finance (Burton and Shah) CMT1 Chapter 7

Burton and Shah, CMT1 Chapter 3

Chapter 3: The Forerunners to Behavioral Finance

Burton and Shah, CMT1 Chapter 2

Chapter 2: The EMH and the “Market Model”

Burton and Shah, CMT1 Chapter 1

Part One: Introduction to Behavioral Finance
Chapter 1: What Is the Efficient Market Hypothesis?