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Knowledge Base | CMT Association

Knowledge Base

The Trend(Line) Is Your Friend (Article)

If you ask any professional trader what is the most important rule when trading; nine times out of 10 the response will be money management. Any two traders can enter the market at the same time and same price but the...
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Fan Principle

Another use of the trendline.  Sometimes after the violation of an up trendline, price will decline a bit before rallying back to the old up trendline (now resistance).  Fan lines are drawn are either drawn along...
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Double Trendline

Double Trendline When two relatively close Parallel Trendlines are needed to define the true trend pattern. Source: Edwards, Robert and Magee, John.Technical Analysis of Stock Trends 9th Edition; (c)...
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Validity of Trendline Penetration

Validity of Trendline Penetration The application of the following three tests when a trendline is broken to determine whether the break is valid, or whether the trendline is still basically intact: (1) the extent of the...
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Red Trendline

Red Trendline A straight line connecting two or more Bottoms together. To avoid confusion, Edwards and Magee use a red line for Bottom Trendlines and a blue line for Top Trendlines. Source: Edwards, Robert and...
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Blue Trendline

Blue Trendline A straight line connecting two or more Tops together. To avoid confusion, Edwards and Magee use a blue line for Top Trendlines and a red line for Bottom Trendlines. Source: Edwards, Robert and Magee,...
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Descending (Down) Trendline

Descending (Down) Trendline The declining wave in a stock or commodity is composed of a series of ripples. When the tops of these ripples form on, or very close to, a downward slanting straight line, a basic Descending or...
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Ascending (Up) Trendline

Ascending (Up) Trendline The advancing wave in a stock or commodity is composed of a series of ripples. When the bottoms of these ripples form on, or very close to, an upward slanting straight line, a basic Ascending or...
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Trendlines

Trendline If we actually apply a ruler to a number of charted price trends, we quickly discover the line that most often is really straight in an uptrend is a line connecting the lower extremes of the Minor Recessions...
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Types of Divergences

Types of Divergences Divergences, whether bullish or bearish in nature, have been classified according to their levels of strength. The strongest divergences are Class A divergences; exhibiting less strength are Class B...
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Divergences and Confirmations

Divergence Divergence refers to momentum that moves in the direction opposite to the direction of the price trend. Divergence also refers to momentum higher or lower, but less high or low than a previous peak or trough,...
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Fixing Bollinger Bands (Article)

Bollinger Bands are used widely in the trading community and are a key component of many trading strategies. By their nature, Bollinger bands offer a particular perspective of the market. But that perspective is not without...
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Keltner Channel

Keltner Channel A volatility based 'envelope' indicator that measures the movement of stocks in relation to an upper and lower moving-average band. This indicator, named after Chester W. Keltner, is used by sophisticated...
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Bollinger Bands

Bollinger Bands This popular indicator is similar to the older moving average envelope. It was developed by John A. Bollinger, CFA, CMT. In contrast to the moving average envelope, instead of plotting a "resistance" line...
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Envelopes

Envelopes Envelopes are lines placed at fixed percentages above and below a moving average line. Envelopes help determine when a market has traveled too far from its moving average and is overextended. Source: Murphy,...
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Channel Line

Channel Line Straight Lines drawn parallel to the basic trendline. In an uptrend, the channel line slants up to the right and is drawn above rally peaks; in a downtrend, the channel line is drawn below price troughs and...
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Schultz AT – The Misnamed Indicator

Tracing an indicator’s origin is an exciting hunt. Gregory Morris and Robert Colby have written about the “Schultz AT” measure of market breadth. Morris asked who Schultz was but did not get a complete answer, while...
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Bulls vs. Bears: The Market Breadth Score (Article)

Bulls vs. Bears: The Market Breadth Score By Alexandra Guevara Summary Volatile and oscillating markets can often make it difficult to discern broader investor sentiment and market direction. For active traders,...
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$TICK – Tock – Testing the NYSE TICK Index

$TICK - Tock - Testing the NYSE TICK Index By Erik Skyba, CMT Senior Market Technician, TradeStation Labs Summary If you search for the words "NYSE Tick Index" on the Internet, you will find links to many articles...
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Directional Movement Indicator (DMI) and Average Directional Index (ADX)

Directional Movement Indicator (DMI) and Average Directional Index (ADX)  Bloomberg Function: Ticker <Equity> <DMI> GO Created by Welles Wilder (also creator of RSI); DMI measures the "directional movement",...
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ARMS Index (TRIN)

ARMS Index (TRIN) Purpose of the ARMS index is to gauge whether there's volume in rising or falling stocks. A short-term techncial analysis breadth indicator calculated as the following:   TRIN stands for...
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Unchanged Issues Index

Unchanged Issues Index The unchanged issues index uses a ratio of the number of unchanged stocks to the total traded. The theory behind it is that during periods of high directional activity, the number of unchanged...
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Hughes Breadth Oscillator

Hughes Breadth Oscillator The Hughes breadth oscillator is a ratio of the difference between the declines divided by the total issues traded. This ratio is traditionally smoothed with a moving average. When the ratio...
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Absolute Breadth Index

Absolute Breadth Index The Absolute Breadth Index is a modestly effective measure of stock price movement, regardless of direction, up or down. The Absolute Breadth Index uses daily New York Stock Exchange data. Weekly...
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Advance/Decline Ratio

Advance/Decline Ratio The Advance/Decline Ratio is a breadth-momentum oscillator calculated by first dividing the number of advancing issues by the number of declining issues each day; and then by smoothing the previously...
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Advance-Decline Line

Advance-Decline Line (A-D Line) The Cumulative Daily Advance-Decline Line, perhaps the most widely known market breadth indicator, traditionally has been used to spot divergences relative to a general market price index,...
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Market Breadth

Market Breadth On any given day, a stock price can do one of three things-close higher, lower, or unchanged from the previous day's close. If a closing price is above its previous close, it is considered to be advancing,...
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Implied Volatility in 3-D (Article)

By Frederic Palmliden | CMT, Senior Quantitative Analyst, TradeStation Labs Summary An implied volatility surface is a three-dimensional plot that reveals implied volatility data for a number of different options...
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FX Volatility (Report)

Summary Very much like people, foreign exchange (forex or FX) pairs have unique behaviors and traits that can be observed and studied over time. This may help us to better understand the nature of their price movements. For...
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2 Rivers Strategy (Article)

2 Rivers Strategy By Frederic Palmliden, CMT Senior Market Technician, TradeStation Labs Summary Accounting for volatility helps filter unwanted signals from a trend-following system, since highly volatile markets are...
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