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Knowledge Base

A

Accumulation

The act of buying more shares of a security without causing the price to increase significantly. After a decline, a stock may start to base and trade sideways for an extended period. While this base builds, well-informed traders and investors may seek to establish or increase existing long positions. In that case, the stock is said to have come under accumulation.

Advancing Declining Issues

A market momentum indicator using the advancing issues and the declining issues. It subtracts the declining issues from the advancing ones and is usually smoothed to make it a good overbought oversold indicator.

Advance Decline Ratio

The ratio of advancing issues over declining issues. Taking the moving average of the AD ratio will smooth it so it can be used as an overbought and oversold indicator.

Arms Index (TRIN)

A market indicator showing the ratio between the average volume of declining stocks and the average volume of advancing stocks. Generally, a rising TRading INdex is bearish and a falling TRIN is bullish.

B

Backwardation

A condition where the Price of the Front Month futures contract is higher than the Near Month contract, or the price of the Front Month contract is higher than Spot value. Backwardation is the opposite of Contango

Bearish Divergence

A situation when price records a higher high and the internals or technical indicators form a lower high. The indicator does not confirm the higher high in prices and this could foreshadow a reversal.

Breadth

A comparison of the number of issues traded with the number of issues listed for trading. A measurement of the number of issues advancing versus the number of issues declining on a given day or as a moving average. Many measurements are used: advances divided by declines, as a percentage, advances minus declines as a net positive or negative number. The measurement consistently followed is an insight into investor sentiment and is used extensively by market analysts.

Bullish Divergence

A situation when price records a lower low and the internals or technical indicators form a lower high. The internals and/or indicators do not confirm the lower low in prices and this can foreshadow a reversal.

C

CBOE

The Chicago Board Options Exchange (CBOE). The largest options exchange in the US. The CBOE trades options for over 2000 equities, over 20 stock indices and over 100 ETFs.

CME

The world’s second-largest exchange for futures and options on futures and the largest in the U.S. Trading involves mostly futures on interest rates, currency, equities, stock indices and a small amount on agricultural products.

CBOT

A commodity exchange established in 1848 that today trades in both agricultural and financial contracts. The CBOT originally traded only agricultural commodities such as wheat, corn and soybeans. Now, the CBOT offers options and futures contracts on a wide range of products including gold, silver, U.S. Treasury bonds and energy

Contango

A condition where the Price of the Front Month futures contract is lower than the Near Month contract, or the price of the Front Month contract is lower than Spot value. Contango is the opposite of Backwardation

Cumulative

A running total of values used to form an indicator. On Balance Volume is a running total of volume. Volume is added on up days and subtracted on down days.

D

Daily Charts

Daily Charts are charts that have Candlesticks, Lines, or Bars where each canle or bar represents a single daily trading session. In the case of line charts, the value generally represents the closing price of the security.

Divergence

A situation when price is travelling in the opposite direction of the internals or technical indicators. The internals and/or indicator does not confirm the new level in prices and this can foreshadow a reversal.

Distribution

The systematic selling of a security without significantly affecting the price. After an advance, a stock may start forming a top and trade sideways for an extended period. While this top forms, a security’s shares may experience distribution as well-informed traders or investors seek to unload positions. A quiet distribution period is usually subtle and not enough to put downward pressure on the price. More aggressive distribution will likely put downward pressure on prices.

Doji

A candlestick with a body so small that the open and close prices are equal. A Doji occurs when the open and close for that day are the same, or very close to being the same.

E

Emini

An electronically traded futures contract on the Chicago Mercantile Exchange (CME) or Chicago Board of Trade (CBOT) that represents a portion, often 1/5th of the normal sized futures contracts. E-mini contracts are available on a wide range of indexes such as the Nasdaq 100, S&P 500, Dow 30, S&P MidCap 400 and Russell 2000 (ICE)

F

Fair Value

In the futures market, fair value is the equilibrium price for a futures contract. This is equal to the spot price after taking into account compounded interest (and dividends lost because the investor owns the futures contract rather than the physical stocks) over a certain period of time.

G

Gamma

The rate of change for delta with respect to the underlying asset’s price. Gamma is an important measure of the convexity of a derivative’s value, in relation to the underlying. In a delta-hedge strategy, gamma is sought to be reduced in order to maintain a hedge over a wider price range. A consequence of reducing gamma, however, is that alpha too will be reduced.

Gap Risk

The risk that an investment’s price will change from one level to another with no trading in between. Usually such movements occur when there are adverse news announcements, which can cause a stock price to drop substantially from the previous day’s closing price.

Game Theory

A model of optimality taking into consideration not only benefits less costs, but also the interaction between participants. Game theory attempts to look at the relationships between participants in a particular model and predict their optimal decisions. Modern Algorithmic trading programs sometimes use a form of Game Theory to attempt to predict other particpants’ reactions to a particular movement in price, and react accordingly.

H

Haircut

1. The difference between prices at which a market maker can buy and sell a security.
2. The percentage by which an asset’s market value is reduced for the purpose of calculating capital requirement, margin and collateral levels.

Hammer

A price pattern in candlestick charting that occurs when a security trades significantly lower than its opening, but rallies later in the day to close either above or close to its opening price. This pattern forms a hammer-shaped candlestick.

Hawk

A policymaker or advisor who is predominantly concerned with interest rates as they relate to fiscal policy. A hawk generally favors relatively high interest rates in order to keep inflation in check. In other words, they are less concerned with economic growth than they are with recessionary pressure brought to bear by high inflation rates.

Heatmap

A visual representation of data using colors. A heatmap can be used with all sorts of data, from representing the number of foreclosures to the spreads of credit default swaps.
For example, a heatmap of foreclosures data could show parts of the U.S. experiencing high rates of foreclosure in a dark color and states with low foreclosure rates in lighter colors. A color-gradient legend typically accompanies a heatmap to specify the data.

I

ICE

A futures and options market based in Atlanta, Georgia that facilitates the electronic exchange of primarily energy commodities. ICE operates completely as an electronic exchange, and it is linked directly to individuals and firms looking to trade in oil, natural gas, jet-fuel, emissions, electric power and commodity derivatives.

Implied Volatility

Implied volatility is the forward estimated volatility of a security’s price. In general, implied volatility increases when the market is bearish, when investors believe that the asset’s price will decline over time, and decreases when the market is bullish, when investors believe that the price will rise over time. This is due to the common belief that bearish markets are riskier than bullish markets. Implied volatility is a way of estimating the future fluctuations of a security’s worth based on certain predictive factors.

Inside Day

The high is below the previous day’s high and the low is above the previous day’s low.

Internals

Internals or Market Internals is a blanket term used to describe the measurements used at the exchange level of net buying or selling either in a number of stocks (issues) or by volume of those stocks. See Bullish and Bearish Divergence

 J

J Curve

A theory stating that a country’s trade deficit will worsen initially after the depreciation of its currency because higher prices on foreign imports will be greater than the reduced volume of imports.

Junk Bond

A colloquial term for a high-yield or non-investment grade bond. Junk bonds are fixed-income instruments that carry a rating of ‘BB’ or lower by Standard & Poor’s, or ‘Ba’ or below by Moody’s. Junk bonds are so called because of their higher default risk in relation to investment-grade bonds.

K

K Ratio

A ratio that is used in the performance evaluation of an equity relative to its risk. The ratio examines the consistency of an equity’s return over time. The data for the ratio is derived from a value added monthly index (VAMI), which tracks the progress of a $1,000 initial investment in the security being analyzed.

Kagi

A type of chart developed by the Japanese in the 1870s that uses a series of vertical lines to illustrate general levels of supply and demand for certain assets. Thick lines are drawn when the price of the underlying asset breaks above the previous high price and is interpreted as an increase in demand for the asset. Thin lines are used to represent increased supply when the price falls below the previous low.

Kondratieff

A long-term cycle present in capitalist economies that represents long-term, high-growth and low-growth economic periods. This theory was founded by Nikolai D. Kondratieff (also spelled “Kondratiev”), a Communist Russia era economist who noticed an approximately 50-year cycle in European agricultural commodity prices and copper prices. Kondratieff believed that these long cycles were a feature of the economic activity of capitalist nations, and that they involved periods of evolution and self-correction.

L

Laddering

The promotion of inflated pre-IPO prices for the sake of obtaining a greater allotment of the offering. Laddering is an illegal IPO practice in which the underwriter engages in the sale of IPO shares to clients with the implicit agreement that more shares will be purchased post IPO, leading to big gains for both parties. Once the price increases a certain level, “insiders” then sell their shares and take their profits.

Lagging Indicator

1. A measurable economic factor that changes after the economy has already begun to follow a particular pattern or trend.
2. A technical indicator that trails the price action of an underlying asset, and is used by traders to generate transaction signals or to confirm the strength of a given trend. Since these indicators lag the price of the asset, a significant move will generally occur before the indicator is able to provide a signal.

Lambda

The ratio of the percentage change in an option contract’s price to the percentage change in the option’s underlying price. Lambda is one of the Greeks – a collection of risk measures or risk sensitivities that are frequently used in options and derivatives analysis. Each Greek measures the sensitivity of a value in relation to a small change in an underlying parameter. Lambda measures the change in option premiums for a percentage point change in its implied volatility. When the lambda value is high, the price of an option will be more sensitive to small changes in volatility. Conversely, when lambda is low, changes in volatility will have less impact on the option’s value.

Liquidity

Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price.
Market liquidity refers to the extent to which a market, such as a country’s stock market or a city’s real estate market, allows assets to be bought and sold at stable prices. Cash is the most liquid asset, while real estate, fine art and collectibles are all relatively illiquid.

M

M1

A measure of the money supply that includes all physical money, such as coins and currency, as well as demand deposits, checking accounts and Negotiable Order of Withdrawal (NOW) accounts. M1 measures the most liquid components of the money supply, as it contains cash and assets that can quickly be converted to currency. It does not contain “near money” or “near, near money” as M2 and M3 do.

M2

A measure of money supply that includes cash and checking deposits (M1) as well as near money. “Near money” in M2 includes savings deposits, money market mutual funds and other time deposits, which are less liquid and not as suitable as exchange mediums but can be quickly converted into cash or checking deposits.

MACD

An indicator developed by Gerald Appel that is calculated by subtracting the 26-period exponential moving average of a given security from its 12-period exponential moving average. By comparing moving averages, MACD displays trend following characteristics, and by plotting the difference of the moving averages as an oscillator, MACD displays momentum characteristics.

McClellan Oscillator

A breadth indicator derived from each day’s net advances (the number of advancing issues less the number of declining issues). Similar to MACD, the McClellan Oscillator is a momentum indicator that is applied to the advance/decline statistics. As a momentum indicator, the McClellan Oscillator attempts to anticipate positive and negative changes in the AD statistics for market timing. Buy and sell signals are generated as well as overbought and oversold readings. Traders may also look for positive or negative divergences to time their trades. Datatraderpro has our own version of the McClellan Oscillator that can be found on the Trend page.

Market Breadth

A technique used in technical analysis that attempts to gauge the direction of the overall market by analyzing the number of companies advancing relative to the number declining. Positive market breadth occurs when more companies are moving higher than are moving lower, and it is used to suggest that the bulls are in control of the momentum. Conversely, a disproportional number of declining securities is used to confirm bearish momentum.

Momentum

A measure of overall market sentiment, calculated as the change in the value of a market index multiplied by the aggregate trading volume occurring within the index components. Market momentum can be a good indicator of overall market changes which are likely to continue in the near future. It is important to understand that momentum considers not only changes in price level, but also volume.

N

NAV

A mutual fund’s price per share or exchange-traded fund’s (ETF) per-share value. In both cases, the per-share dollar amount of the fund is calculated by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding.

Naked Shorting

The illegal practice of short selling shares that have not been affirmatively determined to exist. Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short. But due to various loopholes in the rules and discrepancies between paper and electronic trading systems, naked shorting continues to happen.

Negative Correlation

A relationship between two variables in which one variable increases as the other decreases, and vice versa. In statistics, a perfect negative correlation is represented by the value -1.00, while a 0.00 indicates no correlation and a +1.00 indicates a perfect positive correlation. A perfect negative correlation means that the relationship that appears to exist between two variables is negative 100% of the time. It is also possible that two variables may be negatively correlated in some, but not all, cases.

New Highs/New Lows

New highs refers to the number of stocks recording their highest price level in 52-weeks. New lows are the number of stocks recording their lowest price level in 52-weeks. Lists of stocks making new highs and new lows are available for the NYSE, Nasdaq and Amex. As an indicator, new highs and new lows are usually shown as moving averages to smooth the results and are often plotted together for easy comparison

O

Open Interest

The number of options or futures contracts that are still unliquidated at the end of a trading day. A rise or fall in open interest shows that money is flowing into or out of a futures contract or option, respectively. In futures markets, rising open interest is considered good for the current trend. Open interest also measures liquidity.

Overbought

A technical condition that occurs when prices are considered too high and susceptible to a decline. Overbought conditions can be classified by analyzing the chart pattern or with indicators such as the Stochastic Oscillator and Relative Strength Index (RSI). A sharp advance from $15 to $30 in 2 weeks might lead a technician to believe that a security is overbought. Or, a security is sometimes considered overbought when the Stochastic Oscillator exceeds 80 and when the Relative Strength Index (RSI) exceeds 70. It is important to keep in mind that overbought is not necessarily the same as being bearish. It merely infers that the stock has risen too far too fast and might be due for a pullback.

Oversold

A technical condition that occurs when prices are considered too low and ripe for a rally. Oversold conditions can be classified by analyzing the chart pattern or with indicators such as the Stochastic Oscillator and Relative Strength Index (RSI). A sharp decline from 30 to 15 in 2 weeks might lead a technician to believe that a security is oversold. Or, a security is sometimes considered oversold when the Stochastic Oscillator is less than 20 and when the Relative Strength Index (RSI) is less than 30. It is important to keep in mind that oversold is not necessarily the same as being bullish. It merely infers that the security has fallen too far too fast and may be due for a reaction rally.

Oscillator

An indicator that determines when a market is in an overbought or oversold condition. When the oscillator reaches an upper extreme, the market is overbought. When the oscillator line reaches a lower extreme, the market is oversold.

Outside Day

The high is above the previous day’s high and the low is below the previous day’s low.

P

Pennant

A continuation chart pattern that is similar to the flag, except that it is more horizontal and resembles a small symmetrical triangle. Like the flag, the pennant usually lasts from one to three weeks and is typically followed by a resumption of the prior trend.

Pivot Point

The point at which resistance disintegrates and the stock price begins to rise past the prior resistance level. This point can be considered the optimal time to buy as the bulls are gaining strength. Pivot Points are calculated using the previous day’s open, close, high and low prices, and there are a variety of Pivot types, such as Floor Pivots, Camarilla, DeMark, Woodies, etc.

Price Momentum Oscillator (PMO)

A proprietary indicator created by Carl Swenlin and featured on his website, DecisionPoint.

Q

Q’s

In trader’s jargon, the Q’s are a shortened form for the QQQ Nasdaq 100 based ETF, formerly QQQQ

Quantitative Easing

An unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.

R

Range

The distance between the high price and the low price for a given time period. For example, the daily range is equal to the day’s high minus the same day’s low.

Ratio Analysis

The use of a ratio to compare the relative strength between any two entities. For example, an individual stock divided by the S&P 500 index can determine whether that stock is outperforming or underperforming the stock market as a whole. A rising ratio indicates that the numerator in the ratio is outperforming the denominator. Trend analysis can be applied to the ratio line itself to determine important turning points. Datatraderpro uses Ratio charts on its Daily Chart pages, and on the Daily Volatility Page to determine the relative overbought/oversold conditions of the indexes to their volatility indexes and as a measure of the relative strength or weakness of various volatility indexes themselves

Retracement

A decline that retraces a portion of a previous advance, or an advance that retraces a portion of a previous decline. Retracements typically cover 38.2%, 50%, 61.8% of the previous move, and a retracement of more than 61.8% typically signals a trend reversal.

Resistance

Resistance is a price level at which there is a large enough supply of a stock available to cause a halt in an upward trend and turn the trend down. Resistance levels indicate the price at which most investors feel that prices will move lower.

RSI

A popular oscillator developed by Welles Wilder, Jr. and described in his self-published 1978 book “New Concepts in Technical Trading Systems”. RSI is plotted on a vertical scale from 0 to 100. Values above 70 are considered overbought and values below 30, oversold. When prices are over 70 or below 30 and diverge from price action, a warning is given of a possible trend reversal

S

Sector

A group of companies that generate revenue in similar ways, and tend to rise and fall with the economic cycle. Sectors are commonly broken down into smaller groups called industries. The sectors tracked by the Standard and Poors Index are Basic Industries, Financials, Technology, Industrials, Energy, Consumer Staples, Consumer Services, Utilities, and Transport/Cyclicals.

Sentiment Indicators

Psychological indicators that attempt to measure the degree of bullishness or bearishness in a market. These are contrary indicators and are used in much the same fashion as overbought or oversold oscillators. Their greatest value is when they reach upper or lower extremes.

Standard Deviation (Volatility)

A statistical term that provides a good indication of volatility. It measures how widely values (closing prices for instance) are dispersed from the average. 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.

Stochastic Oscillator

A momentum indicator developed by George Lane that measures the price of a security relative to the high/low range over a set period of time. The indicator oscillates between 0 and 100, with readings below 20 considered oversold and readings above 80 considered overbought. A 14-period Stochastic Oscillator reading of 30 would indicate that the current price was 30% above the lowest low of the last 14 days and 70% below the highest high. The Stochastic Oscillator can be used like any other oscillator by looking for overbought/oversold readings, positive/negative divergences and centerline crossovers.

T

Topping

A period where the stock or market is “catching its breath” after an advance, characterized by a flat trading range without any noticeable trend. It is common to see a topping period after a lengthy increase of the stock price. Topping may be a sign of distribution.

TICK

Each individual move from one stock trade to another. An UP-TICK means the price moved up on the last trade and a DOWN-TICK means it moved down. If there is no change from the last trade, the TICK is considered neutral. The TICK statistic on the NYSE is the net of all UP-TICKs minus all DOWN-TICKs at a given point during the day. If 1000 stocks advanced on their last trade or TICK, 500 declined and 200 were unchanged, the TICK would be +500 (1000 minus 500 equals +500). The closing TICK is based on the last trade of the day. TICK statistics are available for the NYSE, Nasdaq and AMEX.

Trend

Refers to the direction of prices. Rising peaks and troughs constitute an uptrend; falling peaks and troughs constitute a downtrend. A trading range is characterized by horizontal peaks and troughs. Trends are generally classified into major (longer than a year), intermediate (one to six months), or minor (less than a month).

U

Ultimate Oscillator

An oscillator that attempts to combine information for several different time periods into one number. Three different time periods are used, typically a 7-day period, a 14-day period, and a 28-day period. The resulting oscillator is “bounded” in that it moves between 0 and 100 with 50 as the center line. 70 and 30 are used as overbought/oversold levels.

Underlying

1. In derivatives, the security that must be delivered when a derivative contract, such as a put or call option, is exercised.
2. In equities, the common stock that must be delivered when a warrant is exercised, or when a convertible bond or convertible preferred share is converted to common stock.

V

Volatility

1. A statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.
2. A variable in option pricing formulas showing the extent to which the return of the underlying asset will fluctuate between now and the option’s expiration. Volatility, as expressed as a percentage coefficient within option-pricing formulas, arises from daily trading activities. How volatility is measured will affect the value of the coefficient used.

Volume Analysis

The examination of the number of shares or contracts of a security that have been traded in a given time period. Volume analysis is used by technical analysts as one of many factors that inform their trading decisions. By analyzing trends in volume in conjunction with price movements, investors can determine the significance of changes in a security’s price. Volume typically increases as price increases and vice versa; when the opposite occurs, it’s called divergence.

VIX

The ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the “investor fear gauge.”

VXST

The CBOE Short-Term Volatility Index (VXST) reflects investors’ consensus view of expected stock market volatility. VXST provides a market-based gauge of expectations of 9-day volatility, making it particularly responsive to changes in the S&P500 Index.

VXV

The CBOE 3-Month Volatility Index (VXV) is designed to be a constant measure of 3-month implied volatility of the S&P500 (SPX) Index options. The VXV Index has tended to be less volatile than the CBOE Volatility Index (VIX), which measures one-month implied volatility. Using the VXV and VIX indexes together provides useful insight into the term structure of S&P500 (SPX) option implied volatility.

VVIX

The VVIX Index is an indicator of the expected volatility of the 30-day forward price of the VIX. This volatility drives nearby VIX option prices. CBOE also calculates a term structure of VVIX for different VIX expirations. The VVIX or any point on its term structure is calculated from a portfolio of VIX options (VVIX portfolio) using the same algorithm used to calculate the VIX.

W

Warrant

A derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame. Warrants are often included in a new debt issue as a “sweetener” to entice investors.

Weighted Average

An average in which each quantity to be averaged is assigned a weight. These weightings determine the relative importance of each quantity on the average. Weightings are the equivalent of having that many like items with the same value involved in the average

X

X

1. A Nasdaq stock symbol specifying that it is a mutual fund.
2. A symbol used in stock transaction tables found on the internet and in newspapers to indicate that a stock is trading ex-dividends or ex-rights.

Y

Yield

The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value.

Yield Curve

A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.

Z

Zero Coupon Bond

A debt security that doesn’t pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value.

Zero Uptick

A transaction executed at the same price as the trade immediately preceding it, but at a price higher than the transaction before that. For example, if shares are bought and sold at $47, followed by $48 and $48, the last trade at $48 is considered to be a zero uptick. This distinction can be important for short sellers trying to avoid shorting an ascending stock. Also known as a zero-plus tick.

Zombie

Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to the high costs associated with certain operations, such as research and development. Most analysts expect zombie companies to be unable to meet their financial obligations.

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