CMT Level 3 Exam Guide ( Update) The Integration of Technical Analysis | Questions and Verified Answers| Grade A| 100% Correct

Course

CMT

Institution

CMT

CMT Level 3 Exam Guide ( Update) The Integration of Technical Analysis | Questions and Verified Answers| Grade A| 100% Correct Q: 3 steps added to trading plan to limit major disadvantage of trend following system Answer: 1. reduce size or not trade during trendless period (employ trending indicator to determine) 2. reduce trading or stop after equity curve declines by pre-defined amount. 3. reduce or stop trading after equity curve entered pre-defined downtrend. Q: 3 major disadvantages of trend following systems Answer: 1. Series of small losses that add up to a large drawdown in trendless market. (biggest issue) 2. Subject to whipsaws 3. Causes extreme volatility in equity curve Q: How is total risk of a system measured? Answer: Standard deviation of returns Q: How is systematic risk of system measured? Answer: By the beta coefficient of the stocks. Q: 3 conditions that must be met for group think to be useful Answer: 1. people must be unaffected by others decisions. 2. probability of being correct must be independent of probability of everyone else being correct. 3. people must be unaffected by their vote being decisive. Q: Monte Carlo Simulation description Answer: method that creates a sampling distribution from an original sample by randomly resampling and creating an equity curve. process repeated thousands of times and if majority of equity curves are profitable then it's likely that the system is robust and will be profitable. Q: 2 reasons why Gold has inverse relationship with USD. Answer: 1. Hedge vs. inflation 2. Safe haven for weak $ and financial crisis. Q: Rule of thumb about size of st. deviation vs. monthly returns Answer: St. deviation should not be more than 5x the monthly return. Q: Total risk formulas Answer: TR = market risk + firm specific risk TR = systematic risk + unsystematic risk TR = undiversifiable risk + diversifiable risk Q: Decisions required for successful trading system Answer: 1. Markets 2. Position sizing 3. Entries 4. Stops 5. Exits 6 Tactics Q: 5 Initial decisions for setting up a system Answer: 1. Model to use. 2. Markets to trade in. 3. Time horizon 4. Risk control plan 5. Evaluation plan Q: Primary problem of optimization Answer: Curve fitting to the data. Q: profit factor and levels Answer: total profit/total loss must be greater than 1. greater than 2 is good. over 10 is a warning of curve fitting Q: payoff ratio and levels Answer: avg. winning trade/avg. losing trade. greater than 2 is good Q: % of winning trades levels Answer: >60% for profit systems 30%-50% for trend following systems Q: MAR ratio and levels Answer: Profit/MDD should be greater than 1 (Recovery Ratio) System MAR is the ratio of annual percentage net gain for the system to the maximum percentage drawdown (MDD). The maximum percentage draw-down is the maximum percent that the equity curve corrected from a peak. The ratio measures the greatest decline that occurred during the system run and thus the potential loss in the future for the system. A ratio of greater than 1.0 is preferred. Trade MAR is the ratio of the net annual gain percentage to the largest trade drawdown in a trade, sometimes called the Maximum Adverse Excursion. Where maximum system drawdown may include many trades, the individual trade risk is also needed to gauge the systems performance and isolate where losses are occurring. Q: 3 Ways to create synthetic data Answer: 1. Monte Carlo 2. Random numbers