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Glossaries

Fundamental Analysis Glossary

growth stock: A stock whose earnings are expected to grow at a higher-than-average rate compared to the market as a whole. 

Cycles Glossary

Calendar effect:  The tendency of stocks to perform differently at different times, including such anomalies as the January effect, month-of-the-year effect, day-of-the-week effect, and holiday effect. [mprofile.com]

Double Witching: Fancy Way to Say: Normal Options Expiration. If the third Friday of the month isn’t a triple witch then it’s a double witch. Since there are four triple witchings a year it leaves the other eight as double witchings. That just means it’s a normal options expiration where the following expire:

  • stock options
  • options on stock index futures

double witching hour: The final hour of the stock market trading session on the third Friday of all months other than March, June, September, and December, when stock option and index option contracts expire. See also triple witching hour.

January Barometer:  Market forecasting tool whose statistics show that the market rises in years when the Standard & Poor’s 500 Index is up in January and will drop when the index is down for that month.

January Effect:  The tendency for securities prices to recover in January after tax-related selling is completed before the year-end. The January Effect is caused by year end selling for tax losses, recognizing capital gains, or effecting portfolio window dressing. Even though the sell off depresses the stocks, it has nothing to do with their basic worth. Bargain hunters may quickly buy in and thus, cause the January rally.

October Effect: The perception that the stock market tends to do poorly in October.  Although historically there has been a slight underperformance in October which most observers attribute to chance, the psychological effects of a few serious market crashes in October have kept the perception alive.

Santa Claus Rally:

Triple Witching: Fancy Way to Say: Mass Derivative (i.e. options, futures) Expiration. Four times a year, on the third Friday of the quarter ending month (March, June, September, December) three different types of derivatives related to stocks expire:

  • Options on Individual Stocks
  • Options on Stock Index Futures
  • Stock Index Futures

The ‘mass’ expiration can cause wild gyrations and false moves in prices as contracts are covered, rolled over, etc.

triple witching hour: The final hour of the stock market trading session on the third Friday of March, June, September, and December, when option contracts and futures contracts expire on market indexes used by program traders. The simultaneous expirations often set off heavy trading of options, futures and the underlying stocks. See also double witching hour.

Stock Trading Glossary

Mutual Fund Glossary

actively managed funds: With these funds, managers pick stocks or other securities with a certain goal in mind, like beating a particular index or achieving a certain level of return while assuming a certain level of risk. Because there’s stock-picking going on, these funds tend to have higher expense ratios, and higher taxes, than passively managed funds).

alpha: Tells you how a fund is actually doing compared to its beta. If the beta is 1.5, and the fund rises 15% more than the market, then the alpha is zero.

back-end load: A load paid when you redeem your shares. Most funds drop the load if you hold for a specified period of time, usually several years.

beta: This volatility measure is supposed to give you some sense of how far the fund will fall if the market takes a dive and how high the fund will rise if the bull starts to climb. A fund with a beta greater than 1 is considered more volatile than the market; less than 1 means less volatile. So say your fund gets a beta of 1.15 — it has a history of fluctuating 15% more than the S&P. If the market is up, the fund should outperform by 15%. If the market heads lower, the fund should fall by 15% more. Problem: For funds that don’t correlate well to the S&P, beta just doesn’t tell you much.

blended fund: These mutual funds include a combination of growth and value stocks. Growth stocks typically have a high valuation because investors expect rapid growth. Conversely, value stocks have low valuation because slower growth is anticipated.

capital gains distribution: A payment to investment company shareholders of profits realized on the sale of its securities. Equity funds usually pay out these amounts once a year, typically in December, while bond funds often include capital gains in their monthly distributions. Many funds allow automatic reinvestment of capital gains, instead of distribution.When the fund sells securities it has owned for more than 12 months (18 months after 7/28/97), the profits, or losses, are distributed among and passed through to the shareholders. These gains are taxable at the capital gains rate. If the securities sold were held for less than one year, the distributions would be taken into ordinary income and taxed at your individual rate.

classes of shares: Various classes of a single portfolio are distinguished by the type of sales charge they levy. In general: — Class A shares carry a front-end load. — Class B shares carry a back-end load (also known as a contingent deferred sales charge). — Class C shares carry an ongoing charge (usually in the form of an annual 12b-1 charge).

closed-end funds: Closed-end funds are baskets of stocks that are grouped according to an investment objective and overseen by a manager. But unlike open-end funds, which continue to increase their asset base by selling to new shareholders, closed-end funds bring in assets by selling a fixed number of shares through an initial offering. After the initial sale, the closed-end fund’s shares trade like stocks on exchanges like the NYSE or the AMEX. Low demand for a fund can cause closed-end shares to trade at discounts to net asset value. High demand can create premiums to NAV.

contra fund: A fund with an investing strategy that seeks the stock of out of favor companies, with good fundamentals such as low debt or good potential earnings, with the belief that the stock will increase in value.

front-end load: A load paid when you first invest.

global funds: Invest in stocks of companies based both inside and outside the U.S. Since a fund needs only to have 25% of its assets in overseas companies to be considered global, this is not the kind of fund you want for strict asset allocation. Rather, it’s great if you like the manager and have faith in his freedom to find good investments around the globe.

growth funds: Funds that invest in companies believed to have steadily growing earnings. On the extreme, growth investors pay little attention to price and focus almost entirely on earnings growth. Prototypical example: Gary Pilgrim, PBHG Growth.

hedge funds: A fund that can go long or short stocks, hence the hedge connotation. But it’s is different from a regular fund in the way its managers are compensated. Regular money managers get a percentage of the assets. Hedge fund managers get a percentage of the assets and take 20% of the gains, both realized and unrealized.

international funds: International funds invest in stocks of companies based outside the U.S. This is what you want if you are diversifying your portfolio and are looking specifically for overseas exposure. Sixty-five percent of the fund’s total assets must invested in companies based outside the U.S. for a fund to qualify, under the Lipper Analytical Services definition.

level load: An annual load that usually is lowered gradually based on the number of years you keep your money in the fund.

Lipper fund categories:

  • Micro-cap funds: Funds that invest primarily in companies with market capitalizations of less than $350 million.
  • Small-cap funds: Funds that invest primarily in companies with market capitalizations of less than $1 billion.
  • Mid-cap funds: Funds that invest primarily in companies with market capitalizations of less than $5 billion.
  • Growth funds: Funds that normally invest in companies whose long-term earnings are expected to grow faster than the market.
  • Growth & income funds: Funds that combine growth in earnings and an income requirement for dividends.
  • Equity income funds: Funds that seek high income and growth by investing at least 60% of their portfolio in equities.
  • Capital appreciation: Funds that aim at 100% maximum capital appreciation, through such moves as leveraging, using options and going into cash.

load: Also called a sales charge, this is a fee imposed on mutual fund buyers that is generally divided between the fund family and the financial advisor who sells the fund, like a broker. Loads can be as high as 8% but usually range from 2%-5%. Investors should realize that a hefty expense ratio (1.4% is average though it varies by fund objective) can be a lot more damaging if you’re a long-term holder, as that bites into your returns every year. Most loads, in contrast, are a one-time charge.

management fee: This is a fee that the fund pays to its investment advisor for managing the portfolio. It is usually 0.5%-1% of the fund’s total assets annually and is included in the overall expense ratio.

minimum investment: Minimum Initial indicates the minimum deposit required to open a regular or IRA/SEP/Keogh tax-deferred account with the mutual fund. Minimum subsequent indicates the minimum required to make deposits in an already opened regular or tax-deferred account with the mutual fund.

momentum funds: Momentum has gotten a reputation as a nasty word, partly because the strategy hasn’t been successful in the past couple of years, and partly because it is an investment strategy focused on stock movement more than the underlying companies. Convene the Un-American Activities Committee! In momentum investing, money managers are looking for stocks with earnings and/or price momentum in the relatively short term, with little regard for the underlying company or its value compared with the stock price.

money market fund: A money market fund is a mutual fund that invests only in money market investments. Most money funds allow limited check writing and keep your principal constant but vary the interest rate. An investment in a money market fund is not insured or guaranteed by the U.S. government. There is no assurance that the fund will maintain a $1 share price. This is a market for short-term debt instruments such as certificates of deposit, commercial paper, banker’s acceptances, Treasury bills, and discount notes of the Federal Home Loan Bank and the Federal National Mortgage Association, among others. Elements of the money market have two things in common: safety and liquidity.

Morningstar risk rating: Measures how often a fund loses money compared with the T-bill and the fund’s investment class. 1.0 is the average for a class, so if a fund has a rating of 0.6, it is 40% less risky than its peers. If its rating is 1.5, it is 50% more risky than the funds in its class.

mutual fund: A mutual fund is a pool of money invested in a group of securities owned by a group of investors, and managed by an investment company. It is managed by investment professionals who make buy and sell decisions for the group. Investors choose to purchase shares in mutual funds for a couple of reasons: they can diversify their holdings more easily with a smaller amount of money (because the mutual fund has the money to buy shares in many different types of securities); and they can rely on investment professionals to make trading decisions for them.They offer investors a variety of goals, depending on the fund and its investment charter. Some funds, for example, seek to generate income on a regular basis. Others seek to preserve an investor’s money. Still others seek to invest in companies that are growing at a rapid pace. Funds can impose a sales charge, or load, on investors when they buy or sell shares. Many funds these days are no load and impose no sales charge. Mutual funds are investment companies regulated by the Investment Company Act of 1940.

NAV: Net Asset Value. The current value of a share in a mutual fund. It’s just the fund’s assets minus liabilities divided by the number of outstanding shares. Most funds calculate their NAV after the close of trading each day. For conventional mutual funds, your share is worth the day’s NAV, but in closed-end mutual funds, the NAV and the market price aren’t usually the same. That’s because closed-end fund shares trade like stocks, from investor to investor, and sell at a premium or discount to their NAV, depending on a variety of factors (such as transaction costs and investor expectations).

net assets: The total assets (net of liabilities) held in a fund.

net fund flows: Tracked by several different companies, fund flows represent the amount of new money coming into mutual funds less the amount of money “redeemed” by investors. Though a decidedly inexact science, fund flow tracking has become a cottage industry, as market watchers use the figures to measure public sentiment toward the market and liquidity.

no-load: Funds that do not charge a load. Note: Funds can impose a sales charge of up to 1% and still be considered no-load.

objective: The fund’s investment strategy category as stated in the prospectus. There are more than 20 standardized categories.

open-end funds: The vast majority of mutual funds are open-end funds, which can issue new shares all the time in response to investor demand. (In contrast, closed-end funds have a set number of shares outstanding.) Sometimes the fund family will close these funds, both to new and current investors, when their asset size becomes too big to manage efficiently.

passively managed funds: This term generally refers to index funds. The manager is not actually exercising discretion in his choice of stocks. Rather, he is investing in a basket of stocks that mirrors a predetermined index, like the S&P 500. Because there’s less work involved, and little portfolio turnover, passive management generally generates less in expenses and taxes than active management. At the same time, their goal is to match the index, not beat it. Most well known for its passive or index funds: Vanguard.

regional fund: An international mutual fund that invests in securities from one particular area, such as Latin America or the Far East.

reinvested dividends: Fund investors have the option of receiving payouts for any dividends generated by the securities in funds they own, or reinvesting the income represented by the dividends in the form of purchases of new shares of the fund. Most reinvest by checking a little box when they buy the fund.

sales charge: A sales charge is the fee charged when shares are purchased (front end) or redeemed (CDSC). Also called a load. Most of the sales charge is returned to the broker/dealer as commission; a smaller portion is retained by the mutual fund company. Reinvested dividends and capital gains generally are not assessed a sales charge.

share classes: A load fund will often offer several share classes, each with a different load and expense-ratio combination. The idea is to give investors a choice of whether they want to get smacked with a load right away or whether they want to put off the inevitable.

Sharpe ratio: A measure of a portfolio’s excess return relative to the total variability of the portfolio. Related: treynor index This formula, developed by Nobel Laureate Bill Sharpe, tries to quantify how a fund performs relative to the risk it takes. Take a fund’s returns in excess of a guaranteed investment (a 90-day T-bill) and divide by the standard deviation of those returns. The bigger the Sharpe ratio, the better a fund performed considering its riskiness. The Sharpe benchmark is a statistically created benchmark that adjusts for a managers’ index-like tendencies.

single country fund: A mutual fund that invests in individual countries outside the United States.

standard deviation: Measures the fund against itself — how is it doing based on its own past performance. A low standard deviation means it’s not “deviating” from its normal rate or return. Problem with this measure — sometimes the deviation could be zero, reflecting consistently bad performance.

total return: Return on investment including price appreciation with reinvested dividends or income over a specific period of time.

transfer agent: Usually a bank. They do all the paperwork for the fund, keeping track of all the fund owners’ records.

Treynor Index: A measure of the excess return per unit of risk, where excess return is defined as the difference between the portfolio’s return and the risk-free rate of return over the same evaluation period and where the unit of risk is the portfolio’s beta. Named after Jack Treynor.

12b-1 fees: These fees are named for the Securities and Exchange Commission regulation that authorized them. If you own shares of a 12b-1 mutual fund, you will be assessed fees, known as 12b-1 fees, to cover some of the fund’s promotional and marketing expenses. The fees are usually set on a percentage basis and range from 0.25 percent to 8.5 percent. 12b-1 fees can seriously cut into your yield, especially if the percentage is high. A fund family that charges more than 0.25% in 12b-1 fees cannot advertise itself as no load. The fee is incorporated into the overall expense ratio.

turnover ratio: This ratio shows the amount of times per year that the fund’s holdings are turned over. If a fund has $100 million in assets and sells stocks accounting for $40 million, the turnover ratio is 40%. High turnover often, but not always, leads to big tax bills.

value funds: Funds that invest in companies that are presumed to be undervalued by some measure like price-to-earnings, price-to-book or the “instrinsic value” of a company. Prototypical example: Warren Buffett.

Orders Glossary

A

agency order: An order to buy or sell that does not originate from the actual customer for whose account it is executed.

all or any part: A stipulation of a buy or sell order for a discretionary account which instructs the broker to fill whatever part of the order he/she feels is appropriate, at the specified price.

all or none: (AON) A stipulation of a buy or sell order which instructs the broker to either fill the whole order or don’t fill it at all; but in the latter case, don’t cancel it, as the broker would if the order were fill or kill. For example, the customer won’t accept a partial execution (only 300 shares out of an order for 1000).

alternative order: Two orders given to a broker, for which the execution of either one automatically cancels the other. One example is combining a buy limit order with buy stop order. The buy limit order will only be executed if the market price is below a specified price, and the buy stop order will only be executed if the market price is above a certain price. If one order is executed, the other is cancelled. Also called either-or order.

at-the-opening order: An order that specifies it is to be executed at the opening of the market or of trading in that security or else it is to be canceled. The order does not have to be executed at the opening price.

B

block trade: Usually, a trade of 10,000 shares or more. For bonds, a $200,000 face amount or more. Block trades are often executed through a special section of a brokerage firm called the Block Desk. Using the Block Desk may result in a better price.

buy stop order: An order to buy a security that is entered at a price above the current offering price and that is triggered when the market price touches or goes through the buy stop price.

buy stop limit order: A buy stop limit means that as soon as a trade occurs at the target price, the order becomes a limit order to buy.

C

canceled order: A buy or sell order that is canceled before it has been executed. In most cases, a Limit Order can be canceled at any time as long as it has not been executed. A Market Order may only be canceled if the order is placed after market hours and is then canceled before the market opens the following day.  If part of the order has already been executed, a cancel instruction stops work on the remainder of the order.

conditional order: An order with stipulations added, such as price or quantity.

contingency order: An order that is executed only if one or more specified conditions are met. Possible conditions may include the price of another security or the completion of another order. Brokerages do not have to accept contingency orders, but some do.

D

day order: A day order is good just as the name implies: for the day only. At the end of the day if the order is not filled, it is automatically canceled. All orders are day orders unless otherwise indicated. A day order is good for the day of entry only. Compare “good-til-cancelled” order, which means that the order remains in effect until executed or cancelled.

discretionary trading: Customer accounts where specified employees of a brokerage firm may execute trades without explicit authorization of every individual transaction.

do not reduce: (DNR) Stipulation to an order that instructs the broker not to decrease the limit price on buy-limit and sell-stop orders on the record date or ex-dividend date of a cash dividend.

duration of an order: In brokerages, when trading stocks or options, it designates whether a limit trade is valid for good until canceled or day only. Market orders all have a duration of day only by definition, since they are executed as soon as possible at the market price. It is possible that a market order could arrive after the market close, in which case, it may remain valid at the next market opening.

E

either-or order: An order that involves entry of a limit order and a stop order on the same ticket for the same security at different prices–also called an “alternative order.” The order is either to buy or to sell, never both. In an either/or buy limit/buy stop order, for example, the buy limit is below the current price and the buy stop is above. The execution of the buy limit cancels the buy stop and vice versa. To illustrate, if a stock is trading at 32, an investor may place an order to either buy at 30 or 33 stop. If the price rises to 33 (or above), the stop is chosen–the security is purchased at the market and the limit is canceled. If the price falls to 30, the limit is executed and the stop is canceled. If there is a partial execution of one, the number of shares executed is automatically canceled from the other. An either/or order is used by an investor who is uneasy about a stock’s price movement and wants to protect an interest or position if the price fluctuates in an unexpected manner. See alternative order.

executed order: A completed buy or sell transaction.

F

fill-or-kill order: (FOK) An order that must be offered or bid immediately at a given price and canceled if not executed if it cannot be filled immediately at its stipulated price limit. Also known as an Immediate Order.

frontrunning: Frontrunning occurs when the broker uses his knowledge of an impending block or program trade to trade advantageously on his own account.

G

gather in the stops: A trading strategy in which investors sell stocks in order to drive prices below a level at which stop orders are known to have been set by others. This triggers more selling, which in turn sets off more stop orders, accelerating the decline. In order to mitigate the effects of such a feedback loop, exchange officials sometimes suspend stop orders. [InvestorWords.com]

good-til-canceled order: (GTC) An order to buy or sell at a fixed price that remains open until executed or canceled by the customer. Most brokerage firms let GTC orders automatically expire after 30 – 90 days. Also called an Open Order.

good til executed order: (GTX) An order to buy or sell that remains in effect until it is executed.

good this week order: (GTW) – Order which is valid only for the week in which it is placed.

H

I

immediate or cancel order: (IOC) IOC orders will scan against the existing Island book and any portion of the order not immediately executed will be cancelled.

J

K

kill: Cancel a trade or order that has been placed but not filled.

L

limit order: An order to buy a security at or below a certain price; or sell at or above a certain price. It’s a conditional trading order designed to avoid the danger of adverse unexpected price changes. The customer specifies a price and the order can be executed only if the market reaches or betters that price. If the price you specify is not within the current market quote, it is said to be ‘away from the market’ and will be entered into the queue behind any other orders. If no price is indicated, the order is a market order by default. There is no guarantee that a limit order will ever be filled. Sometimes known as an “or better” order.

limit order book: A record of unexecuted limit orders that is maintained by the specialist. These orders are treated equally with other orders in terms of priority of execution.

M

market order: (MKT) An order for a broker to buy or sell a security immediately at the best available price at the time the order is received in the trading marketplace. Most orders executed on the world exchanges are of this type. A market order will always be filled, and is the only order that guarantees execution. This type of order takes precedence over all other orders, such as limit orders. The catch is that it may not be filled at the price you expected or wanted. Also known as unrestricted order.

market-if-touched order: (MIT) A contingency order given with a limited price instruction, that when the market reaches the required price level, it becomes a market order to trade at the next best trading price. This order can be given as a buy or sell order. The significant difference between an MIT order and a Stop order is its location for execution relative to current prices.

market-not-held order: This is a market order. However, the investor is giving the floor trader the discretion to execute the order when he feels it is best. If the floor trade feels that the market will decline, he may hold the order to try to get a better fill. This order may not get filled.

market-on-close order: (MOC) A market order to be executed at the close of the trading session requesting an execution price as close as possible to the closing market price.See Stop-Close-Only Order.

market-on-open order: An order to buy or sell at the beginning of the trading session at a price within the opening range of prices.  Execution can take place only during the exchange-specified opening period. The trading price does not need to be the first price traded nor necessarily be guaranteed to be the best price in that range.

N

O

one-cancels-the-other order: (OCO) An order designating both sides or the same side of a trading range with different months, markets, commodities, prices, etc. When the condition of one is reached and executed, the other is canceled.

open order: Same as GTC (good-til-cancelled)  An open order stays active until it is executed or the investor cancels it.

or-better order: Same as a limit order.

P

price limit order: Same as  limit order.The customer specifies the price at which a trade can be executed.

Q

R

rejected order: Order which is invalid or unacceptable.

round turn: Futures and commodities brokers generally only charge one commission, called a round-turn commission, to open and close a position of the same delivery month. Refers to the complete process of first taking on a position and then the later liquidation of that position.This practice differs from stock trades, which involve one commission to buy a stock and another to sell it.

round trip: See round turn.

S

sell limit order: A limit order used when selling a position.

sell stop limit order: A sell stop limit order means that as soon as the stock hits a target price, the order becomes a limit order to sell.

skip-day settlement: The trade is settled one business day beyond what is normal.

stop order: An order to buy or sell a security at a designated price, called the stop price, after the security has traded at that price. A stop order becomes a market order when the stop price is hit and the order will be executed at any market price at, above or below stop price. Buy stop orders are placed above the present market price. Sell stop orders are placed below the present market price. A stop order can be a day order or a good-till-cancelled (GTC) order. A variation of this, the stop-limit order, will only be executed at the limit price. If the market falls quickly, a stop order might be executed at a price much lower than the stop price and a stop-limit order might not get executed at all. Some investors prefer to set Mental Stops. When a stop order is executed an investor is said to be “stopped out”. Also called a stop-loss order when it’s a sell order. This order is typically used in anticipation of or in protection against a market reversal. To the long position, the stop loss order is also known as a “stop sell” because he will sell to liquidate the position. Conversely, to the short position, the stop loss order is also known as a “stop buy” because he will buy to liquidate the position. Note: If a stop order is placed at a price that would trigger an immediate execution, then the specialist or the market maker rejects the order as invalid, and no order exists. Sometimes referred to as a Stop Loss Order.

stop-limit order: An order placed with a broker to buy or sell at a specified price or better (called the stop-limit price) after a given stop price has been reached or passed.  In contrast to the stop order, which becomes a market order once the stop is reached, the stop-limit order becomes a limit order once the stop is reached. If the order cannot be executed, it is held until the stated price or better is reached again. Usually the stop price and the limit price are the same; but, occasionally the limit price will be different from the stop price to provide some margin of flexibility to the broker while protecting the investor who placed the order from the adverse effects of a major price move beyond the limit.

stop loss order: A sell stop order placed below the current trading price to protect unrealized profits or limit losses on holdings should the price begin to decline. A “trailing stop” is a stop price that is moved up periodically as the security price moves up.

stop-close-only order: A stop order which can only be executed, if possible, during the closing period of the market. See also Market-on-Close Order.

stopped out: When a stop order is executed an investor is said to be “stopped out” of a position.

T

time-in-force: The length of time that a customer’s order is to remain working.

time limit order: A customer order that designates the time during which it can be executed, such as day or GTC (Good-Til-Canceled).

time-stamped: Part of the order-routing process in which the time of day is stamped on an order. An order is time-stamped when it is (1) received on the trading floor, and (2) completed.

trailing stop order: A stop order that follows the movement of a stock’s price. Trailing stops for long positions move up as the stock’s price moves up. In short positions, they follow the stock’s price down.

trailing stop order: A stop price to buy or sell that is moved up periodically as the security price moves up or down, following the prevailing price trend. For example, an investor may purchase a futures contract for December Gold for $325 and simultaneously place a stop order to sell the contract if it drops to $318 or below. If the commodity contract price rises to $330 without going through the $318 stop price, the investor raises the stop price to $325. Thus the stop price trails the market price of the contract.

U

unrestricted order: Same as a market order.

V

W

X

Y

Z

Glossaries

Technical Analysis Glossary: Bollinger Bands, MACD, oscillators, fibonacci ratios and the like.

Orders Glossary: Market, stop, limit orders, etcetera.

Mutual Fund Glossary: Front-end and back-end loads, net asset value, open-end and closed-end funds, etc.

Cycles Glossary: January effect, Triple witching, etc.

Technical Analysis Glossary

A

accumulation: The first phase of a bull market. While most investors are discouraged with the market, and earnings are at their worst, some investors start buying shares. Or, an addition to a traders position.

accumulation/distribution: The Accumulation/Distribution is a momentum indicator that associates changes in price and volume. The indicator is based on the premise that the more volume that accompanies a price move, the more significant the price move. Accumulation/Distribution attempts to confirm changes in prices by comparing the volume associated with prices. When the Accumulation/Distribution moves up, it shows that the security is being accumulated, as most of the volume is associated with upward price movement. When the indicator moves down, it shows that the security is being distributed, as most of the volume is associated with downward price movement. Divergences between the Accumulation/Distribution and the security’s price imply a change is imminent. When a divergence does occur, prices usually change to confirm the accumulation/distribution. For example, if the indicator is moving up and the security’s price is going down, prices will probably reverse. If the days price change is positive then the difference in the daily high and low price is added to the total, and conversely if the daily change is negative then the daily range is subtracted from the total.

advances vs. declines: (A/D) This is a measure of the number of stocks that have advanced in price and the number that have declined in price within a given time span. The A/D is generally expressed as a ratio and can help indicate the general direction of the market; when a higher number of stocks advance rather than decline on a single trading day, the market is thought to be bullish. The A/D will function best as a confirming indicator and it is often used with other types of analysis as a guide to the trend of the overall market. It is also used occasionally for specific stock/industry groups. [SplitTrader]

The most common way to display A/D data is with a chart showing the cumulative difference between the advances and the declines on the NYSE. The period can be one week, one month, or any other common time frame but since it is best used to identify new or developing trends, it must be relative to the positions in your portfolio. Compare the A/D chart with that of the DJIA. If the Dow is moving higher but the A/D line is flat or dropping, that is a negative signal and may indicate a future slump. Watch for new highs and lows on the A/D chart. Near market peaks, the A/D line will generally top-out and begin a gradual decline before the overall market. As with all technical indicators, make sure that it confirms other signals.

ADX- Directional Movement Index: The Directional Movement Index provides an indication of how much a stock is trending. Since stocks tend to only trend 30% of the time and move sideways the remainder of the time this indicator can prove very useful. There are three lines that make up this indicator. The +DI (Directional Indicator), the – DI (Directional Indicator), and the ADX (Average Directional Indicator). The +DI line measures upward movement, the -DI meansures downward movement. The ADX measures the strength of the prevailing trend. For example: If the +DI crosses over the -DI, or the -DI crosses over the +DI the ADX MUST be rising in order to confirm the signal. [http://www.daytraderpicks.com/adx.htm]

alpha: How a stock outperforms or underperforms the broader market. Usually measured against the Dow Jones Industrial Average or the S&P 500.

Arms index: Also known as a trading index (TRIN)= (number of advancing issues)/ (number of declining issues) (Total up volume )/ (total down volume). An advance/decline market indicator. Less than 1.0 indicates bullish demand, while above 1.0 is bearish. The index often is smoothed with a simple moving average.

autocorrelation: The correlation of a variable with itself over successive time intervals.

autoregressive: Using past data to predict future data.

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B

backtesting: Predicting the success of a trading strategy based on how well it has performed using historical data.

bar chart: A bar chart is a method which uses a series of vertical marks and horizontal marks to graphically summarize the trading price activity of some commodity over some period of time. A bar chart is a graph of the opening, high, low and closing prices of a commodity futures contract versus time. Many bar charts present just the high, low and close.

A graph of horizontal bars or vertical columns comparing characteristics of two or more items or showing differing proportions of those two items. Bar charts are used in technical analysis to track price ranges and movements.

beta: Beta is a measure of a company’s common stock price volatility relative to the market. The Market Guide Beta is the slope of the 60 month regression line of the percentage price change of the stock relative to the percentage price change of the S&P 500. Beta values are not calculated if less than 24 months of pricing is available. [marketguide.com]

beta: The degree of sensitivity that a particular stock has to the broader market. The greater a stock’s price rises during market rallies and falls during market drops, the greater a stock’s beta. If a stock tends to drop when the market rises, and vice versa, its beta will be negative. [iqCharts]

beta: (Coefficient) The degree of risk which cannot be decreased by diversification. A stock with a beta greater than 1 will rise faster or decline faster than the overall market. A stock with a beta lower than 1 will rise slower or decline slower than the overall market.

blow-off top: A steep and rapid increase in price followed by a steep and rapid drop. This is an indicator seen in charts and used in technical analysis of stock price and market trends.

Bollinger Bands: Bollinger Bands plot trading bands above and below a simple moving average. The standard deviation of closing prices for a period equal to the moving average employed is used to determine the band width. This causes the bands to tighten in quiet markets and loosen in volatile markets. The bands can be used to determine overbought and oversold levels, locate reversal areas, project targets for market moves, and determine appropriate stop levels. The bands are used in conjunction with indicators such as RSI, MACD histogram, CCI and Rate of Change. Divergences between Bollinger bands and other indicators show potential action points. As a general guidline, look for buying opportunities when prices are in the lower band, and selling opportunities when the price activity is in the upper band.

breakout: A point when the stock’s price moves above resistance or below support. When a stock exits the boundaries of an area pattern, or rises above or below support and resistance lines. A technical analysis term, used to indicate a rise in a stock’s price above its resistance level (such as its previous high price) or drop below its support level (commonly the last lowest price.) The assumption is that the stock will continue to move in the same direction following the breakout, which generates a buy or sell signal.

buy/sell signals or indicators: Technical indicators which traders use to suggest times at which contracts might be taken on or liquidated. Examples: 1) Trend lines – A possible signal to either liquidate a long position or short a contract is triggered when up trending prices cross and go below an up trend line–example. Conversely, a possible signal to either liquidate a short position or assume a long position is triggered when down trending prices cross and go above a downtrend line. 2) Moving Average – A possible buy or sell signal is triggered when prices cross a moving average. 3) Multiple Moving Averages – In this case, two moving averages are used. One with a shorter averaging period than the other. The possible buy and sell signals are triggered when the shorter average crosses the longer–crossing in the upward direction triggers a possible buy while crossing in the downward direction signals a possible sell.

These are just three examples of what could be hundreds of indicators which traders have developed to aid them in deciding when to enter and exit the market. Traders use these various indicators individually and in combination. They use various indicators and combinations with various commodities and at various times. The practice of using these indicators is widely variable and range from the very simple to the highly complex with some traders using systems which combine many indicators.

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Chaikin Oscillator: The Chaikin Oscillator is created by subtracting a 10 period exponential moving average of the Accumulation/Distribution line from a 3 period moving average of the Accumulation/Distribution Line.

characteristic line: Characteristic Line is the technical term for the best fit or regression line that comes out of regression analysis. It is the line that represents the estimated linear relationship between the dependent variable (the thing we want to explain) and the independent variable (the thing we use to explain it).

Example: Suppose we want to explain the return on IBM by saying that it depends on the Dow Jones Industrial Index. This relationship between IBM and the Dow can be put into a linear equation like this:

RIBM = a + bRDow Jones

The straight line with intercept a and slope b is the characteristic equation. [http://www.uises.com/]

Chartcraft method: A method of point & figure charting that dates back to 1947. It has a default boxsize of 0 and a reversal of 3. The boxsize of 0 sets a box value range from $.25 to $2, depending on the price of the issue. The reversal of 3 means that an X column will change to an O column when the price drops at least three boxes below the highest X in the current column. To reverse from Os to Xs, the price must rise three boxes above the lowest O in the current column.

change: In a futures table, indicates the difference between the closing price on one trading day with the closing price on the previous day.

charting: charting refers to graphically illustrating commodity prices and how they change. Technical traders use many types of charts: Bar Charts, Candlestick Charts, Point and Figure Charts, and others.

confirmation: At least two indicators or indexes corroborate a market turn or trend. In the case of the stock market, with respect to Dow Theory, it would be the Dow Industrials and the Dow Transports.

confirmation: When it comes to studying prices, many investors look for confirmation. This idea suggests that if the price of a stock is moving up or down, there should be one or more technical indicators that confirm this movement if it is to continue. [iqc.com]

confirmation: Confirmation is a subsequent signal that validates a position stance. Traders and investors sometimes look for more than one signal or require validation before acting. For example: confirmation of a trend change may entail an advance past the previous reaction high. For an indicator such as MACD, confirmation of a divergence may be a subsequent moving average crossover. Many candlesticks also require confirmation. Hammers, bullish engulfing and piercing patterns all require a subsequent advance to confirm the reversal. Conversely, shooting stars, bearish engulfing and dark cloud cover patterns require a subsequent decline to confirm the reversal. [stockcharts.com]

congestion area: At a minimum, a series of trading days in which there is no or little progress in price. A period of time when a stock trades either below resistance, above support, or both.

consolidation: A Consolidation is any type of flat, sideways pattern that occurs after a market has moved solidly in either the positive or the negative direction. Consolidations typically take the form of “flags”, “pennants”, or “triangles”, and are discussed at great length in Edwards and McGee’s Technical Analysis of Stock Trends. [SignalWatch]

General Characteristics: A Consolidation is a battle between buyers and sellers in which an approximately equal number of both is basically trading stock between them. One day, you have slightly more buyers, the next slightly more sellers. When price moves outside the range formed by the consolidation, one side gives up, releasing pressure in the continuing direction. If the stock was going down, consolidated, and is moving down again; Who wants to buy it? Consolidations have the unique characteristic of measuring moves at the 50% point. That is, if you had a top, and then a consolidation after a stock is down 10 points, it will likely move down another 10 points before reversing.

Market Relevance: Since a Consolidation play involves a continued move, you really want to see a market that is either very fearful (if you are going short), or absolutely fearless and greedy (if you are going long). On the bull side, it is best if the market is doubtful that the “bull” will continue, but is moving up anyway. On the bear side, disbelief is the best emotion to see among market participants.

contango: When prices rise progressively in consecutive months.

covariance: A measure that reflects both the variance (volatility) of a stock’s returns and the tendency of those returns to move up or down at the same time relative to other stocks (their correlation). This is a way to see if two stocks tend to move up or down together and how big those movements usually are.

curve fitting: This is adding complexity to a system in order to produce better and better historical results. For example, A simple system that is profitable but only 60% of its trades are winners. You notice that many of the “bad” signals occur near the beginning of the month so you filter those out by adding complexity that brings your accuracy to 70%. As you add complexity you can continue to improve your historical record to 90% accurate. However, the complicated system is much less likely to reproduce the 90% accuracy than the simple system was to reproduce the 60% accuracy.

cyclic analysis: analysis that uses various seasonal factors as a basis to determine trends and prices.

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D

delta: A measure of the change in an option’s price compared to the change in the underlying price of the stock. A percentage value of the amount that an option premium can be expected to change for a given unit change in the underlying futures contract. The factor takes into consideration the time remaining to an option’s expiration, the volatility of the underlying futures contract, and the price relationship. Factors are available from all the clearinghouses offering option trading. They change on a daily basis.

delta: A measure of how much an option premium changes, given a unit change in the underlying futures price. Delta often is interpreted as the probability that the option will be in-the-money by expiration.

deterministic models: Liability-matching models that assume that the liability payments and the asset cash flows are known with certainty. Related: Compare stochastic models

divergence: Simply stated, a divergence occurs when prices move in one direction (up or down) and an indicator based on those prices moves in the opposite direction.

Divergences signal impending changes in the direction of a stock’s price. They come in two flavors – “positive” (AKA “bullish”) and “negative” (AKA “bearish”). A positive divergence happens when an indicator starts moving higher after prices have been in a downtrend (a potentially bullish development). A negative divergence occurs when an indicator moves lower while prices are still rising and is a bearish warning signal.

Any oscillating indicator can be used in a divergence study. Popular choices include the MACD, Stochastics, and Wilder’s RSI. Many people also use indicators that include volume information – Chaikin’s Money Flow for example – since price and volume often diverge at key turning points.

Unfortunately, like many things in the field of technical analysis, spotting divergences while they are still forming can be tricky. The biggest problem is distinguishing between a real divergence and just random “noise” on the chart. Just because a stock moves up for two days while its RSI (for example) declines, it doesn’t necessarily mean that a significant divergence has developed – yet.

divergence: Two curves are said to diverge when one curve makes a significant new peak (or valley) but the other curve does not. Divergence is an important part of many technical indicators. The following three classic examples all look for divergence between the price of an issue and an indicator based on the issue. In each case, divergence usually signals a change in price trend. They are: price and OBV, price and RSI, price and a stochastic. Divergence also helps you study market indexes, like the S&P 500, and market indicators, like the Advance/Decline Line. You can identify divergence simply by looking at a chart because your eyes automatically can pick out significant peaks, often ignoring many smaller peaks in the process. However, it is difficult to create a computer algorithm that ignores insignificant peaks. TechniFilter Plus’s solution is the divergence combiner formula-writing tools. [rtrsoftware.com]

DMA: Day Moving Average. As in 200 DMA.

drawdown: Reduction in account equity from a trade or series of trade. It happens to all of us some of the time.

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Elliot Wave: Theory of cyclical movements of prices. Follows certain indicators that predict and confirm price movements. The Elliot Wave Theory was originally published by Ralph Nelson Elliot in 1939. It is a pattern recognition theory. It holds that the stock market follows a pattern of five waves up and three waves down to form a complete cycle. Many technicians believe that this pattern can hold true for as short a time period as one day. However, it is generally used to measure long periods of time in the market.

envelope: An envelope is comprised of two moving averages (see Moving Average). One moving average is shifted upward and the second moving average is shifted downward. The Envelope is plotted around a price plot or indicator. Envelopes define the upper and lower boundaries of a security’s normal trading range. A sell signal is generated when the security reaches the upper band whereas a buy signal is generated at the lower band. The optimum percentage shift depends on the volatility of the security–the more volatile, the larger the percentage. The logic behind envelopes is that overzealous buyers and sellers push the price to the extremes (i.e., the upper and lower bands), at which point the prices often stabilize by moving to more realistic levels. This is similar to the interpretation of Bollinger Bands.

equivolume chart: Richard Arms created this type of chart. It measures the relationship between price and volume. Price is measured on the vertical axis and volume is measured on the horizontal axis.

exponential moving average: An exponential (or exponentially weighted) moving average is calculated by applying a percentage of today’s closing price to yesterday’s moving average value. Exponential moving averages place more weight on recent prices. For example, to calculate a 9% exponential moving average of IBM, you would first take today’s closing price and multiply it by 9%. Next, you would add this product to the value of yesterday’s moving average multiplied by 91% (100% – 9% = 91%). [equis.com]

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Fibonacci ratios: (Fibonacci numbers). Ratios of cyclical market movements to one another that are used to establish price objectives concerning the likely movements in the next cycle. The relationship between two numbers in the fibonacci sequence. The sequence for the first three numbers is 0.618, 1.0, and 1.618. In general terms the fibonacci series is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, etc.

Fibonacci Ratios and Retracements: They can be applied both to price and time, although it is more common to use them on prices. The most common levels used in retracement analysis are 61.8%, 38% and 50%. When a move starts to reverse the 3 price levels are calculated (and drawn using horizontal lines) using a movements low to high. These retracement levels are then interpreted as likely levels where counter moves will stop. It is interesting to note that the Fibonacci ratios were also known to Greek and Egyptian mathematicians.The ratio was known as the Golden Mean and was applied in music and architecture. A Fibonacci spiral is a logarithmic spiral that tracks natural growth patterns.

float: The number of free trading shares out of the total number of outstanding shares of a company’s stock. Some shares may be restricted, such as those owned by company insiders, and are not available for trading on the open market.

fundamentals: Company fundamentals are financial information and management commentary, as reported in quarterly or annual statements, press releases or other public venues. Anecdotal reports from company customers and suppliers, or general information on the company’s product markets, are also part of the fundamental picture. Technical information based on stock prices and trading volume is not considered part of the fundamentals.

fundamental analysis: Fundamental analysis can be described as the study of any economic, political, psychological, weather, or other news-based item that affects the market price of a commodity. The fundamental approach appeals to traders who need to know why a particular commodity is moving higher or lower. Prediction of futures prices based upon an analysis of demand and supply. See technical analysis.

fuzzy systems: Systems which process inexact information inexactly. It describes ambiguity instead of uncertainty of an occurrence. This is not Boolean.

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gamma: A measurement of how fast delta changes, given a unit change in the underlying futures price.

Gann Square: The Gann Square is a mathematical system for finding support and resistance based upon a commodity or stock’s extreme low or high price for a given period. Attainment of a particular price level in a square tells you the next probable price peak or valley of future movement. The probable price levels tend to be more reliable if they are extrapolated from Gann Square values along one of the major axes of the Gann Square. The Gann Square is generated from a central value, normally a all-time or cyclical high or low. If a low is used, the numbers are incremented by a constant amount to generate the Gann Square. If a high is used, the numbers are decremented during the square generation.

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Herrick Payoff Index: This is a commodity trading tool, useful for the early spotting of changes in price trend direction. The Payoff Index is best used to distinguish trends that are destined to continue from those that will most likely be short-lived. The Payoff Index is a commodity trading tool that is useful in the early identification of changes in the direction of price trends. The Payoff Index frequently helps distinguish between a rally in a trend that is destined to continue and a significant trend change that will provide a worthwhile trading opportunity. The Payoff Index tends to give coincident signals within a day or two before a significant change in price trend. This advance action is accomplished through use of trading volume and contract open interest to modify the price action. Analysts have observed that volume trends often change before a price-trend change. There are also generally accepted relationships between the price trend and the trend of open interest. [centrex.com]

I

inside day: A day in which the total range of price is within the range of the previous days price range.

J

K

L

lifetime highs & lows: In a futures table, the highest and lowest price during the lifetime of a particular contract. Indicates how much volatility there has been in the trading of a particular contract for a particular commodity — an indication of risk and reward.

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MACD: Moving Average Convergence/Divergence. The crossing of two exponentially smoothed moving averages. They oscillate above and below an equilibrium line.The Moving Average Convergence/Divergence indicator (MACD) is calculated by subtracting the value of a 0.075 (26-period) exponential moving average from a 0.15 (12-period) exponential moving average. A 9-period dotted exponential moving average (the “signal line”) is automatically displayed on top of the MACD indicator line. The basic MACD trading rule is to sell when the MACD falls below its 9-period signal line. Similarly, a buy signal occurs when the MACD rises above its signal line. A variation of the MACD can be created by plotting the following formula:

macd( ) – mov(macd( ), 9, E).

Then change the indicator line style to a histogram, and plot a 9-period dotted moving average of the indicator. In a system test of this indicator, sell arrows are drawn when the histogram peaked and turned down and buy arrows are drawn when the histogram formed a trough and turned up.

The MACD is used to determine overbought or oversold conditions in the market. Written for stocks and stock indices, MACD can be used for commodities as well. The MACD line is the difference between the long and short exponential moving averages of the chosen item. The signal line is an exponential moving average of the MACD line. Signals are generated by the relationship of the two lines. As with RSI and Stochastics, divergences between the MACD and prices may indicate an upcoming trend reversal.

McClellan Oscillator: This index is based on New York Stock Exchange net advances over declines. It provides a measure of such conditions as overbought/oversold and market direction on a short-to- intermediateterm basis. The McClellan Oscillator measures a bear market selling climax when it registers a very negative reading in the vicinity of -150. A sharp buying pulse in the market would be indicated by a very positive reading, well above 100. [centrex.com]

momentum: The strength behind an upward or downward movement in price. Graphically, momentum is represented as a horizontal line which fluctuates above and below an equilibrium line.Momentum provides an analysis of changes in prices (as opposed to changes in price levels). Changes in the rate of ascent or descent are plotted. The Momentum line is graphed positive or negative to a straight line representing time. The position of the time- line is determined by price at the beginning of the Momentum period. Traders use this analysis to determine overbought and oversold conditions. When a maximum positive point is reached, the market is said to be overbought and a downward reaction is imminent. When a maximum negative point is reached, the market is said to be oversold and an upward reaction is indicated. [centrex.com]

momentum divergence: Momentum divergence is the deviation of price and volume demonstrated as a continuation of a trend without the necessary momentum to sustain the move. For example, the price of a stock may continue to rise, however, the volume begins to decline behind the ascension, indicating a lack of conviction from the buyers. Momentum divergence can signal a pending trend reversal.

money flow index: A volume indicator that combines the ideas of positive and negative volume with the RSI calculation. Money flow is defined as the typical daily price times today’s volume. This quantity is tracked from day to day, and averages of up-money flow days and down-money flow days over some specified period of time are computed. MFI is defined as the percentage of the total money flow that is up.

moving averages: An average that is updated by dropping the first number and adding in the last number. A method for averaging near-term prices in relation to long-term prices. Oldest prices are dropped as new ones are added. Note: Moving averages are not restricted to day measurements. Any constant unit measure can be applied, and the average can be of as few as two units to whatever number of units the user wishes.

The moving average is probably the best known, and most versatile, indicator in the analysts tool chest. It can be used with the price of your choice (highs, closes or whatever) and can also be applied to other indicators, helping to smooth out volatility. As the name implies, the Moving Average is the average of a given amount of data. For example, a 14 day average of closing prices is calculated by adding the last 14 closes and dividing by 14. The result is noted on a chart. The next day the same calculations are performed with the new result being connected (using a solid or dotted line) to yesterday’s. And so forth. Variations of the basic Moving Average are the Weighted and Exponential moving averages. [centrex.com]

Moving averages are used in a similar manner as charting patterns, Dow theory, or Elliot Wave theory. The difference is, since the patterns being charted are based on a moving average of a stocks price activity, a smoother trend is exhibited. The smoothing affect of moving averages removes some of the inter-day volatility, or trading noise, allowing the technician to interpret market trends more effectively. Moving averages are defined as an average which is recomputed each time a new observation occurs. Thus a “n” day moving average of the stocks closing price would drop the observation from “n+1″ days ago and add the most recent observation. The new set of numbers are averaged using the number of observations in the set. The new number is the moving average for the most recent period. Many technicians use a cross-over method of interpreting moving averages. If a stocks price crosses over a moving average line, then a trend reversal is likely. Moving averages are a useful technical tool in a trending market. However, should a market be trading in a consolidative manner (sideways), then many false signals are given by a moving average indicator. Moving averages may also act as support and resistance levels in a trending market. [http://www.finpipe.com]

moving-average charts: A statistical price analysis method of recognizing different price trends. A moving average is calculated by adding the prices for a predetermined number of days and then dividing by the number of days.

multicolinearity: Multicolinearity – Sensible technical analysis means avoiding multicolinearity or the use of more than one indicator to count the same information. For instance, MACD, RSI and Rate-of-change are all based on closing prices and all are momentum indicators. Using these together would be practicing multicolinearity. To avoid multicolinearity, indicators should complement one another. For example, RSI, Chaikin Money Flow and moving averages might be used together to avoid multicolinearity. RSI for momentum, Chaikin Money Flow for buying and selling pressure and moving averages trend following. [stockcharts.com/education/Resources/Glossary/multicolinearity.html]

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narrow participation: When a stock is below its 200-day moving average, we can conclude that it is in a long-term declining trend. Currently about 70% of NYSE stocks are below their 200-DMA, yet the NYSE Composite is very near all-time highs. This shows how narrow participation has become, meaning that money has become concentrated in a small group of large-cap stocks. This deterioration has taken place over an extended period of time (about a year and a half), and currently the configuration is quite similar to the setups into the July 1990 and October 1994 tops. The subsequent results of those tops were declines of 20% and less than 10% respectively, showing that there is a wide range of possible outcomes, but I think we should be expecting some serious trouble in a month or two. [decisionpoint.com 3/01/99]

negative divergence: When two or more indicators, indexes, or averages, fail to show confirming trends. A negative Divergence occurs when a price index is making a higher top at the same time a technical indicator is flat or making a lower top. This happened with the Advance-Decline Volume Index at the July 1998 market top and marked the beginning of a 20% market correction. –Carl Swenlin

noise: Fluctuations in the market which can confuse one’s interpretation of market direction.

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OBV: On Balance Volume. OBV is one of the most popular volume indicators and was developed by Joseph Granville. Constructing an OBV line is very simple: The total volume for each day is assigned a positive or negative value depending on whether prices closed higher or lower that day. A higher close results in the volume for that day to get a positive value, while a lower close results in negative value. A running total is kept by adding or subtracting each day’s volume based on the direction of the close. The direction of the OBV line is the thing to watch, not the actual volume numbers.

Formula: OBV=SUM(C-CP)/(ABS(C-CP)xV)

C=Today’s Close CP=Yesterday’s Close V=Today’s Volume

odd lot: A block of stock consisting of less than 100 shares. When odd lots trade, a premium is usually tacked on by the specialist or market maker. These receive the least favorable price and trade last. Or, my next door neighbors.

odd lot theory: A technical analysis theory based on the assumption that the small investor is always wrong. Therefore, if odd lot sales are up – that is small investors are selling stock – it is probably a good time to buy.

open: The price at which a commodity first sold when the exchange opened in the morning. (Can calculate the full value of one contract by multiplying the price by the units that commodity is sold in). The first price of each period. When the period is a trading session, the open may be a selected price or average recorded during the opening period of the session.

open interest: The number of contracts outstanding or unliquidated at the end of a day. Open interest refers to the total number of contracts outstanding at the end of a trading period. This is represented by the number of long contracts outstanding divided by the number of short contracts outstanding, not the sum of them. The important measure from this indicator is the change in open interest. The change is a measure of capital flow in the market. During a market rally, the open interest should increase, as new money is attracted into the market. The change in open interest reflects the strength of the up trend. However, if the open interest decreases as a market rallies, then it is likely that short positions are being covered. The bull run will likely come to an end once the shorts have been covered. The converse is true for bear markets. [www.finpipe.com]

In a futures table, open interest refers to the total number of outstanding contracts; that is, those that have not been cancelled by offsetting trades. Allows you to see how much interest there is in trading a particular contract. The closest months usually attract the most activity. In an options table, open interest refers to the number of outstanding option contracts that have not been offset by an opposite transaction. The total number of outstanding or unliquidated contracts at the end of the day. These open contracts have neither been offset in the marketplace nor fulfilled by delivery.

The total number of futures contracts of a given commodity that have not yet been offset by opposite futures transactions nor fulfilled by delivery of the commodity; the total number of open transactions. Each open transaction has a buyer and a seller, but for calculation of open interest, only one side of the contract is counted.

The total number of open futures or options contracts. This is typically reported for each trading session by the next day. Keep in mind that each contract has two sides, a buyer and a seller. There are always an equal number of long and short position in the market. The open interest is the number of open contract-pairs.

oscillator: a type of technical analysis tool used in predicting price movements.

overbought: A technical analysis term for a market in which more and stronger buying has occurred than the fundamentals justify. See also oversold.

oversold: Market prices that have declined too steeply and too quickly. A technical analysis term for a market in which more and stronger selling has occurred than the fundamentals justify. See also overbought.

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P

parabolic: (SAR) The Parabolic is a Time/Price system for the automatic setting of stops. The stop is both a function of price and of time. The system allows a few days for market reaction after a trade is initiated after which stops begin to move in more rapid incremental daily amounts in the direction the trade was initiated. For example, when a long position is taken the stop will move up regardless of price direction. However, the distance that the stop moves up is determined by the favorable distance the price has moved. If the price fails to move favorably within a certain period of time, the stop reverses the position and begins a new time period.

pivot points: The Pivot Point is defined as the average of the high, low and settlement price, and is plotted as the green line across the chart. The blue line above the pivot point is the resistance level and is defined as twice the pivot point minus the low price. The red line below the pivot point is the support level and is defined as twice the pivot point minus the high price. Pivot points are used primarily as support and resistance levels with the pivot point the best support resistance level. [BarCharts.com]

point: The minimum price fluctuation of a contract.

point-and-figure chart: Charts that show price changes of a minimum amount regardless of the time period involved.  Both Bar and Candlestick charts plot commodity prices along the y-axis and time along the x-axis. Point and Figure charting deviates significantly from this pattern by plotting price changes along both axes. The objective of this type of chart is to emphasize how prices are responding to the market pressures of supply and demand and to do this regardless of time. A Point and Figure chart is made up of invisible squares called boxes. When prices are rising, an “X” is placed in one of the boxes. An “O” is used when prices are falling. The first step in constructing a Point and Figure chart is to decide upon the size of the “box” and the number of boxes required to trigger a reversal. These determinations are strictly arbitrary and should reflect the amount of price change sensitivity that the chart is intended to portray. Smaller boxes will render the chart more sensitive to price changes.

A chart which plots price only. A chart constructed to detail a continuous flow of price activity without regard to time. Plotting direction is determined by a preset number of price changes in sequential order. X’s are place in boxes representing up days; and O’s are placed in boxes representing down days. There is no provision for time in point and figure charting. As long as the trend remains the same, the X’s or O’s are placed above or below each other. When a reversal takes place, the next vertical column starts the next trend.

point value: A multiplication factor used to convert a reported price-per-unit of a commodity to the contract price. The definition of point value can vary from trader-to-trader. The purpose of the point value is to determine the price of a complete contract or to determine profit or loss. Therefore, you must know the contract size and the price quote to accurately the point value in making the desired conversion to dollars.

price quote: price quotes (e.g. whether in $/bushel or ¢/bushel) depends upon the source of the quote.

A multiplication factor used to convert a reported price-per-unit of a commodity to the contract price. When a quote includes a dash, the number following the dash is considered to be in 32nds rather than in tenths: 107-5 quote >> 107.15625 points

positive divergence: One of the most common and important technical signals is the positive divergence. It occurs when a price index is making a lower bottom at the same time a technical indicator is making a higher bottom. This happened with the ITBM (Intermediate-Term Breadth Momentum Oscillator) at the October 1998 lows and marked the beginning of a breath-taking rally. –Carl Swenlin

PREV: Q. What is the new PREV constant available in the Indicator Builder and how is it used? A. The PREV constant is used in a custom indicator to reference the previous output of the same formula. The following is a general example of a formula that uses PREV: PREV+1. The above formula takes the previous result of its own calculation and adds one to it. The formula is automatically “primed” with the first output so that there is something to start calculating with.The first output of this formula would be 2, then 3, then 4, and so forth.The PREV function is useful in performing exponential-type calculations. For example, an 18% exponential moving average can be calculated with the following formula: (close * 0.18) + (PREV* 0.82). The above formula takes 18% of the closing price and adds on 82% of the same formula’s previous result. For additional information, search for ‘Prev Constant’ in the MetaStock 6.0 online help or in the User’s Guide index. [http://www.equis.com/customer/newsletters/1996-3.html]

price earnings ratio: The ratio of the price of a stock to the earnings per share. Or total annual profit divided by the number of shares outstanding.

price patterns: Price Patterns are formations which appear on commodity and stock charts which have shown to have a certain degree of predictive value. Some of the most common patterns include: Head & Shoulders (bearish), Inverse Head & Shoulders (bullish), Double Top (bearish), Double Bottom (bullish), Triangles, Flags and Pennants (can be bullish or bearish depending on the prevailing trend).

public book: The public orders to buy or sell a security which are not market orders.

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Q

quant: Also known as a rocket scientist, a quant is someone who is really good at math, computer science and the like and brings those skills to bear in the securities industry. The rise of computers and exotic derivatives on Wall Street is both a cause and an effect of quants. Such tools (along with the big bucks to be made) bring quants to the industry, who in turn create more such tools themselves.

R

random walk theory: A market analysis theory that the past movement or direction of the price of a stock or market cannot be used to predict its future movement or direction.

range: The difference between the high and the low prices recorded over some period. The period can range from minutes to years.

regression: method of statistical analysis that measures quantitative correlations between different variables. One method is to weigh hedges (hedge ratios).

relative strength indicator: A technical analysis tool that attempts to indicate when the market has moved excessively in one direction and is likely to be reversed by a technical reversal.

relative strength: A comparison of an individual stock’s performance to that of a market index. Most times the S&P 500 or the Dow Jones Industrial Index are used for comparison purposes. It is calculated by dividing the stock price by the index price. A rising line indicates that the stock is doing better than the market. A declining line indicates that the stock is not doing as well as the market.

relative strength index: (RSI) This indicator was developed by Welles Wilder Jr. Relative Strength is often used to identify price tops and bottoms by keying on specific levels (usually “30” and “70”) on the RSI chart which is scaled from from 0-100. The study is also useful to detect the following:

  1. Movement which might not be as readily apparent on the bar chart
  2. Failure swings above 70 or below 30 which can warn of coming reversals
  3. Support and resistance levels
  4. Divergence between the RSI and price which is often a useful reversal indicator

The Relative Strength Index requires a certain amount of lead-up time in order to operate successfully.The formula for calculating the RSI is:

  • rsi=100-(100/1-rs)
  • rs= average of x day’s up closes divided by average of x day’s down closes

relative strength: The Relative Strength Index (RSI) is one of the most popular overbought/oversold (OB/OS) indicators. The RSI was developed in 1978 by Welles Wilder. The name “Relative Strength Index” is slightly misleading, as the RSI does not compare the relative strength of two securities, but rather the internal strength of a single security. The RSI is basically an internal strength index and is adjusted on a daily basis by the amount by which the market rose or fell. A high RSI occurs when the market has been rallying sharply and a low RSI occurs when the market has been selling off sharply.

One characteristic of the RSI is that it moves slower when it reaches overbought or oversold conditions, and then snaps back very quickly when the market enters even a mild correction. This brings the RSI back to more neutral levels and indicates that the price trend may be able to resume. When Wilder introduced the RSI, he recommended using a 14-day RSI. Since then, the 9-day and 25-day RSIs have also gained popularity. The fewer days used to calculate the RSI, the more volatile the indicator.

The RSI is a price-following oscillator that ranges between 0 and 100. A popular method of analyzing the RSI is to look for a divergence in which the security is making a new high, but the RSI is failing to surpass its previous high. This divergence is an indication of an impending reversal. When the RSI then turns down and falls below its most recent trough, it is said to have completed a “failure swing.” The failure swing is considered a confirmation of the impending reversal.

The formula for the RSI:
A= An average of upward price change
B= An average of downward price change
Relative Strength=100-100/(1+A/B)

resistance: The price a stock can trade at, but not go higher than over a period of time. (The opposite of support.) A price level where a security’s price stops rising and moves sideways or downward. It indicates an abundance of supply. Because of this, the stock may have difficulty rising above this level. There are short term and longer term resistance levels.

retracement: A reversal in the movement of a stock’s price counter to the prevailing trend.

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S

SAR: Stop And Reverse. (or Switch and Reverse indicator) (related: Parabolic SAR indicator)

secondary market: A market available to trade securities after their initial public offering. The New York Stock Exchange is an example of a secondary market.

settle: The closing price for the day.

short interest: Shares that have been sold short and not yet repurchased.

short interest ratio: A ratio which tells how many days it would take to buy back all the share which have been sold short. A short interest ratio of 2 would indicate that it would take 2 trading days to buy back all the shares which have been sold short. This is based on the current volume.

simple linear regression: A regression analysis between only two variables, one dependent and the other explanatory.

simple linear trend model: An extrapolative statistical model that asserts that earnings have a base level and grow at a constant amount each period.

simple moving average: (SMA) The mean, calculated at any time over a past period of fixed length.

simulation: The use of a mathematical model to imitate a situation many times in order to estimate the likelihood of various possible outcomes. See: Monte Carlo simulation.

standard deviation: A measure of a mutual fund’s volatility, standard deviation is a statistical measure of the range of a fund’s performance. The higher the number the greater the volatility. When a fund has a high standard deviation, its range of performance has been very wide, indicating that there is a greater potential for volatility. The standard deviation figure provided here is an annualized statistic based on 36 monthly returns. By definition, approximately 68% of the time the total returns of any given fund are expected to differ from its mean total return by no more than plus or minus the standard deviation figure. Ninety-five percent of the time, a fund’s total returns should be within a range of plus or minus two times the standard deviation from its mean. These ranges assume that a fund’s returns fall in a typical bell-shaped distribution. In any case, the greater the standard deviation, the greater the fund’s volatility.For example, an investor can compare two funds with the same average monthly return of 5.0%, but with different standard deviations. The first fund has a standard deviation of 2.0, which means its range of returns for the past 36 months has typically remained between 1% and 9%. On the other hand, assume that the second fund has a standard deviation of 4.0 for the same period. This higher deviation indicates this fund has experienced returns fluctuating between -3% and 13%. With the second fund, an investor might expect greater volatility. [MSN]

standard deviation: The standard deviation is one of several indices of variability that statisticians use to characterize the dispersion among the measures in a given population. To calculate the standard deviation of a population it is first necessary to calculate that population’s variance. Numerically, the standard deviation is the square root of the variance. Unlike the variance, which is a somewhat abstract measure of variability, the standard deviation can be readily conceptualized as a distance along the scale of measurement.

standard deviation: (volatility) Standard deviation is a statistical term that provides a good indication of volatility. It measures how widely values (closing prices for instance) are dispersed from the average. Dispersion is difference between the actual value (closing price) and the average value (mean closing price). The larger the difference between the closing prices and the average price, the higher the standard deviation will be and the higher the volatility. The closer the closing prices are to the average price, the lower the standard deviation and the lower the volatility.

standard deviation: Standard Deviation is a statistical measurement of volatility. It is derived by calculating an x-time period simple moving average of the data item (i.e., the closing price or an indicator); summing the squares of the difference between the data item and its moving average over each of the preceding x-time periods; dividing this sum by x; and then calculating the square root of this result. Standard Deviation is typically used as a component of an indicator, rather than as a stand-alone indicator. For example, Bollinger Bands are calculated by adding a security’s Standard Deviation to a moving average. High Standard Deviation values signify high volatility: the data item being analyzed is deviating from its moving average significantly. Similarly, low Standard Deviation values signify low volatility; the data item is re_toping close to its moving average.Typically, low Standard Deviation values (i.e., low volatility) tend to come before significant upward price changes. Many analysts agree that major tops are normally accompanied with high volatility and major bottoms are generally calm with low volatility. [www.tradingtactics.com]

standard deviation: Standard Deviation is a statistical measure, which is closely related to volatility. Standard Deviation is typically used as a component of other indicators, rather than as a stand-alone indicator. For example, Bollinger Bands are calculated by adding a security’s Standard Deviation to a moving average. High Standard Deviation values occur when the price is changing dramatically (high volatility). Similarly, low Standard Deviation values occur when price is relatively stable (low volatility). For example a stock whose price increases by 4% to 5% each day will have a lower standard deviation, than a stock whose price increases by 1% each day followed by a 3% increase. Standard Deviation is derived by calculating an n-period simple moving average of the data item (i.e., the closing price or an indicator), summing the squares of the difference between the data item and its moving average over each of the preceding n-time periods, dividing this sum by n, and then calculating the square root of this result. [Barcharts.com]

stochastic: The Stochastic Indicator is based on the observation that as prices increase, closing prices tend to accumulate ever closer to the highs for the period. Conversely, as prices decrease, closing prices tend to accumulate ever closer to the lows for the period. Trading decisions are made with respect to divergence between % of “D” (one of the two lines generated by the study) and the item’s price. For example, when a commodity or stock makes a high, reacts, and subsequently moves to a higher high while corresponding peaks on the % of “D” line make a high and then a lower high, a bearish divergence is indicated. When a commodity or stock has established a new low, reacts, and moves to a lower low while the corresponding low points on the % of “D” line make a low and then a higher low, a bullish divergence is indicated. Traders act upon this divergence when the other line generated by the study (K) crosses on the right-hand side of the peak of the % of “D” line in the case of a top, or on the right-hand side of the low point of the % of “D” line in the case of a bottom. Two variations of the Stochastic Indicator are in use: Regular and Slow. When the Regular plot of the Stochastic too choppy, the “Slow” version can often clarify the results by reducing the sensitivity of the calculations. The formula is:

Note: 5 Days is the most commonly used value for %K
%K=100 {(C-L5)/(H5-L5)}
The %D line is a 3 day smoothed version of the %K line
%D=100(H3/L3) where H3 is the 3 day sum of (C-L5) and L3 is the 3 day sum of (H5-L5)

stochastics: Select this toggle to display the selected stock’s stochastics, calculated using a 10-day period. Stochastics give an indication of the stocks last closing price relative to the stocks recent trading range. On uptrends stocks tend to close near the high of the day’s trading range. As the trend matures, stocks tend to close away from the highs of the day. During a downtrend stocks will most likely close near the low of the trading range. The stochastic indicator attempts to find trend reversals by measuring points in a rising trend where closing prices are near the lows of the day and vice versa. A low stochastic indicates that a stock is trading near the bottom of its recent trading range, where a high stochastic indicates that a stock is trading near the top of its recent trading range. [marketguide.com]

K=(Price – L)/(H – L)*100
Price – closing price for the day
L – n-period low price
H – n-period high price
n – any number (usually 5-21), our default is a 10 day period

stochastic models: Liability-matching models that assume that the liability payments and the asset cash flows are uncertain. Related: Deterministic models.

stochastic–random: Finance theorists believing in the efficient market hypothesis hold that futures prices move in a random fashion (stochastic process).

stochastic oscillator: A stochastic oscillator measures, on a percentage basis, where a contract is in relation to its price range for a selected number of days. It’s actually a study that helps determine overbought and oversold conditions in the market. It compares where a contract’s price closed relative to its price range over a given time period. It is graphically displayed in two lines.

stop and reverse: A stop that when hit is a signal to close the current position and open an opposite position. A trader holding a long position would sell that position and then go short on the same security.

stop and reverse: (SAR) A stop that, when hit, is a signal to reverse the current trading position, i.e., from long to short. Also known as reversal stop.

support: The price a stock trades at, but does not go lower than, over a period of time. (The opposite of resistance.)

support: The place on a chart where the buying of futures contracts is sufficient to halt a price decline.

support: A price level at which declining prices stop falling and move sideways or upward. It is a price level where there is sufficient demand to stop the price from falling. Something my friend Bob pays his ex wife.

swing index: Using the high, low, close and open on two consecutive days, this indicator attempts to determine the “real” market price of a security by measuring the price swing. [rtrsoftwarre]

swing index: The Swing Index (primarily for use with commodity trading) attempts to determine real market direction, and changes in direction, by making use of the most significant comparisons between the results (Open-High-Low-Close) of the current and previous days’ trading. [centrex.com]

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T

technical analysis: Technical analysis is the study of market movement primarily through the use of charts. This method has three underlying premises: 1) market action discounts everything; 2) prices move in trends; and 3) history repeats itself. For the most part, technical analysis is a method that is concerned with timing the market. Attempts to predict future price movements by analyzing the past sequence of prices, volume, etc.

technical analysis: Anticipating future price movement using historical prices, trading volume, open interest and other trading data to study price patterns.

technical analysts: Also called chartists or technicians, analysts who use mechanical rules to detect changes in the supply of and demand for a stock and capitalize on the expected change.

tick: A minimum upward or downward movement in the price of a security. The tick is the upward or downward movement of a stock’s price. (i.e. “It just ticked up.”) The TICK, usually given as one of a number of market indicators, refers to the net tick on their last trade of all stocks being traded on a given day. This information is useful in determining the current direction of the market and strength of the market in a given direction. For example, the market could be up 50 points, but, if the TICK were -400, it would indicate that the market had changed directions and was heading down. Or the market could be up 50 points with a tick of +750. This would indicate that the market was likely to go much higher since the momentum is clearly up. {DecisionPoint.com]

trading philosophies: There seem to be three major and well defined trading philosophies; contrary opinion, fundamental analysis and technical analysis. It further appears that although each commodities author may claim to have strongly adopted one of philosophies that most seem to practice combinations of each.

Contrary Opinion: Contrary opinion was first prominently set forth by Neill Humphrey in The Art of Contrary Thinking. Several other texts are also included in the References section. Very simply put, contrary opinion is practiced at market tops and bottoms. It relies heavily on the belief that most traders will be wrongly investing to continue the current trend immediately before a reversal occurs.

Fundamental: A fundamentalist strongly believes that the perception of supply and demand sets the price and direction of market prices. Consistent with this belief, the fundamentalist researches information on inventories, changes in the nature of the consuming market, factors affecting manufacture and delivery, rumors which might affect what other traders currently believe about the condition of supply and demand and a multitude of other data and factors. Fundamental factors vary with commodities–grains are affected by weather conditions, current and forecasted, and by government reports; currencies are affected by interest rates and where they are trending, and political conditions. You can see that aggressive fundamental trading requires a great deal of study.

Technical: The pure technical trader relies strictly on price information. This trader would strongly believe that all of the fundamental factors are either already integrated into or are being signaled by the current price patterns. Because of this, the major tool of the technical trader is the price chart; the bar, the candlestick and the Point and Figure Charts.

trading range: Ranges of prices over which market action has been taking place during the time frame under study.

trending market: Price moves in a single direction and it usually closes on an extreme for the day.

U

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V

volatility: The measurement of how much an underlying security fluctuates over a period of time. This analysis is based on the idea that stocks bottom from “panic” selling, after which a rebound is imminent. One way of measuring this phenomenon is to observe a widening range between high and low prices each day. In general a progressively wider range, observed over a relatively short period of time, can indicate that a bottom is near. Price tops are generally reached at a more leisurely pace and can be characterized by a narrowing of the price range. This measure of the trading range takes place over a specified period in order to determine whether or not an issue is being “dumped” and is approaching a bottom. A pre-requisite to a valid bottom is an increase in the volatility line above the reference line. In a similar manner, an indication of an imminent top would be a decrease in the volatility line below the reference line. As long as volatility is rising, in all probability a stock will not approach a top. It should be noted that this study should be used in conjunction with trend following analyses and momentum oscillators for confirmation and accuracy. [centrex.com]

volume accumulation: This volume indicator addresses some of On Balance Volume’s shortcomings and was developed by Marc Chaikin. Where OBV assigns all of a day’s volume a positive or negative value, Volume Accumulation counts only a percentage of the volume as positive or negative, depending on where the close is in relation to the average price of the day. The only time the entire day’s volume is assigned a positive value is when the close is the same as the day’s high. The opposite applies for a close at the day’s low. [centrex.com]

volume indicators: A family of technical indicators that combine price and volume to form time series that can be used in formulas. In theory, volume leads price, so you should be able to predict where price is going by examining volume. Volume indicators try to capitalize on this belief. In formulas, On-Balance Volume is a volume indicator represented by the building block K. [rtrsoftware]

volume spike: Unusually large volume, graphed on a bar chart as a spike. To locate volume spikes, you compare a single day’s volume to average volume. If one day’s volume is two to three times the average volume, it will appear as a spike. Unusually large volume often foreshadows a major change in price trend.

VWAP: Volume Weighted Average Price. Volume Weighted Average Price. Volume Weighted Average Price is equal to the sum of the volume of every transaction multiplied by the price of every transaction divided by the total volume for the trading day.A trading benchmark particularly used in pension plans. Calculated by adding up the dollars traded for every transaction (price times shares traded) and then divide by the total shares traded for the day. The theory is that if the price of a buy trade is lower than the VWAP, it is a good trade. The opposite is true if the price is higher than the VWAP.

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W

Williams %R: William’s Percent R was created by Larry Williams to identify overbought and oversold conditions based on today’s price in relation to past prices. It is another overbought/oversold indicator that is expressed as a percentage, and ranges from 100% to zero, which is the reverse of the Relative Strength Index. Williams %R has an excellent ability to anticipate price extremes and many times forms a top or bottom and reverses days before the securities does. The chart is read upside down with peaks designates as lows on the %R scale. Oversold readings occur in the 80-100 range and overbought readings in the 0-20 range.

X

Y

Z