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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C

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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E

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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F

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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G

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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H

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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M

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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N

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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O

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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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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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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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