CMT TUTORIAL

LEVEL 2

www.malkansview.com
 Level 2 Examination
2

Exam length: 4 hours

Exam format: MULTIPLE CHOICE

Questions to be solved: 160

www.malkansview.com
3

 The CMT level 2 candidate is responsible for theory and

application of concepts and techniques covered by the
assigned readings.

 The exam requires the candidate to demonstrate a greater

depth of competency and proficiency by applying more
advanced analytical techniques.

www.malkansview.com
 Content wise Weightage
4

Content Areas Percentage Questions

Theory and History 3% 4
Market Indicators 5% 7
Construction 1% 1
Trend Analysis 20% 30
Chart & Pattern Analysis 23% 35
Confirmation 15% 23
Cycles 3% 4
Selection and Decision 17% 26
System Testing & 10% 15
Money Management
Ethics 3% 5

TOTAL 100% 150

www.malkansview.com
 Topics
5

 Point & Figure

 Price Patterns
 Candlestick Patterns
 Elliot Wave Theory
 Momentum Indicators
 Sentiment Indicators
 Volume, Open Interest & Breadth
 Cycles
 Diversification & Portfolio Allocation
 Investment Psychology
 Relative Strength
 Ethics

www.malkansview.com
 Significant Topics from Recommended Readings
6

 Point & Figure

 Elliot Wave Analysis
 Portfolio Management Strategies based on TA
 Inter Market Analysis
 Statistics
 Cycles

www.malkansview.com
7 Point & Figure Charts
www.malkansview.com
Introduction

1. Very different from Bar & Candle Charts

- Time is not a factor, account for price only
2. Terminology
- Point: refers to the location of the price plot
- Figure: the ability to figure target prices from the points
3. Relatively simple to employ, only prices that meet the “box”
and “reversal” size are used
4. The Chart reflects the High and Low, whenever important,
which many feel is a better measure of supply and demand,
rather than the open and close, which many feel to be arbitrary
times
Box Size

 Can be expanded or contracted depending on personal preference

 The larger the box size, the less noise
 The smaller the box size, the greater the detail
 Two Types -
 One Box Reversal - Outdated
 Multi - Box Reversal
 Reversal can be different from box size
 3 Box Reversal the most popular
 X: used in columns when price is increasing
 O: used in columns when price is decreasing
Key Characteristics

1. “Box” & “Point” are used interchangeably

2. P&F does not take into account time or volume
3. Requires continuous time flow
4. Analyzes all price action
5. Disregards inactive period, concentrates on active period
6. Screens out price action that has little predictive ability
 One Box Reversal Point and Figure

1. No longer very popular

2. Patterns are not precise and require and experienced analyst to

interpret

3. One advantage: The Count

• Anticipating the expected move is done by measuring the
width of the observed base

4. Trendlines are drawn in the same manner as with bar charts

5. Trendline breaks negate earlier observation

 Patterns

- Point and Figure uses both traditional and unique patterns -

- Traditional: Head and Shoulders Top
- Unique: Semi-catapult and Fulcrum

- Semi-Catapult
-It is a continuation pattern

-Fulcrum
-It is a reversal pattern

-Easily recognized

-Holds a reliable count as it is contained by distinct walls

Three Box Reversal Point and Figure

1. More popular than one point predecessor

2. Can be plotted from prices found in the newspaper. Two Methods
used -
1. Close only method
2. High/Low method
3. Requires the knowledge of only a few basic patterns
4. Academics like it because these patterns can be tested
5. Can have only X’s or O’s in each column
6. Due to asymmetry, reversals can be used as trailing stops
The Count in a Three-Point Reversal Chart

Less ambiguous and easier than 1 box charts

Two Methods:
1. The Vertical Count
2. The Horizontal Count
 Standard Patterns

1. Double Top and Double Bottom

2. Rising Bottom and Declining Top
3. Triple Top and Triple Bottom
4. Ascending Triple Top and Descending Triple Bottom
5. Spread Triple Top and Spread Triple Bottom
6. Bullish/Bearish Triangle
7. Above Bullish Resistance/Bearish Support Line
8. Below Bearish Resistance/Bearish Support Line
 Trendlines

- Drawn at 45 degree angles for multi-box reversal, subjectively for 1x1

- If price can’t maintain a rise of at least the value of 1 box every time it
makes a reversal, it can no longer be considered a bull trend
- Bullish Support Line
- Drawn from one box below the last observable column (always an O column)

- Bearish Resistance Line

- exact opposite

- General Rules:
- One should never buy unless price is greater than trendline support
- One should never sell unless price is less than trendline resistance
- Trendline breaks only valid if they coincide with a pattern break as well
Other Patterns

Three other patterns of note:

1. Catapult
2. Spike aka “Long Tail”
3. Shakeout
 Traps

A pattern completes as expected, but then reverses and breaks

out to the other side
- Bull Trap
- Bear Trap
Poles

- Always a reversal pattern

- Predominantly 3-box chart patterns
- Occurs when price breaks above previous price action by 3 or more
boxes and then reverses in the next column by at least 50%
- Confirmed when price breaks to the other side
- Represent a complete reversal of market psychology
20 Elliot Wave Analysis
www.malkansview.com
Basic Tenets

 Movements in the direction of the trend develop into five wave

patterns.

 Counter-trend movements display three wave structures.

 Elliott Wave Analysis assesses probable outcomes by determining

the current position within the larger pattern .
Vocabulary

 Impulse Waves – aka “motive” or “actionary” waves are

movements in the direction of the trend of one larger degree

 Corrective Waves – aka “reactionary” waves are movements

against the trend of one larger degree
 Three
Three Rules
Rules of Elliott
of Elliott

 Wave 2 CANNOT retrace more than 100% of Wave 1.

 Wave 3 can NEVER be the shortest.
 Wave 4 NEVER ends in the price territory of Wave 1.
Wave 2 CANNOT retrace more than 100% of Wave 1.

4
1

2
Wave 3 can NEVER be the shortest

2
Four does not overlap One

5
3

1 4

2
 Guidelines - True most of the time

EQUALITY
When 3 is longest, 5 will approximate 1
ALTERNATION
If 2 is sharp, 4 will be sideways
If 2 is sideways, 4 will be sharp
CORRECTIONS
Usually end in the area of the previous wave 4
Guidelines
Guideline- of
True most of the time
Alternation

3
Four is sideways

1
Two is sharp

2
Guideline of Alternation

Four is sharp

1
Two is sideways
2
Guideline of previous fourth wave support

(1) 5
b
3

a Span of 4th wave

of previous degree

4 c
(2)
1 Previous 4th wave

2
36 Wave Characteristics

www.malkansview.com
37 Impulse Waves

www.malkansview.com
Wave 1

 Half are a “basing” process

 Heavily corrected by Wave 2
 Lots of short selling
 Crowd “convinced” trend is down
 One more rally to short…
 Distribution is in full force

 Technically more constructive to past bear market rallies.

 Breadth and volume increases, momentum turns
 Accumulation is beginning…
Wave 2

 Erodes much of Wave 1 advance

 Particularly true in leveraged market

 Crowd convinced “Bear is Back”

 One last chance to sell!

 Fundamental conditions are as bad or worse than the those

at the previous bottom
 Often end of very low volume
 Plenty of Fear among traders

 Evidence of drying up selling pressure

Wave 3

 Strong and Bold

 Breakouts on significant volume
 Battle of shorts v/s longs
 High liquidity in play

 Continuation gaps possible

 Expanding breadth
 Increasingly favorable fundamentals, investor confidence
returns
 Wave 3 holds the most valuable keys to personality of move
Wave 4

 Predictable in depth and form

 Guideline of alternation is critical…
 Reference Wave 2!

 More often move sideways due to Wave 3 strength

 Powerful base for Wave 5 move

 Lagging stocks build their tops

 “Moved” on Wave 3 of like securities

 Initial deterioration sets the stage for non-confirmations and

weakness during fifth wave
Wave 5

 Less dynamic than other waves

 Lower Breadth, Declining Volume
 Boring, confusing, aggravating
 Most position traders are “gone”
 Distributed, selling into strength
 Despite weakening internals, optimism runs at extreme highs
 Remember post Wave 5 targets!
 Zone between Wave 3 and Wave 4 extreme price terminations
44 Corrective Waves

www.malkansview.com
A Wave

 First real damage to individual equities or index components

 Most important Corrective Wave!
 Wave A tells us the pattern
 3 Waves = Flat/Triangle, 5 = Zig Zag
 Public convinced it’s a pullback
 Trade counter to technical “cracks”
 Ignores revealing stock patterns
 Bargain hunters come out in droves
B Wave

 Sucker wave
 Deceptive

 False return to previous direction

 Breadth is narrow, momentum is shallow and often diverging

 Retracement depth says a lot

 Shallow retracements can lead to deep and powerful C
Waves
C Wave

 Can be devastating
 Don’t get caught in B Waves!

 Have many properties of Wave 3’s

 Strength, etc
 Breadth and volume, secondary market indicators are strong
 Fundamentals conditions collapse and fear reigns supreme
Corrective Waves

 The “key” to Elliott Wave

 Corrections are never 5’s!

 Corrections take form of 3’s…

 Come in 2 styles
 Sharp, Sideways

 Come in 4 categories
 Zig Zag, Flat, Triangle, Combination
Corrective Wave Types

Zig Zag Flat Triangle

Zig Zag (5-3-5)

 3 wave correction labeled A, B, C

 Sub-wave sequence is 5-3-5

B 3
5
A
C 5
Flat (3-3-5)

Sideways market correction

B 3

A C 3 5
Triangle (3-3-3-3-3)

Coiling, sideways correction

B 3
D 3

E 3
C 3
A 3
D & E Waves

 Characteristics

 D Wave
 Must have the 3-3-3 in Waves A-C

 Accompanied by expanding volume

 E Wave
 Falls short of “well thought out” targets

 Volume continues to expand into breakout

Triangles as Targets

}
Breakout targets

{
B
D

E
C
A
56 Portfolio Management - David Aronson

www.malkansview.com
Modern Portfolio Theory

1. The Mean Portfolio Return is the average of the mean return of the
individual stocks
2. The Standard deviation of portfolio returns is a quadratic function
3. Standard Deviation is almost always less than the average of the
individual stock deviations
4. Significant Benefits to diversification even with weak positive correlation
5. For large portfolios, individual stock variance matters little to portfolio
variance
Capital Asset Pricing Model (CAPM)

1. Computationally easier than MPT

2. Several simplifying assumptions

3. Beta of a stock: aka measure of relative riskiness off stock when

compared to the broader markets
Performance Measurement

 Sharpe Ratio:
 Reward in excess of risk free rate per unit of risk:
 (Average Return – Risk Free Rate) / standard deviation of returns
 Drawbacks
 Uses average monthly return not actual annual returns
 Fails to account for Drawdown
 Assumes normal distribution of returns
Performance Measurement

 Alternatives:
 Return Retracement ratio
 Sterling Ratio
 Sortino Ratio

 Jensen’s Alpha: excess return beyond what is expected as defined by CAPM

 Treynor Measure of Performance: excess return per unit of Beta

Money Management

 Know and be wary of Max Draw Down

 The worst that has occurred for the trading system under
question
 Largest peak percentage loss

 Determining Optimal Position Size

 Three Methods:
 Risk of Ruin
 Theory of Runs
 Optimal f or Kelly Formula
Risk of Ruin

 Uses 3 pieces of Information:

 The probability of success aka the percentage of wins
 The payoff ratio:
 Avg winning Trade/Avg losing trade
 The fraction of exposed trading
 ROR = {(1-ta)/(1+ta)} * CU
 TA = % wins - % losses
 CU = number of trading units
 Risk of Ruin is proportional to the % of wins
 Fails to account for the amount of each win or loss
 Systems will a few very big winners have greater
probability of ruin
Optimal Percentage of Capital

PCT = {[(A+1)*p] – 1 / A

 PCT = Percent of Capital to use

 A = the average Payoff Ratio

(average win size/average loss size)

 p = percent of wins
Theory of Runs

 Odds of going broke

 Frequency of trading times the percentage of losses to the
power of the largest string of losses
 Most analysts will assume a minimum string of ten
consecutive losses as the base line
 Results in Max percentage investment of about 2%
Optimal f & Kelly formula

 Useful in helping to determine optimal position size

 Defined as “The Threshold of maximum growth"
 Optimal f % = (Win % * (profit factor +1)-1)/ profit factor
 Profit factor: total gains/total losses
 Optimal f * portfolio = position size

 Drawback: does not account for Max Drawdown (MDD) and

thus risk of ruin
 % of capital usually 80% of optimal f
 Secure f : divide MDD/optimal f to determine the appropriate risk amount
 Larry Williams: divide risk amount (account balance * risk %) divided by
largest single loss
Final Position Size & Initial capital

 Smallest % of capital suggested by the 3 formulas is the % used

 Because of theory of runs: most traders use a max of 2%

Data Mining Bias

 The extraction of knowledge in the form of patterns, rules,

models, functions, etc from large data bases

 Three types of searches

 Parameter Optimization
 Rule Searching More investment
 Rule Induction with Variable Complexity
Five Factors Determine the Degree of Data-Mining Bias

 Number of Rules – The larger the number of rules the greater the
backtesting bias

 Number of Observations used to compute the performance statistic – The

larger number of observations, the smaller the data-mining bias

 Correlation among rule returns – The higher the correlation the among
rules the smaller the data-mining bias

 Presence of positive outlier returns – very large positive returns as % of

total observations increases the data mining bias

 Variation in expected returns among the rules – the lower the variation,
the greater the data mining bias
69 Inter Market Analysis
www.malkansview.com
 Inter Market Analysis
70

Four Asset Classes -

1. Currencies
2. Commodities
3. Bonds
4. Stocks

www.malkansview.com
 Relationships Between Various Asset Classes
71

USD and Commodities - Inverse Relationship

• USD ↓ Commodities ↑
•  Falling USD could be bearish for Bonds and Stocks ONLY IF
Commodities are rising
• Falling USD can co-exist with rising Bonds and Stocks as long as
Commodities are stable

Commodities and Bonds – Inverse Relationship

• Commodities ↑ Interest rate (yield) ↑ Bonds ↓
• Interest Rates ↑ Stocks ↓ Bonds ↓

www.malkansview.com
 Relationships Between Various Asset Classes
72

Bonds and Stocks – Direct Relationship

• Bonds ↑ Stocks ↑

• Exception – major turning points

• In deflation they decouple – bonds rise and stocks fall

Commodities and Stocks– Inverse Relationship

• Commodities ↑ Stocks ↓

• Depends on the position of economic cycle

• Stocks change direction before commodities

www.malkansview.com
 Relationships Between Various Asset Classes
73

USD and US Stocks/Bonds – Direct Relationship

Oil & Stocks – Inverse Relationship

• Crude Oil ↑ Stocks ↓

• Oil shares are a leading indicator of oil – they top and bottom

first

www.malkansview.com
 Relationships Between Various Asset Classes
74

Currencies:
 
USD ↓ Drug Stocks ↑ Multinational Stocks ↑
Since major revenue comes from global markets

USD ↑ Small Cap Stocks ↑

Since major revenue comes from domestic markets

Australian & Canadian dollars – commodity based currencies – directly

correlated to commodity prices

www.malkansview.com
 Commodities / Bond Ratio
75

Commodities / Bond ratio ↑ - Inflation ↑

Gold/energy/aluminum/copper/ paper & forest products ↑
 
Commodities / Bond ratio ↓ - Inflation ↓
Interest rate sensitive stocks/ consumer staples/financial &
utilities ↑ 

www.malkansview.com
 Global Interest Rates
76

Global Interest Rates always rise and fall together.

Stock sectors have a tendency to perform globally.

Eg- Auto sector ↑ in US - Auto sector ↑ in Japan

www.malkansview.com
 Inflation/Disinflation/Deflation
77

Inflation – prices of goods rise at a fast rate - Commodities are strongest

Disinflation - prices of goods rise at a slower rate – Stocks are strongest
Deflation - prices of goods fall – Bonds are strongest 

Inflation – Commodities – strong, Stocks & Bonds – weak

Disinflation - Commodities – weak, Stocks & Bonds – strong
Deflation - Commodities – weak, Stocks – weak, Bonds – strong

www.malkansview.com
 Inter Market Analysis
78

Normally Bonds and Stocks tend to move in same direction.

But in deflation they decouple. Bonds rise and stocks fall

(eg – as happened in the year 2000)

www.malkansview.com
 Asset Cycle
79

Bonds top out first Bonds bottom first

Then Stocks top out Then Stocks bottom
Commodities top last Commodities bottom last

www.malkansview.com
 Yield Curve
80

Steep yield curve – prerequisite for an early recovery

Flattening yield curve – sign of an economy that is in recovery
Inverted yield curve – sign of economic weakness
Inverted Yield Curve (IYC)
1. IYC is a situation where short term rates are higher than long term
rates
2. Stocks with high PE ratios become vulnerable (eg-dot com stocks in
2000)
3. IYC – positive for Bonds, negative for stocks
4. All recessions were preceded by IYCs
5. Ideal thing to do while an IYC develops – sit on cash

www.malkansview.com
 Real Estate Funds (REITs)
81

Affected by long term interest rates – rates ↑ REITs ↓

Are counter cyclical – move opposite to business cycle

REITs are an ideal investment in bear market because –

• High dividend yield
• Low correlation to stocks – provide diversification
• Negative correlation to tech stocks (like in 2000) 

Real estate & housing – both inflation as well as deflation sensitive

Real estate cycle – 18 years – called “The Long Cycle” –
combination of Kondratieff & business cycles.

www.malkansview.com
 Economic Cycle
82

3 stages of economic expansion

1. Early Expansion – Transportation
2. Middle Expansion – Technology / Service
3. Late Expansion – Energy

2 stages of economic contraction

1. Early Contraction – Consumer Staples
2. Late Contraction – Financials & consumer cyclicals

www.malkansview.com
 Trends
83

Secular Trend
One that lasts for many years or decades

Cyclical Trend
1. Is a short counter trend within a secular trend
2. Relatively shallow in nature
3. Causes no damage to secular trend

www.malkansview.com
 Efficient Frontier
84

1. A blend of portfolio with different asset classes.

2. Addition of commodities futures to a portfolio (max 30%)

increases the ratio – ie – lowers risk and increases returns.

www.malkansview.com
85 Statistics
www.malkansview.com
Statistics Objectives

• Difference between Inferential & Descriptive Statistics

• Common Measures of Central Tendency and Dispersion

• The Process of Regression

Descriptive vs Inferential Statistics

• Descriptive – describes or characterizes data / observations

• Inferential – uses observations as a basis for making estimates or

predictions, i.e. – inferences about a situation that has not yet been
observed
The Importance of Probability

• Did the observed outcome occur purely by chance?

• Are securities prices random or deterministic?

• The importance of Independence

– The outcome of the 1st event does not effect the probability of the
outcome for the second event

– Technicians do not believe in independence,

Proponents of Random Walk Hypothesis do
The Importance of Sampling

• To determine the statistical properties of an observed outcome

one extracts a subset of the observations from the population.

• Subset must be selected randomly.

• Beware of sampling variability or sampling variation

– Sample may not be completely representative or an
exact duplicate of the population

• Overcome by taking many samples of large size.

Permutations vs. Combinations

•Permutation - The number of ways of selecting or arranging

things when duplication is not allowed and order is important :
n! / (n-x)!

• Combination - The number of ways of selecting or arranging

things when duplication is not allowed and order is not
important :
n! / [(n-x)! * x!]

More investment applications than permutations.

Measures of Central Tendency

• Mean – aka “the average”

• Median – the value that splits the distribution of observations in half

• Mode – the outcome that occurs with the highest frequency

• Geometric Mean – aka “the compound rate of return”

Dispersion

• Dispersion – a very common measure of risk

“the greater the variability of an investment outcome, the greater the risk”

• Range – Difference between the maximum and minimum values of a sample.

Drawbacks:
– 2 values from the sample are used, the rest are ignored
– Does not say how close the observations are to the mean and the media

• Variance – σ2 – the average of the squared differences between each observation of a sample
and the mean of a sample
– Does not measure spread or dispersion, but dispersion about the mean

• Standard Deviation – σ – the positive square root of the variance

– Standardized measure from the mean

** Degrees of Freedom
– When using values from a sample, rather than a population, it is important to use n-1
in the denominator, not n. This is necessary to get an “unbiased estimate”.
The Normal Distribution

 Aka Gaussian distribution or “Bell Curve”

 A continuous probability distribution
 A reasonable approximation of investment returns
 2 very special properties
 An excellent approximation of the random variation of natural phenomena
 It can be described fully by only 2 values
 The mean of the observations, measuring central tendency
 The variance of the observations, which measures dispersion

 Additional Characteristics
 Its symmetric about its mean
 mean = mode = median
 68% of data fall between mean ± 1σ
 95.5% fall between mean ± 2σ
 99.7% fall between mean ± 3σ
 The Standard Normal Variable

 Allows for comparisons of differing probability distributions.

 Follows a normal distribution with a mean of 0 and a standard

deviation of 1.

 Calculated by subtracting the mean from the observation and then

dividing that spread by the standard deviation
The Normal Distribution
Common Distributions

1. Chi-Square Distribution
2. Student’s T Distribution
3. F Distribution

All 3 use The Standard Normal Variable

Covariance & Correlation

Covariance: The 2 variable version of variance

• Answers the question “How similar are these prices or returns?”

• Cov(x1, x2) = 1/n * (x1 i - x1 avg) * (x2 i - x2 avg)

• r = Cov(x1, x2) / σx1 σx2 aka “correlation cofficient”

• When .50 < r ≤ 1 then a strong positive correlation

• When near zero, then not correlated (no relationship between the two)

• When -1 ≥ r > -.50 then a strong negative correlation

Linear Regression

 • Used to help predict the value of an uncertain (dependent) variable from some known
(independent) variable

• Plot the intersects of the observations in a scatter diagram

• Create a Regression Line using “least squares”
• Regression equation = y = a + bx
– a is the y-intercept
– b is the slope
• The slope of the straight line explains the relationship between daily price changes of the
S&P500 and US Two Year Yields
– Upward sloping = positive relationship
– Downward sloping = negative relationship

• r2 = coefficient of determination
– Value between 0 & 1
99 Cycles
www.malkansview.com
 Cycles
100

• Amplitude – Height of the cycle from base up to peak = price at peak

– price at base
• Period – Length of cycle measured from trough to trough ie: 20 days
• Phase – Difference between the troughs of different cycles ie: # of
days between the trough of cycle A and the trough of cycle B
• Inversions – when a peak occurs when we would expect a trough.
Look for the next larger cycle and see if that is peaking, if so then its
accepted because larger cycles dominate
• Translation – a term used to describe where the peak of a cycle falls
in regards to the midpoint
• Right translation – when a peak occurs after the halfway point of the
cycle
• Left translation – when a peak occurs before the halfway point of the
cycle

www.malkansview.com
 Cycles
101

• Principle of Harmonics – cycles tend to have lengths a multiple of two

or three longer or shorter than the next series of cycles.
• Principle of Nominality – cycles are rarely equal therefore an average
or ‘nominal’ period is calculated
• Principle of Commonality – securities of similar nature tend to have
similar cycles, ie: stocks tend to have similar cycles to indices
• Principle of Proportionality – periods of rising prices are followed
equally by periods of falling prices (or of even multiples)
• Principle of Variation – price magnitudes and duration of cycles will be
different because of fundamental and psychological considerations
• Principle of Summation – combining two cycles can produce peaks and
troughs

www.malkansview.com
 Cycles
102

Long Period Cycles -

1. Kondratieff Cycle

2. 34-year Historical Cycle

3. 18 year and 9.2 year cycle

4. Decennial Patterns

Short Period Cycles -

1. Four year (presidential cycle)

2. Seasonal Pattern

3. January Barometer / January Effect

www.malkansview.com
Methods of Determination

Fourier Analysis (Spectral Analysis):

• Problems
 Requires vast amount of data, increasing likelihood of
neutralization due to changing cycles
 Does not maintain phase relationship between cycles
 Very difficult to project combinations of cycles

Fast Fourier Transforms:

 Cuts down on data requirements

Maximum Entropy Spectral Analysis (MESA):

 Created by John Ehlers attempt to address shortcomings of
Fourier analysis
Methods of Determination – more practical

1. Counting/Observations:

2. De-trending:
Subtract average from actual values then divide by the average

3. Centered Moving Average:

The Average should be placed in the time “mid-point” of the period measured

4. Envelopes:
 Uses envelopes of differing time periods to determine cycles of
greater and lesser degree
 Where they overlap indicates extremes
 Most commonly done by “nesting downward”
Methods of projection

Projecting Period
 According to Kirkpatrick 3 pieces needed
• The period
• The standard error
• An ideal starting point
 Three methods
• Measuring by hand (rule and paper)
• Standard charting tools (static cycle finder)
• Linear Regression – prefered (page 476 in Kirkpatrick)
Methods of projection

Projecting Amplitude

 Very difficult (akin to projecting Volatility)

• Kirkpatrick recommends using tools previously Incorporated
• Half Cycle Reversals

 FLD and Centered Moving Average Crossovers

• FLD – Future Line of Demarcation – created by Hurst
Dominant Cycles

 Many different cycles affecting markets

 The only ones with forecasting value are the DOMINANT CYCLES

 Most futures markets have at least 5 dominant cycles

 Use Top Down approach

 Determine long term dominant cycle (years)
 Then intermediate dominant cycle (weeks to months)
 Finally the short term dominant cycle (several hours to days)
Cycle Classification

 Long Term (> 2 years)

 Seasonal (approximately 1 year)
 Primary / Intermediate (12 – 24 weeks) – determines which
side to trade
 Trading Cycle (4 weeks) – entry & exit points
 Alpha and Beta Cycles (2 weeks)
 Figure 14.13, page 358 Murphy
 Left & Right Translation

 Considered the most useful aspect of cycle analysis

 Refers to the shifting of cycle peaks to the left or right of the ideal mid-
point
 Most cycle variations occur at the crest
 If Trend is UP: Crest shifts to the RIGHT
 If Trend is DOWN: Crest shifts to the LEFT
 RIGHT Translation: BULLISH
 LEFT Translation: BEARISH
 In a bull trend, price spends more time rising
 In a bear trend, price spends more time falling
 Figure 14.15, page 364 Murphy
Left & Right Translation
Cycles used in combination with other technical tools

 Most promising are of overlap between cycles and technical

analysis:
 Moving Averages
 Momentum Oscillators

 Both indicators can be enhanced if they are tied to the

dominant trading cycle

 Oscillators should be ½ the length of the appropriate cycle

 Chief problem: determining the dominant cycle

112 Exam Guidelines
www.malkansview.com
 Examination Guidelines
113

• Sleep well the previous night.

• Reach well before the scheduled time.
• Bring your ID to the Testing Centre.
• Watch the clock and leave time to review your test.
• Process of elimination on multiple choice  choose the “best” answer
• Allow yourself enough time to study and choose the right time to take
the test.
• Use the “Mark” button.
• Focus on challenging topics before the exam and during class.
• Read each question well before answering.
• Beware of tricky questions, they may appear to be easy.
• Think Positive

www.malkansview.com
GOOD LUCK!
Vishal B Malkan (MFM, CMT)
Meghana V Malkan (CS, LLB, CMT)

www.malkansview.com
9821618517, 9870093030