Level III Learning Objectives

Level III Learning Objectives by chapter
1.
2.
3.
4.
Triple Screen Trading System

Evaluate the Triple Screen Trading System and identify its strengths
Generalize the characteristics of this system that would make excellent
components of any trading system
Emotions and Probabilities

Explain the Endowment Effect and how this natural condition impedes
traders and investors
Analyze how loss aversion, interferes with sound judgment in trading
and investing
Distinguish between the typical behavior and attitudes of undisciplined
traders when compared with successful professional traders
The Two Main Rules of Risk Control
Identify the two worst mistakes a trader can make
The 2% Rule
Identify the 2% rule and explain its purpose
Calculate the correct position size using the 2% rule when given the
necessary data
The 6% Rule
Identify the 6% rule and explain its purpose
Calculate the correct amount of available risk using the 6% rule when given
the necessary data
5.
6.
7.
8.
9.
Behavioral Techniques
Identify the three major time frames in which the American media could
be viewed as providing trading signals
Using the Volatility Ratio, compare the volatility of an event day in a stock
to most other days in the same stock
Summarize the results of event studies referenced in this chapter
Apply the guidelines for reading the Commitment of Traders reports into a
rule for a trading system or investing methodology
Pattern Recognition
Analyze potential patterns in price data and describe why they may be
valid as a trading signal
Analyze potential trading opportunities based on gaps in price data
Distinguish those signals based on gaps that are likely to be worthwhile
trading signals from those which are not likely to be worthwhile
Multiple Time Frames

Demonstrate that you can evaluate price and chart data using one of the
three multiple time frame methods described in this chapter
Explain two benefits for using Multiple Time Frames in trading
Advanced Techniques
Analyze the relationship between a systems entry signals and changes in
market volatility
Distinguish whether a systems entry signal should be filtered based on
liquidity
Calculate the expected move of an index or security based on volatility
measures
Explain the basics of using Fractal Efficiency, Chaos Theory or genetic
algorithms in trading
Explain the basics of using Neural Network (Machine Learning)
programming to trade with market data
10.
11.
12.
13.
14.
15.
16.
System Testing
Critique the use of performance and risk metrics based on a given
objective
Interpret data from a system test to determine lack of randomness in the
results
Explain the differences of various performance metrics and why one is
more suitable than another for a given objective
Interpret the Sharpe and Treynor ratios for individual stocks and portfolios
Practical Considerations
Explain what checks can be made to verify the validity of daily data
Differentiate between general problems encountered when testing a
system with deeper issues such as the assumptions of the developer
Construct a rule to take advantage of combining the Theory of Runs with
the direction of a trend
Risk Control
Explain how to measure probability of price change and returns over a
given time frame
Explain how to measure risk factors such as news, volatility, etc.
Interpret calculations of VaR
Compare VaR calculation to confirm selection of stop placement
Calculate the amount of money at risk in a portfolio based on a specified
scenario
Differentiate between risk and performance metrics derived from one of
the following: Sharpe ratio, Information Ratio, Treynor Ratio, Calmar Ratio,
Sortino Ratio
Regression
Identify the assumptions of regression
Differentiate between data from a linear regression and data from a
multiple regression
International Indices and Commodities
Describe the different international indexes and commodities
The S&P 500
Describe general correlations noticed between the S&P 500 and
International Indices
European Indices
Describe general correlations noticed between the European Indices and
other indices or commodities
17.
18.
19.
20.
21.
22.
23.
Gold
Describe general correlations noticed between the Gold and other indices
Intraday Correlations
Identify the strongest correlations in various timeframes between the
listed index futures in this chapter
Intermarket Indicators
Analyze and interpret relative strength of different assets
Analyze and interpret Bollinger Band Divergence signals
Interpret data from multiple regression divergence signals to predict a
target market
Prepare a recommendation or other response based on asset correlation
data
Everything is Relative; Strength is Everything
Interpret Relative Rotation Graphs
Explain how Relative Rotation Graphs are an example of a novel approach
to visualizing relative strength
Analyzing the Macro-Finance Environment
Forecast possible progression of a business cycle model
Explain the relationship between the business and financial cycles
Identify leading, coincident and lagging indicators of economic activity
Portfolio Risk and Performance Attribution

Explain the differences of various performance metrics and why one is
more suitable than another for a given objective
Interpret the Sharpe and Treynor ratios for individual stocks and portfolios
Explain the characteristics of different alternative investment types and
why a portfolio manager might consider using them
Statistical Analysis
Differentiate between random and nonrandom trends in data from system
performance.
Analyze fat-tailed distributions among returns data
Explain how to measure probability of price change and returns over a
given time frame
Explain how to calculate relative frequency
Derive a sampling distribution
24.
25.
Hypothesis Tests and Confidence Intervals

Explain why the null hypothesis should be the target of any system
developers research
Interpret data used for statistical inference
Causality and Statistics

Explain why most people make the error of drawing conclusions from data
and identify the kinds of errors they are likely to make
Illusions
Describe and Identify the more common cognitive illusions that investors
are prone to make
The Story is the Thing (the allure of Growth)

Describe some common misconceptions investors make by looking for
evidence of growth globally.
26.
27.
28.
Are Two Heads Better Than One?

Explain three possible means for reducing group biases
The Anatomy of a Bubble

Explain and recognize evidence for the five stages of a bubble
29.
30.
31.
De-Bubbling: Alpha
Identify and explain the three cross-section strategies that should benefit
from a de-bubbling/deflationary period.
The VIX as a Stock Market Indicator

Contrast different measures of volatility Interpret changes in volatility as a
signal useful for forecasting
Explain how volatility can be an integral part of a market forecast
Hedging with VIX Derivatives

Identify the subcomponents of portfolio volatility
Explain how portfolio volatility may be affected by diversification
32.
33.
Introduction to Candlestick Charts
Identify and interpret candlestick patterns

Validate a forecast with candlestick patterns
34.
Findings
Point out one or more of the 18 findings in this chapter as supporting

evidence for a forecast or other technical observation based on given chart
data
35.
Statistics Summary
Identify the top three performing candle patterns (with more than 100
samples) in each of the categories listed in this chapter
36 to 49.
Interpret potential price moves based on the patterns described in these

chapters
Calculate potential price targets
Evaluate price levels for potential support or resistance
Identify and Interpret signals from various oscillators and technical studies
50 to 58.
59.
Various Candle and Price Patterns
Event-Based Patterns
Interpret potential price moves based on the patterns described in these

chapters
Calculate potential price targets
Evaluate price levels for potential support or resistance
Identify and Interpret signals from various oscillators and technical studies
in conjunction with the event-based patterns listed in these chapters
Momentum Investing
Explain valid reasons for establishing strategies based on momentum

investing styles and momentum-based price patterns
Update History
1/6/2015 - Initial posting

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Level III Learning Objectives by chapter

Triple Screen Trading System

Emotions and Probabilities

Multiple Time Frames

Portfolio Risk and Performance Attribution

Hypothesis Tests and Confidence Intervals

Causality and Statistics

The Story is the Thing (the allure of Growth)

Are Two Heads Better Than One?

The Anatomy of a Bubble

The VIX as a Stock Market Indicator

Hedging with VIX Derivatives

Introduction to Candlestick Charts

Identify and interpret candlestick patterns

Point out one or more of the 18 findings in this chapter as supporting

Interpret potential price moves based on the patterns described in these

Various Candle and Price Patterns

Interpret potential price moves based on the patterns described in these

Explain valid reasons for establishing strategies based on momentum

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