A

ABC

Elliott wave terminology for a three-wave countertrend price movement. Wave A is the first price wave against the trend of the market. Wave B is a corrective wave to Wave A. Wave C is the final price move to complete the countertrend price move. Elliott wave followers study A and C waves for price ratios based on numbers from Fibonacci.

Accumulation

An addition to an original market position.

Advance-Decline Line

The number of declining issues is subtracted from the number of advancing issues. The net difference is added to a running sum if the difference is positive or subtracted from the running sum if the difference is negative.

$ADD
Volatility Measure that tracks how many people are buying stocks in the NYSE.

Adverse Excursion

The loss attributable to price movement against the current trade.

Alpha

Premium that an investment portfolio earns above a given point of reference; a measure of stock performance independent of the market.

Amortization

Accounting method in which an asset’s cost is spread out.

Annual Earnings Change

The earnings change between the most recently reported fiscal year earnings and the preceding year’s earnings.

Annual Net Profit Margin

The percentage that the company earned from gross sales for the most recently reported fiscal year.

Annual Sales Change

The percentage change in sales between the most recently reported fiscal year and the preceding.

Annualized

Translating the figures for a given year into an annual rate.

Arbitrage

The simultaneous purchase and sale of two different, but closely related, securities to take advantage of a disparity in their prices.

Assign

To transfer to another to whom property is assigned.

At-the-Money

An option whose strike price is nearest the current price of the underlying deliverable.

Average True Range

A moving average of the calculated time range.

B

Back Month

The out, or back, option contract month, as opposed to the current contract month; the expiration month farther in the future than the current month.

Back-Testing

A strategy is tested or optimized on historical data and then the strategy is applied to new data to see if the results are consistent.

Balanced Mutual Fund

A mutual fund that seeks a return that is a combination of capital appreciation and current income, generally by building a portfolio of bonds, preferred stocks and common stocks.

Bar Chart

Used to plot price movements using vertical bars indicating price ranges.

Basis

The difference between spot (cash) prices and the futures contract

Basis Points

The measure of yields on bonds and notes; one basis point equals 0.01% of yield.

Basket Trades

Large transactions made up of a number of different stocks.

Bear Market

When there is a strong price movement to the down side.

Beta

A regression of the estimated coefficient that belongs to a particular variable.

Beta (Coefficient)

A measure of the market risk associated with any given security in the market. A ratio of an individual’s stock historical returns to the historical returns of the stock market. If a stock increased in value by 12% while the market increased by 10%, the stock’s beta would be 1.2.

Bias

The difference between the expected value of an estimator and the actual value to be estimated.

Bid and Ask

Highest price and lowest price that an investor will pay for a tradable vehicle.

Black Box

A proprietary, computerized trading system whose rules are not disclosed or readily accessible.

Block Trades

Large transactions of a particular stock sold as a unit.

Blow-Off Top

A steep and rapid increase in price followed by a steep and rapid drop in price.

Bonds

A long-term debt security with a stated interest rate and fixed due dates, issued by a corporation or a government, when interest and principal must be paid. There are many variations.

Breakout

The point when price moves out of the trend channel. Price breaks above resistance for a long breakout and below support on a short breakout.

Broker-dealer

A firm that handles transactions for its customers and also purchases securities for its own account, selling them to customers.

Broker’s Deck

Orders physically held by the floor broker in the trading pit.

Bull Market

When there is a strong price movement to the up side.

Butterfly Option Strategy

A butterfly spread is a neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration, but three different strike prices to create a range of prices the strategy can profit from. The strategy sells two option contracts at the middle strike price and buys one option contract at a lower strike price and one option contract at a higher strike price. Both puts and calls can be used for a butterfly spread.

Buy and Hold

The acquisition of a tradable vehicle for the long term rather than quick turnover.

C

Call Option

A contract that gives the buyer of the option the right but not the obligation to take delivery of the underlying security at a specific price within a certain time.

Candlestick Charts

A charting method, originally from Japan, in which the high and low are plotted as a single line and are referred to as shadows. The price range between the open and the close is plotted as a narrow rectangle and is referred to as the body. If the close is above the open, the body is white. If the close is below the open, the body is black.

Capital Gains Distribution

A distribution to investment company shareholders from net long-term capital gains realized by a regulated investment company on the sale of portfolio securities.

Capital Losses

Losses resulting from selling at a loss.

CBOT

Chicago Board of Trade.

Chaikin Oscillator

An indicator created by subtracting a 10-day EMA from a three-day EMA of the accumulation / distribution line.

Channel

In charting, a price channel contains prices throughout a trend. The upper channel is typically determined by the highest high or highest close for a determined time. The lower channel is typically determined by the lowest low or lowest close for a determined time.

Charts

A display or picture of a security that plots price and/or volume (the number of shares sold). The chart is the foundation of technical analysis, and over the years, many different types of charts have been developed.

Closed-End Funds

A mutual fund that does not sell unlimited shares; one with a specific number of outstanding shares.

Closed Trades

Positions that have been either liquidated.

CME

The Chicago Mercantile Exchange.

Commodity Futures Trading Commission (CFTC)

A commission that oversees the commodity exchanges in the US.

Comparative Relative Strength

Compares the price movement of a stock with that of its competitors, industry group or the entire market. This is distinct from J. Welles Wilder’s Relative Strength Index, which compares current price movement to previous price movement of the same instrument.

Compounding

The payment, through interest, based on the sum of the original principal amount and its accrued interest.

Consolidation

Also known as a congestion period. A pause that allows participants in a market to reevaluate the market and sets the stage for the next price move.

Consumer Price Index

The gauge of US inflation.

Convergence

When futures prices and spot prices come together at the futures expiration.

Correction

Any price reaction within the market leading to an adjustment by as much as one-third to two-thirds of the previous gain.

Cost Basis

The cost of a given share or group of stock shares.

Countermove

A price bar showing movement opposite to the direction of the prior time period; a retracement.

Cover

Purchasing back a contract sold earlier.

Covered Write

Writing a call against a long position in the underlying stock. By receiving a premium, the writer intends to realize additional return on the underlying common stock or gain some element of protection (limited to the amount of the premium less transaction costs) from a decline in the value of that underlying stock.

Credit Spread Option Strategy

The difference in value of two options, where the value of the one sold exceeds the value of the one purchased.

Cup and Handle

An accumulation pattern observed on bar charts. The pattern lasts from seven to 65 weeks; the cup is in the shape of a “U” and the handle is usually more than one or two weeks in duration. The handle is a slight downward drift with low trading volume from the right-hand side of the formation.

Current Ratio

The current assets of a company divided by its current liabilities. Balance-sheet strength indication.

D

Daily Range

The difference between the high and low price during one trading day.

Dead Cat Bounce

A rebound in a market that sees prices recover and come back up somewhat.

Death by a Thousand Cuts

John’s way of saying, many small loses that add up to a large total loss. This typically happens from having a stop that is too tight.

Debit Spread Option Strategy

The difference in value of two options, where the value of the long position exceeds the value of the short position.

Deep-in-the-Money

A deep-in-the-money call option has the strike price of the option well below the current price of the underlying instrument. A deep-in-the-money put option has the strike price of the option well above the current price of the underlying instrument.

Delta

The amount by which the price of an option changes for every dollar move in the underlying instrument.

Delta-Hedged

An options strategy that protects an option against small price changes in the option’s underlying instrument. These hedges are constructed by taking a position in the underlying instrument that is equal in magnitude but opposite in sign (+/-) to the option’s delta.

Delta Neutral

This is an “options/options” or “options/underlying instrument” position constructed so that it is relatively insensitive to the price movement of the underlying instruments. This is arranged by selecting a calculated ratio of offsetting short and long positions.

Delta Position

A measure of option price vs. the underlying futures contract or stock price.

Demand Index

An index that shows the buying and selling power of markets and stocks from mathematical calculations of volume and price ratios.

Derivatives

Financial contracts the value of which depend on the value of the underlying instrument commodity, bond, equity, currency or a combination.

Dick for a Tick

John’s way of saying, do not hang on to a winning trade trying to get another few pennies out of the trade. Especially if it’s at the end of the trading day.

Directional Movement Index (DMI)

Developed by J. Welles Wilder, DMI measures market trend.

Distribution

Any set of related values described by an average (that is, mean), which identifies its midpoint, a measure of spread (that is, standard distribution) and a measure of its shape (that is, skew or kurtosis).

Divergence

When two or more averages or indices fail to show confirming trends.

Dividend

Stockholder payment of a share of a company’s profits.

Dividend Reinvestment Plan

A program offered by a publicly held company in which dividends are used to buy more shares of the company.

Doji

A candlestick in which the open and close are the same (or almost the same). Different varieties of doji lines depend on where the opening and close are in relation to the entire range. Doji lines are among the most important individual candlestick lines. They are also components of important candlestick patterns.

Dollar Cost Averaging

Using the same amount of funds to regularly invest and not take into consideration whether the securities being purchased are high or low in price. By using this method, an investor will see an average between their investment costs and the market’s up and down movements.

Double Bottom/Top

The price action of a security or market average where it has declined/advanced two times to the same approximate level, indicating the existence of a support/resistance level and a possibility that the downward/upward trend has ended.

Double Top

See Double Bottom. A price pattern seen on a chart. The patterns occur when prices rise to a resistance level on significant volume, retreat to a support level, and subsequently return to the resistance level on decreased volume. Prices then decline and break through the support level, marking the beginning of a new downtrend in the price of the stock.

Drawdown

The reduction in account equity as a result of a trade or series of trades.

E

Early Entry

A large price movement in one direction within the first 15 minutes after the open of the daily session.

Early Entry Indicator

This Simpler Trading indicator is typically used in conjunction with the Squeeze indicator. It color codes the price bars to show if there is an early indication that the squeeze may be firing soon. Using this indicator with multi-time frames may allow entering a trade early with a higher probability. It can be used on all time frames.

Earnings Estimates

The estimated earnings projected for a company for a fiscal year.

Elliott Wave Theory

A pattern-recognition technique published by Ralph Nelson Elliott in 1939, which holds that the stock market follows a rhythm or pattern of five waves up and three waves down to form a complete cycle of eight waves. The three waves down are referred to as a “correction” of the preceding five waves up.

Engulfing Pattern

In candlestick terminology, a multiple candlestick line pattern; a major reversal signal with two opposing-color real bodies making up the pattern.

Entry

The point at which a trader gets into a position in the market.

Equilibrium Market

A price region that represents a balance between demand and supply.

Estimated EPS Change

(%) Change in estimated mean earnings for the current fiscal year from the last month, last three months and last six months to the current month.

Eurodollar

The term Eurodollar refers to U.S. dollar-denominated deposits at foreign banks or foreign branches of American banks; by being located outside of the United States, Eurodollars escape regulation by the Federal Reserve Board, including reserve requirements.

Exchange Traded Funds/ETF

Collections of stocks that are bought and sold as a package on an exchange.

Ex-Dividend Date

The day on or after which the right to receive a current dividend is not automatically transferred to a buyer.

Exercise

The process by which the holder of an option makes or receives delivery of shares of the underlying security.

Exit

The point at which a trader closes out of a trade.

Expert Systems

Dynamic but not adaptable, expert systems are rule-driven systems that cannot learn as the result of new information being fed into its system as opposed to neural networks, which can.

Expiration

The last day on which an option can be traded.
Expiration is a predetermined date an options (or futures) contract can be exercised. For example, if an investor who had purchased an option and chose not to exercise it, that option would expire and become worthless, resulting in a loss of the investment

Explained

The relative reduction in the variation of variable Y that can be attributed to a knowledge of variable X and its relationship to Y.

Exponential Moving Average/EMA

An exponential moving average is a type of moving average that is similar to a simple moving average, except that more weight is given to the latest data. This type of moving average reacts faster to recent price changes than a simple moving average.

Expert Systems

Dynamic but not adaptable, expert systems are rule-driven systems that cannot learn as the result of new information being fed into its system as opposed to neural networks, which can. Most successful in financial applications where governing rules are consistent.

Extreme

The highest or lowest price during any time period, a price extreme; in the CBOT Market Profile, the highest/lowest prices the market tests during a trading day.

F

Fade

Selling a rising price or buying a falling price. A trader fading an up opening would be short, for example.

Failure Swings

The inability of price to reaffirm a new high in an uptrend or a new low in a downtrend.

Failure

In Elliott wave theory, a five-wave pattern of movement in which the fifth impulse wave fails to move above the end of the third, or in which the fifth wave does not contain the five sub waves.

Fair Values

The theoretical prices generated by an option pricing model (i.e., the Black-Scholes option pricing model).

Federal Reserve Bank

The governing central bank of the US.

Federal Open Market Committee

The policymaking committee of the Federal Reserve Bank. They meet on a regular basis to make decisions on economic policy.

Feed the Ducks

John’s way of saying, it is time to take some profits.

Fibonacci Ratio

The ratio between any two successive numbers in the Fibonacci sequence, known as phi (f). The ratio of any number to the next higher number is approximately 0.618 (known as the Golden Mean or Golden Ratio), and to the lower number approximately 1.618 (the inverse of the Golden Mean), after the first four numbers of the series. The three important ratios the series provides are 0.618, 1.0 and 1.618.

Fill

An executed order; sometimes the term refers to the price at which an order is executed.

Fire

In expert system programming, ordinarily used to describe the “triggering” or “activation” of a rule. A rule is “fired,” “triggered” or “activated” when its conditions have been met, and its “consequents” (resultant facts) are added to the knowledge base.

Float

The number of shares currently available for trading.

Floor Traders

Employees of brokerage firms working on exchange trading floors.

Flyers

Speculative or high-risk trades.

Fractals

Depiction of mathematical models that may be applied to identify data patterns. Commission and fees taken out of investment capital before the money is put to work.

Front Month

The first expiration month in a series of months.

Front-Running

The practice of trading ahead of large orders to take advantage of favorable price movement. Brokers are prohibited from this practice.

Fundamental Analysis

The analytical method by which only the sales, earnings and the value of a given assets may be considered.

Fundamentals

The theory that holds that stock market activity may be predicted by looking at the relative data and statistics of a stock as well as the management of the company in question and its earnings.

Future Volatility

A prediction of what volatility may be like in the future.

G

Gamma

The degree by which the delta changes with respect to changes in the underlying instrument’s price.

Gann Theory

Various analytical techniques developed by legendary trader W.D. Gann.

Gap

A day in which the daily range is completely above or below the previous day’s daily range.

Greeks

Greeks are dimensions of risk involved in taking a position in an option or other derivative. Various sophisticated hedging strategies are used to neutralize or decrease the effects of each variable of risk.

Gross Domestic Product

Value of all goods and services produced domestically.

Growth Fund

A more speculative mutual fund made up primarily of the growth or performance stocks that are expected to appreciate in price more than the broad market over an extended time period.

GTFO

Get The F**K Out. John’s way of saying, get out of the trade right now. Something un-expected has happen and the trade is going against you.

H

Harami

In candlestick terminology, a small real body contained within a relatively long real body.

Head and Shoulders

When the middle price peak of a given tradable is higher than those around it.

Hedge Fund

A mutual fund involving speculative investing in stocks and options.

High-Ticking

To pay the offered price.

Historic Volatility

How much contract price has fluctuated over a period of time in the past; usually calculated by taking a standard deviation of price changes over a time period.

Historical Data

A series of past daily, weekly or monthly market prices (open, high, low, close, volume, open interest).

Hook Day

A trading day in which the open is above/below the previous day’s high/low and the close is below/ above the previous day’s close with narrow range.

Honey Badger Trade

John’s way of saying, this is a trade I am very interested in and expect the trade to do very well.

I

Implied Volatility

The volatility computed using the actual market prices of an option contract and one of a number of pricing models. For example, if the market price of an option rises without a change in the price of the underlying stock or future, implied volatility will have risen.

In Play

A stock that is the focus of a public bidding contest, as in a takeover.

In the Money

A call option whose strike price is lower than the stock or future’s price, or a put option whose strike price is higher than the underlying stock or future’s price. For example, when a commodity price is $500, a call option with a strike price of $400 is considered in-the-money.

Income Dividends

Payments to mutual fund shareholders consisting of dividends, interest and short-term capital gains earned on the fund’s portfolio securities after deduction of operating expenses.

Index Fund

A mutual fund that replicates the behavior of a given index.

Initial Balance

The first or first two half-hour trading periods in the CBOT Market Profile during which prices tend to converge; the initial auction of the trading day.

Initial Public Offering

When a stock is officially available for the public to buy.

Inside Day

A day in which the daily price range is completely within the previous day’s daily price range.

Interest Rate Swaps

An arrangement that requires both sides of the transaction to make payments to each other based on two different interest rates. The most commonly traded requires one side to pay a fixed rate and the other to pay a floating rate.

Intermarket Analysis

Observing the price movement of one market for the purpose of evaluating a different market.

Intrinsic Value

The portion of an option’s premium that is represented when the cash market price is greater than the exercise price; a known constant equal to the difference between the strike price and underlying market price.

IRA

Individual Retirement Account. An employer’s retirement plan that, as specified by tax law, allows employees to elect to have their federal taxable income be deducted and set aside for retirement.

Iron Butterfly Option Strategy

The iron butterfly strategy is created by combining a bear call spread with a bull put spread with an identical expiration date that converges at a middle strike price. A short call and put are both sold at the middle strike price, which forms the “body” of the butterfly, and a call and put are purchased above and below the middle strike price respectively to form the “wings”.

Iron Condor Option Strategy

An iron condor is an option strategy that involves four different contracts. It is constructed by selling one call spread and one put spread (same expiration day) on the same underlying instrument. All four options are typically out–of-the-money. The call spread and put spread are of equal width. It is a ‘market neutral’ trade.

J

January Effect

The tendency for securities prices to recover in January after tax-related selling is completed before the year-end.

Jumbo Certificate of Deposit

A CD worth $100,000 or greater.

L

Lag

The number of data points that a filter, such as a moving average, follows or trails the input price data.

Latest Quarterly Earnings

The percentage change from the latest earnings reported compared with the same quarter a year earlier.

LEAPS

Acronym for long-term equity anticipation securities, which are long-term listed options, with maturities that can be as long as two and a half years.

Leg

One side of a spread.

Leg Out

A method that would liquidate a position in steps.

Limit Move

A change in price that exceeds the limits set by the exchange on which the contract is traded.

Limit Order

An order to buy or sell when a price is fixed.

Limit Up, Limit Down

Commodity exchange restrictions on the maximum upward or downward movements permit ted in the price for a commodity during any trading session day.

Load

Commission and fees taken out of investment capital; that is, the situation in which a front-loaded mutual fund takes commission and fees out of investment capital before the money is put to work.

Locked Limit

A market that, if not restricted, would seek price equilibrium outside the limit but, instead, moves to the limit and ceases to trade.

Long

Establishing ownership of the responsibilities of a buyer of a tradable; holding securities in anticipation of a price increase in that security.

Lookback Interval

The number of periods of historical data used for observation and calculation.

Low-Ticking

To sell at the bid price.

M

Mapping

A function, or relation between values.

Margin

In stock trading, an account in which purchase of stock may be financed with borrowed money; in futures trading, the deposit placed with the clearinghouse to assure fulfillment of the contract. This amount varies daily and is settled in cash.

Marked to Market

At the end of each business day the open positions carried in an account held at a brokerage firm are credited or debited funds based on the settlement price of the open positions that day.

Market Breadth

The shares of a particular stock traded during a specific period. Usually refers to the overall strength and trading volume of the market.

Market If Touched

Resting order with the floor broker that becomes a market order to be executed if the trigger price is traded.

Market Maker

A broker or bank continually prepared to make a two-way price to purchase or sell for a security or currency.

Market on Close

An order specification that requires the broker to get the best price available on the close of trading, usually during the last five minutes of trading.

Market Order

Instructions to the broker to immediately sell to the best available bid or to buy from the best available offer.

Market Risk

The uncertainty of returns attributable to fluctuation of the entire market.

Market Sentiment

Crowd psychology, typically a measurement of bullish or bearish attitudes among investors and traders.

Market Timing

Using analytical tools to devise entry and exit methods.

Market Value

Company value determined by investors, obtained by multiplying the current price of company stock by the common shares outstanding.

Maxima

The highest or maximum value.

Mean

When the sum of the values is divided by the number of observation.

Mean Deviation

The average absolute value of the difference between the population of numbers and the mean.

Mean P/L

The average profitability of a trader’s account, as measured over a given period.

Mean Return

The average monthly total return of a stock. The total return is price change added to dividends.

Mean Reverting

The term adopted in academic literature for one possible state of a price series: that state when price is oscillating randomly about some (unknown) mean value. That is, it is not trending.

Median Line

The line that is drawn from an extreme that bisects a line drawn through the next corrective phase after the pivot point. See Andrews Method.

Mental Stop-Loss

A stop-loss order kept in your head instead of instructing your broker.

Minima

The lowest or minimum value.

Momentum

A time series representing change of today’s price from some fixed number of days back in history.

Momentum Filter

A measure of change, derivative or slope of the underlying trend in a time series. Implemented by first applying a low pass filter to the data and then applying a differencing operation to the results.

Momentum Indicator

A market indicator utilizing price and volume statistics for predicting the strength or weakness of a current market and any overbought or oversold conditions, and to note turning points within the market.

Money Flow

A number of technical indicators that incorporate volume and price action to measure buying or selling pressure.

Money Market

The market in which dealer’s trade riskless, short-term securities such as certificates of deposit and Treasury bills.

Money Market Fund

A mutual fund made up of money market instruments that are short term in nature.

Money Stop

A fixed amount of money that a market participant would lose if a stop were hit.

Monowave

In Elliott wave theory, a single wave within a range of waves.

Morning Star

A bottom reversal pattern, according to Steve Nison a signal that the bulls have seized control.

Moving Average

A mathematical procedure to smooth or eliminate the fluctuations in data and to assist in determining when to buy and sell. Moving averages emphasize the direction of a trend, confirm trend reversals and smooth out price and volume fluctuations or “noise” that can confuse interpretation of the market; the sum of a value plus a selected number of previous values divided by the total number of values.

Moving Average Crossovers

The point where the various moving average lines intersect each other or the price line on a moving average price bar chart. Technicians use crossovers to signal price-based buy and sell opportunities.

Moving Average Convergence Divergence/MACD

The crossing of two exponentially smoothed moving averages that are plotted above and below a zero line. The crossover, movement through the zero line, and divergences generate buy and sell signals.

Mutual Fund

A company that invests money of its shareholders in a variety of areas, usually stocks.

N

Naked Put

The writer of a put option contract who is not short the underlying security.

Narrow Range Day

A trading day with a smaller price range relative to the previous day’s price range.

Near-Month Contract/Far-Month Contract

Contract whose expiration is near/far.

Near-the-Money

An option with a strike price close to the current price of the underlying tradable.

Neckline

A trend line drawn along the support or resistance points of various reversal and consolidation pattern (i.e., head and shoulder, double and triple top/bottom formations).

Negative Amortization

This means that a payment of the stated size is insufficient to repay even the interest on the debt, meaning the total debt actually increases each month instead of falling.

Negative Divergence

When two or more averages, indices or indicators fail to show confirming trends.

Net Asset Value

The total market value of all securities contained in a mutual fund; also known as price per share.

No Brainer Trade

A trade that shows up on the chart and you immediately see the reasons to take the trade.

No-Load

Without any sales charge. For mutual funds, shares sold at net asset value.

Noise

Price and volume fluctuations that can confuse interpretation of market direction.

Non-Trend Day

A narrow range day lacking any discernible movement in either direction.

Normal Distribution

For the purposes of statistical testing, the simulated net returns are assumed to be drawn from a particular distribution. If net returns are drawn from a normal distribution, low and high returns are equally likely, and the most likely net return in a quarter is the average net return.

Normalized

Adjusting a time series so that the series lies in a prescribed normal, standard range.

O

Odd Lot

An order to buy/sell fewer than 100 shares of stock.

On-Balance Volume/OBV

Plotted as a line representing the cumulative total of volume. The volume from a day’s trading with a higher close when compared with the previous day is assigned a positive value, while volume on a lower close from the previous day is assigned a negative value. Traders look for a confirmation of a trend in OBV with the market or a divergence between the two as an indication of a potential reversal.

OPEC

Organization of Petroleum Exporting Countries

Open Trades

Current trades that are still held active in the customer’s account.

Opening Range

The range of prices that occur during the first 30 seconds to five minutes of trading, depending on the preference of the individual trader.

Optimization

A methodology by which a system is developed with rules tailored to fit the data in question precisely.

Option

A contract that provides the right but not the obligation to buy or sell a specified amount of a security within a specified time period.

Optional Cash Purchase

Buying additional shares made through the dividend reinvestment account.

Order

The number of days of past price history used to predict the following day’s price.

Oscillator

Technical indicator used to identify overbought and oversold price regions.

Out of the Money

A call option whose exercise price is above the current market price of the underlying security or futures contract. For example, if a commodity price is $500, then a call option purchased for a strike price of $550 is considered out-of-the-money.

Overbought

Market prices that have risen too steeply and too fast.

Overshoot

To pass beyond or over a specific targeted level.

Oversold

Market prices that have declined too steeply and too fast.

Overbought/Oversold Indicator

An indicator that attempts to define when prices have moved too far and too fast in either direction and thus are vulnerable to a reaction.

P

Par

The full principal amount of an investment instrument.

Parabolic

The definition of parabolic is expressed as a parable, or bowl-shaped.

Pareto’s Law

A law that states that 80% of results come from 20% of the effort.

Pennants

A short compact wedge accompanied by receding volume.

Percentile

A value on a scale of one hundred that indicates the percent of a distribution that is equal to or below it.

Perceptron

A pattern-recognition machine, based on an analogy to the human nervous system, capable of learning by means of a feedback system that reinforces correct answers and discourages wrong ones.

Pessimistic Rate of Return

A statistic that adjusts the usual wins/losses statistic to estimate the worst return from trading results. It reduces the number of wins by the square root of the actual number and increase the number of losses by the square root of the actual number of losses. The resulting numbers of wins or losses are multiplied by the average win or loss and the sum of the resulting wins/losses is divided by the required investment.

Pivot Point

A price reversal point.

Premium

The price a buyer pays to an option writer for granting an option contract.

Price/Earnings Ratio

Stock price divided by annual earnings per share.

Price to Sales Ratio

The price of a stock divided by sales-per-share of the company in the most recent fiscal year. Selling tradables that have appreciated since initial purchase in order to take advantage of the appreciation.

Program Trading

Trades based on signals from computer programs, usually entered directly from the trader’s computer to the market’s computer system.

Prospectus

Report published by the company that operates a mutual fund. It describes the fund’s investment objectives; its managers and their experience; the fees and charges associated with the fund; and policies and restrictions.

Put Option

A contract to sell a specified amount of a stock or commodity at an agreed time at the stated exercise price.

Q

Quarterly Earnings Change

Historical earnings change between the earnings most recently reported and the quarter preceding.

Quarterly Net Profit Margin

Net operating earnings after taxes for the latest quarter divided by revenues for the quarter.

Quick Ratio

Indicates a company’s financial strength; a company’s cash and equivalent divided by current liabilities.

R

RAF Indicator

The Ready, Aim and Fire Simpler Trading indicator is an oversold/overbought indicator. It provides signals that show when an oversold or overbought condition is developing and another signal when to actually enter the trade. It can be used on all time frames.

Rally Tops

A price level that concludes a short-term rally in an ongoing trend. A bull market will be made up of a series of rally tops.

Range

The difference between the high and low price during a given period.

Realized/Unrealized P/L

The difference between trading revenues that are generated on positions that have been offset and closed, versus those associated with the marking of open positions to current market prices.

Rectangle

A trading area bounded by horizontal, or near horizontal, lines. It can either be a reversal or continuation pattern, depending on the breakout.

RTH

Regular Trading Hour

Relative Return

The annualized return on an investment in excess of the average three-month US Treasury bill yield during the same period as the investment. This statistic measures the return on an investment relative to what would have otherwise been earned on a risk-free investment.

Relative Strength

A comparison of the price performance of a stock to a market index such as Standard & Poor’s 500 stock index.

Relative Strength Index

An indicator invented by J. Welles Wilder and used to ascertain overbought/oversold and divergent situations.

Renko

A kind of candlestick chart that does not take time into account for constructing the chart.

Residual Value

The standard deviation of the unexplained portion of the monthly return.

Resistance

A price level at which rising prices have stopped rising and either moved sideways or reversed direction; usually seen as a price chart pattern.

Resistance Line

On a chart, a line drawn indicating the price level at which rising prices have stopped rising and have moved sideways or reversed direction.

Response

The change in value of the average in response to the impulse.

Resting Order

An order placed with a condition or qualifier but not yet executed.

Retention Rate

Percentage of a firm’s after tax profits that can be put to those earnings retained.

Retracement

A price movement in the opposite direction of the previous trend.

Return on Assets/ROA

The net earnings of a company divided by its assets.

Return on Equity/ROE

The net earnings of a company divided by its equity.

Reverse Slippage

When price gaps in your favor and the target exit is hit with more profit than expected.

Reward-Risk Ratio/RRR

The amount of potential reward compared to the amount at risk.

Reversal Gap

A chart formation where the low of the last day is completely above the previous day’s range with the close above midrange and above the open.

Reversal Stop

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

Reversion to the Mean

Price returning to a mean or average over a given amount of time.

Roll

Substituting a far option for a near option on the same underlying instrument at the same strike price; also to roll forward or roll over.

Rotation

Moving funds from one sector to another sector of the stock market as the business cycle unfolds.

Roth IRA

An individual retirement account where contributions are not deductible, taxes are not paid on distributions and allows penalty-free withdrawals for first-time homebuyers and retirees.

RTP

Risk the premium.

Running Market

A market wherein prices are changing rapidly in one direction with very few or no price changes in the opposite direction.

S

Sales Growth

The growth in sales in a company.

Sales Load

A service charge of a mutual fund that is added to the costs of owning a stake in the fund.

Saucer Base

Similar to a cup and handle formation, but the saucer base is shallower and rounder in shape.

Seasonal Trend

A consistent but short-lived rise or drop in market activity that occurs due to predictable changes in climate or calendar.

Seasonality

A consistent and predictable change in market activity that occurs from consistent and predictable events.

Sector Fund

A mutual fund that concentrates on trading a range of securities within a broad industry group, such as technology, energy or financial services.

Sector Rotation

When a block of investment professionals cash out of one industry sector to invest in another.

Selling Short

Selling a security and then borrowing the security for delivery with the intent of replacing the security at a lower price. In futures trading, selling short is to assume the responsibility of the seller vs. the buyer in the establishment of the futures contract between parties.

Settlement

The price at which all outstanding positions in a stock or commodity are marked to market. Typically, the closing price.

Shareholder of Record

Share owner of company stock as registered in company files.

Short Interest

Shares that have been sold short but not yet repurchased.

Short Interest Ratio

A ratio that indicates the number of trading days required to repurchase all of the shares that have been sold short. A short interest ratio of 2.50 would tell us that based on the current volume of trading, it will take two and a half days’ volume to cover all shorts.

Simple Moving Average/SMA

The arithmetic mean or average of a series of prices over a period of time. The longer the period of time studied (that is, the larger the denominator of the average), the less impact an individual data point has on the average.

Simple Regression

A mathematical way of stating the statistical linear relationship between one independent and one dependent variable.

Skew

A descriptive measure of lopsidedness in a distribution.

Slippage

The difference between estimated transaction costs and actual transaction costs.

Smoothing

Simply, a mathematical technique that removes excess data variability while maintaining a correct appraisal of the underlying trend.

Spike

A sharp rise in price in a single day or two; may be as great as 15-30%, indicating the time for an immediate sale.

Spot Month

In trading, the current contract month. Also known as the front month.

Spot Prices

Same as cash price, the price at which a commodity is selling at a particular time and place.

Spread

A trade in which two related contracts/stocks/bonds/options are traded to exploit the relative differences in price change between the two.

Spread Rolls

Using a spread order to bridge the closing of one position and the establishment of a new one.

Squeeze Indicator

This Simpler Trading indicator looks for movements after a consolidation period and predicts the direction of the next price move. It proves a signal when the squeeze has fired. This is John’s number one indicator. It can be used on all time frames.

SSTT Auto Indicator

This Simpler Trading indicator is used in the Simpler Trend Trading System. It is an EOD indicator that identifies potential trade setups. Then provides entry price, stop price, target price and what percentage of the overall account value to risk on the trade. This indicator has only been tested on daily bar charts.

Stair-stepping

In which market activity is characterized by a trend, then sideways movements, followed by another trend and further sideways movement.

Standard Deviation

The positive square root of the expected value of the square of the difference between a random variable and its mean. A measure of the fluctuation in a stock’s monthly return over the preceding year.

Stochastics Oscillator

An overbought/oversold indicator that compares today’s price to a preset window of high and low prices. These data are then transformed into a range between zero and 100 and then smoothed.

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.

Stop Loss

The risk management technique in which the trade is liquidated to halt any further decline in value.

Stops

Buy stops are orders that are placed at a predetermined price over the current price of the market. The order becomes a “buy at the market” order if the market is at or above to the price of the stop order. Sell stops are orders that are placed with a predetermined price below the current price. Sell-stop orders become “Sell at the market” orders if the market trades at or below the price of the stop order.

Straddle

The purchase or sale of an equivalent number of puts and calls on an underlying stock with the same exercise price and expiration date.

Strangle

The purchase or sale of an equivalent number of puts and calls on an underlying stock with the same expiration date but a different exercise price. Usually, the put has a low strike price and the call has a higher strike price.

Strike Price

The price per unit at which the holder of an option may receive or deliver the underlying unit; also known as the exercise price.

Support

A historical price level at which falling prices have stopped falling and either moved sideways or reversed direction; usually seen as a price chart pattern.

Support Line

On a chart, a line drawn indicating the price level at which falling prices have stopped falling and have moved sideways or reversed direction.

Swaps

The sale of one security to purchase another with similar features.

Swings

The measurement of movement of the price of a tradable between extreme highs and lows.

T

Technical Analysis

A form of market analysis that studies demand and supply for securities and commodities based on trading volume and price studies. Using charts and modeling techniques, technicians attempt to identify price trends in a market.

Theta

The measurement of the time decay of a position.

Tick

The minimum fluctuation of a tradable. For example, bonds trade in 32nds, while most stocks trade in eighths.

Tick Indicator

The number of stocks whose last trade was an uptick or a downtick.

Time Value

The difference between the premium paid for an option and the intrinsic value. As the option approaches expiration, the time value erodes, eventually to zero.

Trading Range

The difference between the high and low prices traded during a period of time; in commodities, the high/low price limit established by the exchange for a specific commodity for any one day’s trading.

Trailing Stop

A stop-loss order that follows the prevailing price trend.

Transfer Agent

Financial institution that manages ownership records of company stock.

Transfer Function

The mathematical relationship between the output of a control system and its input for a linear system, it is the Laplace transform of the output divided by the Laplace transform of the input under conditions of zero initial energy.

Trend

The general drift, tendency or bent of a set of statistical data as related to time.

Trend Channel

A parallel probable price range centered about the most likely price line. Historically, this term has been used to denote the area between the base trend line and the reaction trend line defined by price moves against the prevailing trend.

Trend Day

A day in which the price of a tradeable moves consistently away from the opening range and does not return to the opening range prior to the close.

Trend-Following

Moving in the direction of the prevailing price movement.

Trendless

Price movement that vacillates to the degree that a clear trend cannot be identified.

Trend line

A line drawn that connects either a series of highs or lows in a trend. The trend line can represent either support as in an uptrend line or resistance as in a downtrend line. Consolidations are marked by horizontal trend lines.

Triangle

A pattern that exhibits a series of narrower price fluctuations over time; top and bottom boundaries need not be of equal length.

TRIN

The Arms index (TRIN) is a technical analysis indicator that compares advancing and declining stock issues, and trading volume as an indicator of overall market sentiment.

Turning Point

The approximate time at which there is a change in trend.

U

Uncovered Option

The buy or sale of an option without a position in the underlying futures contract; also known as a naked option.

Underlying Instrument

A trading instrument subject to purchase upon exercise.

Underlying Security

In options, a stock subject to purchase upon exercise of the option.

V

Value-Weighted Index

A market average such as Standard & Poor’s 500 Index that takes into account the market value of each security rather than calculating a straight price average.

Vega

The amount by which the price of an option changes when the volatility changes.

Vertical Spread

A stock option spread based on simultaneous purchase and sale of options on the same underlying stock with the same expiration months but different strike prices.

Vesting

The rights that an employee gains for working at a firm for a specific length of time.

Volatility

A measure of a stock’s tendency to move up and down in price, based on its daily price history over the latest 12 months.

Volume

The shares that are traded for a given market or tradable within a specified time period.

Voodoo Lines Indicator

This Simpler Trading indicator is a very complex resistance and support indicator. Even though it is complex in design it is very easy to understand and use. It can be used on all time frames.

W

W Formation

A double-bottom formation.

Warrant

A company-issued certificate that represents an option to buy stock shares at a given time.

Wave

In Elliott wave theory, a sustained move by a market’s price in one direction as determined by the reversal points that initiated and terminated it.

Wave Cycle

An impulse wave followed by a correction wave, the impulse wave being made up of five smaller, numbered waves of alternating direction designated 1, 2, 3, 4 and 5, and the correction wave being composed of three smaller alternating waves designated a, b, and c.

Wedge

A pattern in which two converging lines connect a group of price peaks and troughs.

Weighted Average Purchase Price

Multiply each purchase order bought by the associated purchase price, add them together and divide the total by the number of blocks. The result is the weighted average purchase price.

Weighted Industry Index

An index where the importance of each stock is related to its market capitalization.

Weighted Moving Average/WMA

A moving average that puts more weight on recent prices. A three-day weighted moving average would add a multiple of 1 to the first date, 2 to the second date and 3 to the third date.

Whiplash

Alternating buy and sell signals that result in losses.

Whipsaw

Losing money on both sides of a price swing.

Window

Set period of time such as a lookback period for market indicator in question.

Z

Zero-Coupon Government Bonds

Government bonds that are purchased at a deep discount and pay no cash dividend, unlike regular bonds.

Zeta

The percentage change in an options price per 1% change in implied volatility.

Zigzag

In a bull market, an Elliott three-wave pattern that subdivides into a 5-3-5 pattern with the top of wave B noticeably lower than the start of wave A. In a bear market, this pattern will be inverted.


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