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Known ahead of time.
Abandoned Baby Pattern
A rare candlestick pattern in which an upside gap doji star (where the shadows do not touch) is followed by a downside gap black candlestick where the shadows also do not touch; considered a major top reversal signal.
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 the Fibonacci series.
An addition to a trader’s original market position. The first of three distinct phases in a major trend in which investors are buying.
See Chaikin Oscillator.
Refers to actual physical commodities, as distinguished from futures.
Block-structured programming language developed under the guidance of the U.S. Department of Defense to provide a medium for writing real-time, concurrent applications, for facilitating program verification.
Smoothing and/or forecasting prices with continuously updated weighting of past prices.
Each day’s 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.
The loss attributable to price movement against the position in any one trade.
An acronym for “automated knowledge acquisition.” Refers to the use of programs to create knowledge needed by other programs (usually expert systems).
Premium that an investment portfolio earns above a given point of reference; a measure of stock performance independent of the market.
American Depository Receipts (ADRs)
Certificates that are issued by a bank of US origin and traded in the U.S. as domestic shares. The certificates represent the foreign securities that the bank holds in that security’s country of origin.
Accounting method in which an asset’s cost is spread out.
Analysis of Variance
(Anova) The partitioning of total sum of squares into the sum of squares explained by the model and the remaining sum of squares unexplained.
Candlestick formation. An exceptional exhaustion pattern (meaning “gap filling”) composed of five candles. The anaume occurs when the gap is filled in after a market price has changed directions. This pattern coupled with the other patterns indicate a strong potential for a bullish reversal and price advance.
Behavioral finance. The tendency to evaluate current decisions in the context of past events.
A technique whereby a technician will pick an extreme low or high to use as a pivot point and draw a line, called the median line, from this point that bisects a line drawn through the next corrective phase that occurs after the pivot point. Lines parallel to the median line are drawn through the high and low points of the corrective phase. The parallel lines define the resistance and support levels for the price channel.
Generally a metallurgical process, in artificial intelligence a process in which a neural net work searches for a set of weights to minimize errors; the search constantly shrinks as the weights find better values, analogous to the rearrangement of the molecules in a heated metal bar as the bar cools.
Annual Earnings Change
(%) The historical earnings change between the most recently reported fiscal year earn ings and the preceding.
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.
Translating the figures for a given year into an annual rate.
Two forecasts whose errors are negatively correlated.
The simultaneous purchase and sale of two different, but closely related, securities to take advantage of a disparity in their prices.
See AutoRegressive Integrated Moving Average
ARMAX (AutoRegressive Moving Average eXogenous variables model)
The combination of fundamental variables outside the particular market that correlates with the independent variable added with the ARMA modeling of the remaining residuals.
Also known as TRading INdex (TRIN):
An advance/decline stock market indicator. A reading of less than 1.0 indicates bullish demand, while greater than 1.0 is bearish. The index is often smoothed with a simple moving average.
The field of computer science dedicated to producing programs that attempt to mimic the processes of the human brain.
To transfer to another to whom property is assigned.
Any earthly cycle, such as a market cycle, that has been scientifically related to the physics of the planetary system.
An option whose strike price is nearest the current price of the underlying deliverable.
The fractional part of reduced energy or lost power due to smoothing or filtering.
The correlation between the values of a time series and previous values of the same time series.
AutoRegressive Integrated Moving Average (ARIMA)
A linear stochastic model forecasting methodology described by Box and Jenkins in their book Time Series Analysis, Forecasting and Control.
Using previous data to predict future data.
Average Directional Movement Index (ADX)
Indicator developed by J. Welles Wilder to measure market trend intensity.
Average True Range
A moving average of the true range.
Indicates where the closing price is within Bollinger bands:
The out, or back, contract month, as opposed to the current contract month; the expiration month farther in the future than the current, or spot, month.
A feedforward multilayered neural network that is a commonly used neural network paradigm.
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.
An oscillator that accentuates only the frequencies in an intermediate range and rejects high and low frequencies. Implemented by first applying a low pass filter to the data and then a high pass filter to the resulting data (e.g., two SMA crossover system).
Bank Investment Contracts (BICs)
A negotiated-term deposit issued by a commercial bank. See Guaranteed Investment Contracts (GICs).
Used to plot price movements using vertical bars indicating price ranges.
The difference between spot (cash) prices and the futures contract price.
The measure of yields on bonds and notes; one basis point equals 0.01% of yield.
Large transactions made up of a number of different stocks.
Bayes Decision Rule
A rule that states the strategy chosen from those available is that for which the expected value of payoff is the greatest.
A securities market characterized thus based on declining prices.
A regression of the estimated coefficient that belongs to a particular variable.
A measure of the market/nondiversifiable 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.
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.
In which observations are displayed as having two distinct peaks.
A proprietary, computerized trading system whose rules are not disclosed or readily accessible.
Black-Scholes Option Pricing Model
A model developed to estimate the market value of option contracts.
Large transactions of a particular stock sold as a unit.
A steep and rapid increase in price followed by a steep and rapid drop in price.
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.
Describes a variable that may have one of only two possible values: true or false. After George Boole, English logician, credited with the invention of “Boolean logic.”
Box-Jenkins Linear Least Squares
The additive structure of Box-Jenkins models with a polynomial structure.
From G.E.P. Box and G.M. Jenkins, who authored Time Series Analysis: Forecasting and Control. The method refers to the use of autoregressive integrated moving averages (ARIMA), which fit seasonal mod els and nonseasonal models to a time series.
Box-Jenkins Nonlinear Least Squares
The multiplicative structure of Box-Jenkins models using the Gauss-Newton algorithm with numerical derivatives.
Literally “bald” or “monk” in Japanese; in candlestick terminology refers to a situation during which a trading cycle opens or closes on a high or low, indicating a victory for the bulls or the bears.
A trading range market or a price region that is non-trending.
When a tradable exits a trading range by trading at price levels that leaves a price area where no trading occurs on a bar chart. Typically, these gaps appear at the completion of important chart formations.
The point when the market price moves out of the trend channel.
A firm that handles transactions for its customers and also purchases securities for its own account, selling them to customers.
Orders physically held by the floor broker in the trading pit.
A securities market characterized thus on rising prices.
Buy and Hold
The acquisition of a tradable for the long term rather than quick turnover.
Widely used systems development language, also block-structured, but with more facilities to control the machine at the level of the hardware.
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.
Takes the average rate of return for the last 36 months and divides it by the maximum drawdown for the same period. It is usually calculated on a monthly basis. A negative value for the Calmar ratio means that the system or trader had a negative performance over the last three years.
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.
Losses resulting from selling at a loss.
Chicago Board of Trade.
Central Limit Theorem
From statistics, the theorem that the distribution of sample means taken from a large population approaches a normal, Gaussian, curve.
An oscillator created by subtracting a 10-day EMA from a three-day EMA of the accumulation /distribution line.
In charting, a price channel contains prices throughout a trend. There are three basic ways to draw channels: parallel, rounded and channels that connect lows (bear trend) or highs (bull trend).
Describes the behavior of nonlinear systems. A subset of nonlinear dynamics analysis, chaos theory is a branch of mathematics focusing on irregular and complex behavior that has an underlying order. In the stock market, chaos theory seeks to forecast the future path of stock prices, including sudden changes that occur during periods of intense market activity.
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.
A statistical test to determine if the patterns exhibited by data could have been produced by chance. The chi-square test with Yates’s correction using two-way statistics for decline vs. advance is:
oj = actual observed frequency of test
ej = expected or theoretical frequency of test.
Christmas Tree Spread
The simultaneous purchase and writing of options with either a different strike price or expi ration date or combination of the two.
In artificial intelligence, these systems perform a type of machine learning that generates rules from examples.
A smaller version of a retail mutual fund, it is offered as a subaccount in a variable annuity. The daily price of a clone fund is different among variable annuities that carry it because each clone fund starts on a different date and with a base price of $10.
A mutual fund that does not sell unlimited shares; one with a specific number of outstanding shares.
Positions that have been either liquidated or offset.
Locating the presence of groups of vectors that are similar in some fashion.
The Chicago Mercantile Exchange.
A constant used to multiply another quantity or series; as in 3 xand ax, 3 and a are coefficients ofx.
Coefficient of Determination
R-squared. The proportion of the variation in the data explained by the model.
In Gann theory, a projected reversal point.
The weighted average of two or more forecasts.
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.
A device of some kind that compares two inputs.
The payment, through interest, based on the sum of the original principal amount and its accrued interest.
A measure of the degree of likelihood that a rule is correct, which may reflect the percentage of times that it has proven to be correct in the past or just a subjective measure of our confidence in its degree of reliability.
The degree of assurance that a specified failure rate is not exceeded.
Indication that at least two indices, in the case of Dow theory the industrials and the transportation, corroborate a market trend or a turning point.
Congestion Area or Pattern
A series of trading days in which there is no visible progress in price.
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.
A chart in which the price scale for the data for the end of a given contract and the data for the beginning of the next contract are merged in order to ease the transition of one contract to the next.
An agreement as in options in which rights are exchanged by law. Correlation Coefficient-When two random variables X and Y tend to vary together. The measurement is given by the ratio of the covariance of X and Y to the square root of the product of the variance of X and the variance of Y.
When futures prices and spot prices come together at the futures expiration.
Traders buy and sell two different securities (or synthetic securities), forcing equivalent prices for equivalent securities.
Also Coppock Guide. A long-term price momentum indicator: a 10-month weighted moving aver age of the sum of the 14-month rate of change and the 11-month rate of change for the Djia.
Any price reaction within the market leading to an adjustment by as much as one-third to two-thirds of the previous gain.
A wave or cycle of waves moving against the current impulse trend’s direction.
When two random variables X and Y tend to vary together. The measurement is given by the ratio of the covariance of X and T to the square root of the product of the variance of X and the variance of Y.
Degree to which two series of numbers plot as a straight line. A correlation coefficient of 1 (or -1) indicates that the two series of numbers plot exactly along a straight line. A correlation coefficient of zero indicates that there is no straight line relationship between the two series of numbers. As applied to two portfolios, a high correlation coefficient for the relative returns indicates that the portfolio values have moved in tandem and a low correlation coefficient means the opposite. When the correlation coefficient is high, one portfolio could have been used as a surrogate or a hedge for the other.
A numerical and graphical display of the test statistics of an autocorrelation diagnostic routine.
The cost of a given share or group of stock shares.
A price bar showing movement opposite to the direction of the prior time period; a retracement.
Multiplies the deviation of each variable from its mean, adds those products and then divides by the number of observations.
Purchasing back a contract sold earlier.
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.
The spread between crude oil and its products: heating oil and unleaded gasoline plays a major role in the trading process.
The difference in value of two options, where the value of the one sold exceeds the value of the one purchased.
The extent to which the revenue streams of individual traders within a single enterprise tend to exhibit similar patterns over time.
Market Profile terminology for commercial clearing members, as opposed to CTI1, local floor traders.
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.
The current assets of a company divided by its current liabilities. Balance-sheet strength indication.
The continuous image of the unit interval.
Developing complicated rules that map known conditions.
The number assigned by the Committee of Uniform Security Identification Procedure that appears on all securities documents. Each security is given a number so that it is easily identifiable.
A point where higher frequency cycles will not pass through a filter (e.g., a 10-day SMA will eliminate cycles of 20 days or less).
A variation where a point of observation returns to its origin.
A stochastics indicator that has had its values smoothed a second time, usually with a three-period moving average.
The difference between the high and low price during one trading day.
Altering data to some extent to be more accurately analyzed; smoothing, reducing unwanted data, removing trend. Processing data is mathematically transforming the data from one form into another with the goal of amplifying pertinent information for traders.
Dead Cat Bounce
A rebound in a market that sees prices recover and come back up somewhat.
The difference in value of two options, where the value of the long position exceeds the value of the short position.
Logic traditionally used in expert systems, which defines a method for reasoning from the general to the specific.
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.
Degrees of Freedom
The number of independent observations; the number of observations minus the number of parameters to be estimated.
The amount of time that elapses between a change in an input event and the resultant change in a related output event or time series.
The amount by which the price of an option changes for every dollar move in the underlying instrument.
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 magni tude but opposite in sign (+/-) to the option’s delta.
This is an "options/options" or "options/underlying instrument" position constructed so that it is rela tively insensitive to the price movement of the underlying instruments. This is arranged by selecting a calculated ratio of offsetting short and long positions.
A measure of option price vs. the underlying futures contract or stock price.
An index that shows the buying and selling power of markets and stocks from mathematical calcu lations of volume and price ratios.
For any measure m , a function that gives rise to m when integrated with respect to some other specified measure. A probability density function is a function whose integral over any set gives the probability that a random variable has values in this set.
A relationship between two different experimental results in which the first result does not directly influence the chances of the second result occurring, but instead, the two results are indirectly related because they are subject to influences from a common outside factor.
Financial contracts the value of which depend on the value of the underlying instrument commodity, bond, equity, currency or a combination.
Known in advance when the sum of one-step ahead forecast mean squared errors is zero.
The fundamental continuous effect of an exogenous variable such as money supply that can be deter mined to be explanatory.
A system in which the outcome is determined by an equation; a system in which cause and effect is easily determined.
To remove the general drift, tendency, or bent of a set of statistical data as related to time.
A statistical test that indicates the likelihood of observing the difference if the true differ ence were zero. A large value of this statistic leads to nonacceptance of the null hypothesis that the true difference is zero.
Subtracting previous from current values to obtain a stationary (detrended) time series: P stationary = Pt - Pt-1.
A partial differential equation, used in solving a random walk problem.
An index that measures the percentage of individual series that are positive compared with the aggregate group that is, the percentage of S&P groups that are above their 30-week moving average.
Directional Movement Index (DMI)
Developed by J. Welles Wilder, DMI measures market trend.
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).
When two or more averages or indices fail to show confirming trends.
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.
A session in which the open and close are the same (or almost the same). Different varieties of doji lines (such as a gravestone or long-legged doji) 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 (often quarterly or monthly) 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 down ward (upward) trend has ended.
A price series that has been smoothed by a mathematical technique such as a moving average. This first series of smoothed price data is then smoothed a second time.
See Double Bottom. A price pattern seen on a chart. The patterns occurs 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.
The reduction in account equity as a result of a trade or series of trades.
See Random walk.
The probability that first order correlation exists. With a range between zero and 4, the closer to 2.0, the lower the probability is.
Dynamic Data Exchange
Ability to automatically update an application from within another application.
Dynamic Linked Language
Refers to programming code that can be used ("called") by your main program while running under Windows.
A large price movement in one direction within the first 15 minutes after the open of the daily session.
The estimated earnings projected for a company for a fiscal year.
Efficient Market Theory
All known information is already discounted by the market and reflected in the price due to market participants acting upon the information.
The ability to recover an original configuration.
Electronic Communications Network
Independent execution systems set up by brokerage firms, matching new retail limit orders with compatible orders already in the system.
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.
See Exponential Moving Average.
In candlestick terminology, a multiple candlestick line pattern; a major reversal signal with two opposing-color real bodies making up the pattern. (Also referred to as tsutsumi. )
Lines surrounding an index or indicator that is, trading bands.
The point at which a trader gets into a position in the market.
A price region that represents a balance between demand and supply.
Created by Richard W. Arms, a chart in which the vertical axis is the high-low range for each day, while the horizontal axis represents the volume of shares of stock or the number of contracts traded for the day. The purpose of the chart is to highlight the relationship between price and volume.
The Employee Retirement Income Security Act.
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.
Dollars deposited in foreign banks, with the futures contract reflecting the rates offered between London branches of top US banks and foreign banks.
Evening Star Pattern
The bearish counterpart of the morning star pattern; a top reversal, it should be acted on if it arises after an uptrend.
Collections of stocks that are bought and sold as a package on an exchange, principally the American Stock Exchange (AMEX), but also the New York Stock Exchange (NYSE) and the Chicago Board Options Exchange (CBOE).
The day on or after which the right to receive a current dividend is not automatically transferred to a buyer.
The process by which the holder of an option makes or receives delivery of shares of the underlying secu rity.
The point at which a trader closes out of a trade.
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.
The last day on which an option can be traded.
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
The EMA for day D is calculated as: where PR is the price on day D and a (alpha) is a smoothing constant . Alpha may be estimated as 2/(n+1), where n is the simple moving average length. Another form of the formula is .
A mathematical-statistical method of forecasting that assumes future price action is a weighted average of past periods; a mathematic series in which greater weight is given to more recent price action.
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.
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.
The ratio of the variance explained by treatments to the unexpected variance.
Selling a rising price or buying a falling price. A trader fading an up opening would be short, for example.
The inability of price to reaffirm a new high in an uptrend or a new low in a downtrend.
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 subwaves.
The theoretical prices generated by an option pricing model (i.e. , the Black-Scholes option pricing model).
Fast Fourier Transform
A method by which to decompose data into a sum of sinusoids of varying cycle length, with each cycle being a fraction of a common fundamental cycle length.
A declaration that market conditions in the futures pit are so disorderly temporarily to the extent that floor brokers are not held responsible for the execution of orders.
Federal Deposit Insurance Corporation
A self-sustaining, independent executive agency established to insure deposits of all US banks entitled to federal deposit insurance, as stated by the Federal Reserve Act.
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.
Neural network in which neurons receive information only from the previous layer and send outputs only to the following layer.
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.
The sequence of numbers (0, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233...), discovered by the Italian mathematician Leonardo de Pisa in the 13th century and the mathematical basis of the Elliott wave theory, where the first two terms of the sequence are 0 and 1 and each successive number in the sequence is the sum of the previous two numbers. Technically, it is a sequence and not a series.
An executed order; sometimes the term refers to the price at which an order is executed.
An order that must be filled immediately (or canceled).
The time at which a portfolio insurance program makes an adjusting trade.
A device or program that separates data, signal or information in accordance with specified criteria.
(verb) 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.
A quantitative comparable measure used to minimize model errors.
Before conducting statistical tests, an analyst must select a confidence level that will be used to determine when to accept the null hypothesis. A 5% confidence level indicates that one is not willing to accept the null hypothesis when the average net return calculated from the sample could have occurred in only five of 100 samples if the null hypothesis were true.
Sideways market price action that has a slight drift in price counter to the direction of the main trend; a consolidation phase.
Order filled immediately by hand signal on the trading floor.
The number of shares currently available for trading.
Employees of brokerage firms working on exchange trading floors.
Speculative or high-risk trades.
The most recent historical period for which data is used to build a forecasting model. The next time period is the first forecast period.
Forward-Rate Agreements (FRAs)
Cash payments are made daily as the spot rate varies above or below an agreed -upon forward rate and can be hedged with Eurodollar futures.
From fractal geometry, used to describe the irregular nature of lines, curves, planes or volumes.
Depiction of mathematical models that may be applied to identify data patterns.
Framing or Frame Dependence
Behavioral finance. The tendency to evaluate current decisions within the framework in which they have been presented. Making decisions based on perceptions of risk/return rather than pure risk and return. The usual example is categorization of where money comes from and what it is "assigned" to instead of recognizing its fungibility. The alternative is to speak of frame independence, wherein behavior is not influenced by how the decision is framed. Examples are loss aversion, hedonic editing, loss of self-control, regret, and money illusion.
The number of complete cycles observed per time period (i.e., cycles per year).
That part of a time series that may be represented as a cycle.
A chart showing the number of times (or "frequency") an event occurs for each possible value of the event. The vertical or y-axis of the chart is the frequency axis and the horizontal or x-axis shows the different values the variable being measured can take.
Variation in a time series is accounted for by cyclical components at different frequencies.
The transfer of the frequency of the underlying data, usually prices, to the frequency of its moving average.
Commission and fees taken out of investment capital before the money is put to work.
The first expiration month in a series of months.
The practice of trading ahead of large orders to take advantage of favorable price movement. Brokers are prohibited from this practice.
The analytical method by which only the sales, earnings and the value of a given tradable’s assets may be considered.
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.
A prediction of what volatility may be like in the future.
A problem-solving method that can be applied to neural networks, expert systems and other comput ing methods. Fuzzy systems process inexact information inexactly and describe ambiguity rather than the uncer tainty of an occurrence and are useful in performing control and decision-making tasks. Not Boolean.
The degree by which the delta changes with respect to changes in the underlying instrument’s price.
Gann’s Square of 9
A trading tool that relates numbers, such as a stock price, to degrees on a circle.
Various analytical techniques developed by legendary trader W.D. Gann.
A day in which the daily range is completely above or below the previous day’s daily range.
Algorithms that mimic the characteristics associated with evolution and that are well-suited to optimization problems such as optimizing neural network parameters.
In artificial intelligence, this form of programming automatically generates a program from a set of primitive constructs.
When a broker executes an order for another broker’s client and the two brokers split the commission; the client pays nothing extra.
Golden Mean or Golden Ratio
The ratio of any two consecutive numbers in the Fibonacci sequence, known as phi and equal to 0.618; a proportion that is an important phenomenon in music, art, architecture and biology.
Any length divided so that the ratio of the smaller to the larger part is equivalent to the ratio between the larger part and the whole and is always 0.618.
Jargon; a loose term encapsulating a set of risk variables used by options traders.
Gross Domestic Product
Value of all goods and services produced domestically.
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.
Guaranteed Investment Contracts (GICs)
A single lump-sum deposit that earns a guaranteed interest until a known maturity date. GICs are issued by insurance companies.
where weight (W) at point J in window width of N points is determined by this formula.
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.
A mutual fund involving speculative investing in stocks and options.
Herrick Payoff Index
An index requiring two inputs, one of which is a smoothing factor known as the multiplying factor and the other of which is the value of a one-cent move.
The use of rules of thumb for decisions.
Problem solving approached by trying out several different methods and comparing which pro vides the best solution.
(computer science)Computational rules of thumb. Distinct from algorithms, which are programs guaran teed to generate the correct result under all circumstances, heuristics may only turn out to be correct a certain percentage of time.
Elements that give a neural network the ability to learn nonlinear patterns. The hidden nodes math ematically transform inputs by passing weighted sums of those inputs through nonlinear functions.
Hierarchical Neural Network
In artificial intelligence, a neural network in which predictions derived from networks at one level of the hierarchy are incorporated as inputs at another level. This architecture lends itself to faster training, as each network focuses learning solely on its own output.
High Pass Frequency Filter
A detrending filter that lets pass the high frequency noise and rejects low frequency trend. Implemented by first applying a low pass filter to the data, then subtracting the filtered data from the original data.
To pay the offered price.
A modified put/call ratio that refines traditional option ratio analysis by including the open interest figures in the equation and can be defined as (Total put volume/Total put open interest) divided by (Total call volume/Total call open interest)
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.
A series of past daily, weekly or monthly market prices (open, high, low, close, volume, open inter est).
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.
The excess return expected from a stock to justify its current weighing in the portfolio.
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.
A sharply defined change in a series of input data being studied, such as market prices or volume.
A wave or cycle of waves that carries the current trend further in the same direction.
A stock that is the focus of a public bidding contest, as in a takeover or bear raid.
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.
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.
A mutual fund that replicates the behavior of a given index.
The progress from statements describing particular events to a general statement.
Behavioral finance. Driven by frame dependence and heuristic bias, when market prices stray from fundamental values.
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.
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.
Observing the price movement of one market for the purpose of evaluating a different market.
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.
Small, private organizations in which a group of investors, usually novices, pool their time and resources to learn more than they could on their own about various forms of investments and then invest their own money as a group.
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.
A type of Elliott wave correction that has a 3-3-5 wave pattern, where the B wave terminates beyond the start of wave A. A "flat" is in progress, implying that a larger pattern is developing. It will contain waves of one higher degree than the A-B-C waves just completed.
Electronic communications network.
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 at least $100,000.
One of three types of Japanese candlestick charts that does not have time on the horizontal axis.
A linear system in which the mean squared error between the desired and the actual output is minimized when the input is a random signal.
Bet bigger when the odds are in your favor. In management wisdom, if anything does go wrong, it will do so in triplicate. Also, an executive will always go back to work early if no one takes him.
In artificial intelligence, a given inventory of knowledge specific to a set of rules.
Developer of a wave theory.
Indicator developed by Martin Pring. A weighted summed rate of change oscillator. Four different rates of change are calculated, smoothed, multiplied by weights and then summed to form one indicator.
Descriptive measure of how flat or pointed a distribution is.
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 earnings reported compared with the same quarter a year earlier.
Law of Series
A succession of random events, such as flipping a coin.
The number of data points that a filter, much as a moving average, precedes the input price data.
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.
Least Squares Method
A technique of fitting a curve close to some given points that minimizes the sum of the squares of the deviations of the given points from the curve.
One side of a spread.
In rolling forward in futures, a method that would result in liquidating a position.
A change in price that exceeds the limits set by the exchange on which the contract is traded.
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.
A programming language based on predicate logic and is the one most commonly used in artificial intelligence applications.
A chi-square test of significance of higher order correlation existence. The marginal significance level is the probability that a no more higher order correlation exists.
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.
The trader in a pit of a commodity exchange who buys and sells for his or her account.
A market that, if not restricted, would seek price equilibrium outside the limit but, instead, moves to the limit and ceases to trade.
Establishing ownership of the responsibilities of a buyer of a tradable; holding securities in anticipation of a price increase in that security.
The number of periods of historical data used for observation and calculation.
Low Pass Frequency Filter
A data smoother or filter that lets pass low frequency trend sinusoids and rejects high frequency noise (see SMA).
To sell at the bid price.
See Moving Average Convergence/Divergence.
A computer method commonly used in spreadsheets to automate repetitive steps by recording the necessary keystrokes. The macro can then be run and the keystrokes implemented.
The overall trend of the market such as might be observed on a bar chart.
A fund that uses the futures market as its primary asset.
Complex but structured pattern produced by an equation in which the result is fed back into the equation repeatedly; self-similarity.
A function, or relation between values.
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.
Marginal Significance Level of Test-Statistics
The probability distribution used to test the hypothesis that the beta coefficient does not equal zero. A T-statistic of approximately 1.65 reflects a 0.90 or 90% confidence and the mar ginal significance is 1-0.90 = 0.1 or 10%.
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.
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.
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.
Instructions to the broker to immediately sell to the best available bid or to buy from the best available offer.
The uncertainty of returns attributable to fluctuation of the entire market.
Crowd psychology, typically a measurement of bullish or bearish attitudes among investors and traders.
Using analytical tools to devise entry and exit methods.
Company value determined by investors, obtained by multiplying the current price of company stock by the common shares outstanding.
A set of processes where the probabilities for the next state are dependent on the present state.
From roulette; a tactical system that requires doubling your bet after each loss, so that winning once you recoup the amount originally bet.
The Marche A Terme Des Instruments Financiers exchange in Paris.
The highest or maximum value.
Optimistic decision-making that identifies the decision alternative with the best possible outcomes.
Pessimistic decision-making that identifies the decision alternative with the worst possible outcomes.
Maximum Adverse Excursion
A historical measurement of the closed losing trades versus the closed profitable trades of a trading system. Used to determine the stop-loss level that can be used that will allow winning trades to remain; the extreme unfavorable price level reached for both profitable and unprofitable trades.
Maximum Entropy Method
More flexible than Fourier analysis, the maximum entropy method is both a tool for spectrum analysis and a method of adaptive filtering and trend forecasting. As a tool for spectrum analysis, the MEM system can provide high resolution spectra for identifying the dominant data cycles within relatively short time series, such as open, high, low, close, volume and open interest, or study results, such as RSI, TRIX, and so on. (Fourier analysis, in contrast, gives best results when applied to time series of six months or longer.) As a forecasting tool, MEM is used in conjunction with moving averages to forecast lower and upper trend channels in the data.
Maximum Entropy Spectrum Analysis
See Maximum Entropy Method.
When the sum of the values is divided by the number of observation.
The average absolute value of the difference between the population of numbers and the mean.
The average profitability of a trader’s account, as measured over a given period.
The average monthly total return of a stock. The total return is price change added to dividends.
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.
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.
See Maximum Entropy Method.
A stop-loss order kept in your head instead of instructing your broker.
See Maximum Entropy Spectrum Analysis.
The lowest or minimum value.
The latest trend of the market, i.e., what it is doing now.
The most frequently occurring value.
Modern Portfolio Theory
Investing theory in which portfolio managers estimate and manage risk and return.
Modified Endowment Contract
Life insurance in which funds such as policy loans, assignments, pledges, and partial surrenders are considered gross income and subject to income tax.
A time series representing change of today’s price from some fixed number of days back in history.
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.
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.
A number of technical indicators that incorporate volume and price action to measure buying or selling pressure.
The market in which dealers 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.
A fixed amount of money that a market participant would lose if a stop were hit.
In Elliott wave theory, a single wave within a range of waves.
A bottom reversal pattern, according to Steve Nison a signal that the bulls have seized control.
A mathematical procedure to smooth or eliminate the fluctuations in data and to assist in determin ing 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 Model
A time series equation representing an observed value at time t as a linear combination of present and past random shocks et (forecast errors). A moving-average process of order Q, MA(q), may be written:
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.
Snapshot of a portion of a time series at an instant in time. The window is moved along the time series at a constant rate.
Two variables that have a correlation of greater than 0.70 or less than -0.70 in a regression model. The final result is the two variables explaining the same portion of variation where either variable would be suffi cient.
Multiple Linear Regression
More than one independent variable is used to account for the variability in one depen dent variable.
A company that invests money of its shareholders in a variety of areas, usually stocks.
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.
National Association of Investors Corporation
Also known as the National Association of Investment Clubs.
Near-Month Contract/Far-Month Contract
Contract whose expiration is near/far.
An option with a strike price close to the current price of the underlying tradable.
A trendline drawn along the support or resistance points of various reversal and consolidation pattern (i.e., head and shoulder, double and triple top/bottom formations).
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.
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.
An artificial intelligence program that is capable of learning through a training process of trial and error.
The Federal Reserve, the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC) agrees to take no action to block a proposal by an exchange or company in conducting some aspect of the securities business. The aspect could be for almost anything, but the most common is a new contract listing or a new security issuance.
Without any sales charge. For mutual funds, shares sold at net asset value.
Price and volume fluctuations that can confuse interpretation of market direction.
A signal in which the effects of random influences cannot be dismissed.
Nonlinear Dynamics Analysis
Analysis of relationships that start from well-defined outcomes to complex and cha otic results.
Statistics theory that attempts to define probability distribution from disorder to either a more orderly state or a sharp trend reversal, such as stock market fluctuations.
Autocorrelation that shows up other than at 12-month lag intervals.
A narrow range day lacking any discernible movement in either direction.
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.
Adjusting a time series so that the series lies in a prescribed normal, standard range.
The day that a notice of intent to deliver is issued to a futures contract holder.
The hypothesis that there is no validity to the specific claim that two variations (treatments) of the same thing can be distinguished by a specific procedure.
A concept used in radar research, applicable to trading, in how often and what manner detection or radar contact is achieved.
See On-Balance Volume.
An order to buy/sell fewer than 100 shares of stock.
The amount of stocks held by nonproducers including supplies held at mills, elevators, terminals, and processors.
The amount of stocks held by producers.
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.
A statistical test of significance for a distribution that changes its shape as N gets smaller; based on a variable t, equal to the difference between the mean of the sample and the mean of the population divided by a result obtained by dividing the standard deviation of the sample by the square root of the number of individuals in the sample.
Organization of Petroleum Exporting Countries Opening Print
The first price of a stock that comes across the ticker for the session.
Current trades that are still held active in the customer’s account.
n -day open TRIN =
A period at the opening of a futures market in which the price for each contract is established by outcry.
The range of prices that occur during the first 30 seconds to five minutes of trading, depending on the preference of the individual analyst.
Income foregone by the commitment of resources to another use.
A methodology by which a system is developed with rules tailored to fit the data in question precisely.
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.
The number of days of past price history used to predict the following day’s price.
Technical indicator used to identify overbought and oversold price regions. An indicator that detrends data, such as price.
An item within the range of a sample that does not conform to the mean of the sample.
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.
A mismatched trade between two traders in the pit, and which is settled the next day.
The result (singular) stemming from a statistical test.
A value removed from the other values to such an extreme that its presence cannot be attributed to the random combination of chance causes.
Outside Reversal Month
A month in which the recent monthly trading range exceeds the previous month’s range and closes opposite (reverses) the previous month’s close.
Market prices that have risen too steeply and too fast.
The parameters of a trading system are selected to return the highest profit over the historical data.
A model developed with rules tailored to fit the historical data precisely.
To pass beyond or over a specific targeted level.
Market prices that have declined too steeply and too fast.
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.
The full principal amount of an investment instrument.
The U-shaped curve in the plane given by the equation of the form
Of, having the form of or relating to a parabola.
A variable, set of data, or rule that establishes a precise format for a model.
A law that states that 80% of results come from 20% of the effort.
Block-structured programming language developed originally as an aid to instruction, now widely used for applications development.
A short compact wedge accompanied by receding volume.
A value on a scale of one hundred that indicates the percent of a distribution that is equal to or below it.
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.
The time lag that a filter falls behind the pre-filtered data.
Used to describe the frequency, amplitude, and phase of all frequency components of the signal.
In market activity, a price reversal point.
Point and Figure Chart
A price-only chart that plots up prices as Xs and down prices as Os. The minimum price recorded is called the box size. Typically, a three-box reversal indicates a change in the direction of prices.
Position Management Ratio
The ratio of profits extracted on winning transactions versus losses suffered on trades that liquidate unprofitably.
The price a buyer pays to an option writer for granting an option contract.
Altering data to some extent to be more accurately analyzed; smoothing, reducing unwanted data, removing trend. Processing data is mathematically transforming the data from one form into another with the goal of amplifying the pertinent information for traders.
Removing the bulk of first, second and possibly third order autocorrelations using non-linear regres sion.
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.
Probability Density Function
A graph showing the probability of occurrence of a particular data point (price).
Profit Margin Expansion
In long-term reference, a measure of a company’s net profit margin in the latest reported quarter divided by profit margin in the fiscal year previous. In short-term reference, a measure of a company’s net profit margin in the latest reported quarter divided by profit margin in the quarter immediately preceding.
Selling tradables that have appreciated since initial purchase in order to take advantage of the appreciation.
Trades based on signals from computer programs, usually entered directly from the trader’s com puter to the market’s computer system.
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.
A contract to sell a specified amount of a stock or commodity at an agreed time at the stated exercise price.
To increase holdings that an investor has by using the most buying power available in a margin account with paper and real profits.
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.
Indicates a company’s financial strength; a company’s cash and equivalent divided by current liabili ties.
A proprietary financial data service.
The percentage of variation in the dependent variable that is explained by the regression equation. A relative measure of fit.
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.
The unexplained component of an equation that models a time series (e forecast errors).
A theory that says there is no sequential correlation between prices from one day to the next, that prices will act unpredictably as they seek a level in response to supply and demand.
The difference between the high and low price during a given period.
In the CBOT Market Profile, a price movement beyond the range set by the initial auction.
Rate of Change
In which today’s closing price is divided by the closing price n days ago. Multiply by 100. Subtract 100 from this value. ((C today/Cn) * 100) - 100.
The relation that one quantity bears to another of the same kind, with respect to magnitude or numerical value.
The R-squared value adjusted for the number of degrees of freedom.
A short-term decline in price.
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.
A trading area bounded by horizontal, or near horizontal, lines. It can either be a reversal or continuation pattern, depending on the breakout.
A process that is repetitive and usually dependent upon the results of the previous repetition.
A mathematical way of stating the statistical linear relationship between one independent and one dependent variable.
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 Return Standard Deviation
Measures the amount of variability of the relative return. A large relative return standard deviation indicates that the relative return experienced during the holding period fluctuated dramatically and, if the holding period was different, a significantly different relative return would have been achieved. A small relative return standard deviation indicates the opposite.
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.
A kind of candlestick chart that does not take time into account for constructing the chart.
Behavioral finance. Judgment by stereotype.
The standard deviation of the unexplained portion of the monthly return.
A price level at which rising prices have stopped rising and either moved sideways or reversed direction; usually seen as a price chart pattern.
On a chart, a line drawn indicating the price level at which rising prices have stopped rising and have moved sideways or reversed direction.
The change in value of the average in response to the impulse.
An order placed with a condition or qualifer but not yet executed.
Percentage of a firm’s aftertax profits that can be put to those earnings retained.
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 Exponential Moving Average
An exponential moving average computed working backward through the time series, rather than forward, as is the case with a standard EMA. A REMA is used so the target would reflect only future price behavior, not past action that would induce spurious correlation.
Monthly excess return to risk comparison, calculated by dividing alpha by standard deviation. (A ratio better than 0.4 is excellent.)
Stocks ranked in descending order by reward-risk ratio.
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.
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.
Price higher than expected.
In which the formula produces the percentage overbought/oversold for a contract using the price, a moving average and the option’s implied volatility.
Risk-Adjusted Return on Capital (RAROC)
Another measure of risk-adjusted profitability, derived as the ratio between P/L and value at risk.
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.
Root Mean Square Percentage Error
(Rmspe) Square root of the average sum of squared errors experessed as a percentage.
Moving funds from one sector to another sector of the stock market as the business cycle unfolds.
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.
A market wherein prices are changing rapidly in one direction with very few or no price changes in the opposite direction.
Each day’s value is added to yesterday’s total or subtracted if the value is negative.
The growth in sales in a company.
A service charge of a mutual fund that is added to the costs of owning a stake in the fund.
Similar to a cup and handle formation, but the saucer base is shallower and rounder in shape.
Savings and Loan Investment Contracts (SLICs)
A negotiated-term deposit issued by a savings and loan.
Chart formation in which the price dips momentarily, forming a cup, before resuming its upward course.
In commodities, purchasing and selling in equal amounts so there is no net position at the end of the trading day; a speculative attempt to make a quick profit by buying at the initial offering price in the hope the issue will increase and can be sold.
A dedicated computer system for options calculations and simulations.
Autocorrelation that shows up at 12-, 24-, 36- and 48-month lag intervals or at four, eight, 12 and 16 quarterly lags.
A consistent but short-lived rise or drop in market activity that occurs due to predictable changes in climate or calendar.
A consistent and predictable change in market activity that occurs from consistent and predictable events.
A mutual fund that concentrates on trading a range of securities within a broad industry group, such as technology, energy or financial services.
When a block of investment professionals cash out of one industry sector to invest in another.
Pertaining to a long indefinite period of time.
Security Selection Ratio
The percentage of trades in a given account that liquidate profitably.
The first value used to start a calculation. For example, an exponentially smoothed moving average (EMA) uses the previous day’s EMA for the calculation. On the first day’s calculation of the EMA, you could use a simple moving average as the seed for the EMA.
A Nasdaq execution technology.
A rescaling procedure used in fractal geometry and performed on a two-variable system. For example, in a system utilizing an x-axis and y-axis representing time and price, the x-axis could be rescaled by one ratio and/or procedure while the y-axis is rescaled by a different ratio and/or procedure.
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.
Scaling method. With semilog, the distance between each point of a chart is exponential. Semilog scaling is used to compare relative price changes rather than physical point changes.
The rate of change of the moving average in response to the movement of the underlying data. The most sensitive period is that in which the rate of change of the moving average is fastest in response to changes in the sinewave.
The systematic relationship between successive observation of a time series.
A number that is unrelated to the previous number in a given series in any way.
The price at which all outstanding positions in a stock or commodity are marked to market. Typically, the closing price.
A statistical test indicating the likelihood that the sample of simulated net returns was drawn from a normal distribution. A small value of this statistic leads to nonacceptance of the null hypothesis that the sample is drawn from a normal distribution.
Shareholder of Record
Share owner of company stock as registered in company files.
Sharpe Ratio Method
(Also see Sterling ratio method) The Sharpe Ratio Method is the classic return/risk measure, given by:
E = Expected return
I = Risk-free interest rate
sd = Standard deviation of returns
Both the Sharpe and the Sterling ratio methods compare returns with variability of returns, as opposed to risk of loss of original investment.
In candlestick charting, when the shadows of a candle which mark the area between the real body and the extremes and give the appearance of being wicks are absent.
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.
In the context of stock or commodity time series historical data, this is usually daily or weekly prices.
In artificial intelligence, a numeric variable that is prevalued in the knowledge base. In moving average jargon, the first moving average is smoothed by a second moving average. The second moving average is the signal line.
Signature Medallion Guaranty
Program used by banks and other institutions to verify a signature.
The probability of rejection on the basis of a statistical test and a hypothesis that there is no validity to the specific claim that two variations of the same thing can be distinguished by a specific procedure.
Simple Moving Average
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.
A mathematical way of stating the statistical linear relationship between one independent and one dependent variable.
A wave whose amplitude varies as the sine of a linear function of time.
A descriptive measure of lopsidedness in a distribution.
The difference between estimated transaction costs and actual transaction costs.
See Simple Moving Average.
Small Order Execution System (SOES)
Computerized system developed by Nasdaq for immediate electronic execution of up to 1,000 shares of stock.
Simply, a mathematical technique that removes excess data variability while maintaining a correct ap praisal of the underlying trend.
A trader on the market floor assigned to fill bids/orders in a specific stock out of his/her own account when the order has no competing bid/order to ensure a fair and orderly market.
To set the parameters and variables of a given model.
The frequency decomposition of time series data. This is used to detect periodic fluctuations or cycles in historical price data.
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.
The linear interpolation between two adjacent points on a curve.
In trading, the current contract month. Also known as the front month.
Same as cash price, the price at which a commodity is selling at a particular time and place.
A trade in which two related contracts/stocks/bonds/options are traded to exploit the relative differences in price change between the two.
Using a spread order to bridge the closing of one position and the establishment of a new one.
A two-day pattern in which on the first day, the market declines below a support point, while the next day sees the market move strongly back up into the congestion area.
Another term for upthrust; occurs when price moves above a pivot top and a widespread reversal ensues as follows: a) two previous closes are reversed, b) close is below pivot top, c) close is below opening and mid-range, d) daily price range is greater than the previous day’s range.
In which market activity is characterized by a trend, then sideways movements, followed by another trend and further sideways movement.
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.
Standard Error of the Estimate (SEE)
A measure of absolute fit. One can use this measure to compare the last portion of this model with another portion of the same dependent variable.
Standardized Unanticipated Earnings
(SUE) A company’s average earnings surprise is compared with analyst earnings estimates dispersion, which can be used to estimate the likelihood of earnings surprises.
A distribution of a quantity that does not change over time.
Stationary Time Series
Implies that no trend is observed in the time series. Identified when the time series has a constant mean and variance.
A function defined on an interval so that the interval can be partitioned into a finite number of subinter vals on each of which the function is a constant. Also known as a simple function.
A mathematical technique to choose the independent variables that best describe the behavior of the dependent, in order of improving description.
Sterling Ratio Method
A measure of risk/return given by:
T = Three-year average annual return
AM = Three-year average maximum annual drawdown. Both Sharpe and Sterling ratio methods compare returns with variability of returns, as opposed to risk of loss of original investment.
Literally means random.
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.
Stock Index Futures
A futures contract traded that uses a market index as the underlying instrument. Typically, the value of the contract is $500 times the underlying index. The delivery mechanism is usually cash settlement.
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 .
The risk management technique in which the trade is liquidated to halt any further decline in value.
After a trend, the market will enter into a trading range and have a tendency to trade to levels where stop-loss orders have been placed.
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.
The purchase or sale of an equivalent number of puts and calls on an underlying stock with the same exer cise price and expiration date.
A balance point between a set of conflicting forces.
The purchase or sale of an equivalent number of puts and calls on an underlying stock with the same expira tion date but a different exercise price. Usually, the put has a low strike price and the call has a higher strike price.
Stock ownership in which shares are registered to a brokerage or other financial institution and held.
The price per unit at which the holder of an option may receive or deliver the underlying unit; also known as the exercise price .
An option strategy in which an investor buys one call and two puts on the same underlying security with the same exercise price and expiration date.
The price at which an exercised option delivers the underlying securities.
The pseudonym for Irish chemist W.S. Gosset, who published "The Probable Error at a Mean" under that name in 1908.
Sum of Squared Residuals (SSR)
Measure related to the R-squared value and the smaller the number, the higher will be the R-squared, and the better the regression.
NYSE execution technology.
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.
On a chart, a line drawn indicating the price level at which falling prices have stopped falling and have moved sideways or reversed direction.
The sale of one security to purchase another with similar features.
A chart that has a straight line drawn from each price extreme to the next price extreme based on a set criteria such as percentages or number of days. For example, percentage price changes of less than 5% will not be measured in the swing chart.
The measurement of movement of the price of a tradable between extreme highs and lows.
Synergistic Market Analysis
Also known as synergistic analysis . An analytical method that merges technical and fundamental analysis with an emphasis on intermarket analysis.
Security created by buying and writing a combination of options that imitate the risk and profit profile of a security.
The probability distribution used to test the hypothesis that a random sample of n observations comes from a normal population with a given mean.
A statistical test of significance for a distribution that changes its shape as N gets smaller; based on a variable t equal to the difference between the mean of the sample and the mean of the population divided by a result obtained by dividing the standard deviation of the sample by the square root of the number of individuals in the sample.
Cash equivalents of the futures contracts.
In which an investment allows an investor to postpone paying taxes on money put into the investment until the investor literally takes possession of the money invested.
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.
A variation of the Diffusion Equation that describes minor differences in the drunkard’s walk, in which the random decision controls the change in direction rather than the direction itself.
Also known as yield curve. The slope of the term structure is the yield on long-term government bonds minus the yield on short-term instruments such as Treasury bills.
The measurement of the time decay of a position.
A comparison between the price difference of successively lower pivot bottoms or higher pivot tops. For example, a reduction in the difference between pivot bottoms shows loss of momentum; an increase in the difference shows increased momentum.
The minimum fluctuation of a tradable. For example, bonds trade in 32nds, while most stocks trade in eighths.
The number of stocks whose last trade was an uptick or a downtick.
Variation of a time series is accounted for by an autocorrelation function and other time series.
A collection of observations made sequentially in time and indexed by time.
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.
Time-Price Opportunity; a price that occurs during designated half-hour periods of trading; a price-time relationship developed for the Chicago Board of Trade’s Market Profile and Liquidity Data Bank reports.
Lines plotted in and around the price structure to form an envelope, answering whether prices are high or low on a relative basis and forewarning whether to buy or sell by using indicators to confirm price action.
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.
A stop-loss order that follows the prevailing price trend.
Financial institution that manages ownership records of company stock.
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.
Refers to the shape of the wave coming out of a filter in comparison to the shape going into it.
A process to change or convert. For example, a simple moving average is a filter to reduce noise; the moving average is the transform function.
The general drift, tendency or bent of a set of statistical data as related to time.
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 trendline and the reaction trendline defined by price moves against the prevailing trend.
A day in which the price of a futures contract moves consistently away from the opening range and does not return to the opening range prior to the close.
Moving in the direction of the prevailing price movement.
Price moves in a single direction, generally closing at an extreme for the day.
Price movement that vacillates to the degree that a clear trend cannot be identified.
A line drawn that connects either a series of highs or lows in a trend. The trendline can represent either support as in an uptrend line or resistance as in a downtrend line. Consolidations are marked by horizontal trendlines.
A pattern that exhibits a series of narrower price fluctuations over time; top and bottom boundaries need not be of equal length.
Triangular Moving Average
A moving average in which each day’s data are multiplied by a weight that increases in value at steady increments to a peak value and then declines to zero at equivalent increments. The sum of the weighted daily data is divided by the number of variables.
See Arms Index Trix-The one-period difference of the triple exponential smoothing operating on the log of price.
The largest of the following: Today’s high minus today’s low, today’s high minus yesterday’s close, today’s low minus yesterday’s close.
True Strength Index
A momentum indicator developed by William Blau that double-smoothes the ratio of the market momentum to the absolute value of the market momentum.
Mtm = one-day change in closing price.
|Mtm| = absolute value of Mtm.
Er = exponential smoothed moving average of r days.
Es = exponential smoothed moving average of s days.
A sector that is the intense focus of speculators at the moment.
The approximate time at which there is a change in trend.
Tweezers Bottoms and Tops
Candlestick formations. Both candles must have identical highs and lows. Significant when found at contract highs or lows, and can indicate a breakout.
The buy or sale of an option without a position in the underlying futures contract; also known as a naked option.
A trading instrument subject to purchase upon exercise.
In options, a stock subject to purchase upon exercise of the option.
Uniform Gifts to Minors Acts
A law that allows minors to own property without the use of a trust.
Involving only one variable.
Occurs when price moves above a pivot top and a widespread reversal ensues as follows:
two previous closes are reversed,
close is below pivot top,
close is below opening and mid-range,
daily price range is greater than the previous day’s range.
The price range on the CBOT Market Profile in which approximately 70% of the day’s trades occur.
Value at Risk (VaR)
A measure of exposure within a given portfolio, which attempts to estimate how much the portfolio would be expected to lose, given the recent behavior of the securities contained therein.
In which the average is taken of a series of values.
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.
Variable-Length Moving Average
A moving average where the number of periods selected for smoothing is based on a volatility measurement of price. Typically, the standard deviation of price is used to measure price volatility. The more volatile the price is, the shorter the number of periods used is for smoothing.
The amount by which the price of an option changes when the volatility changes.
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.
The rights that an employee gains for working at a firm for a specific length of time.
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.
The shares that are traded for a given market or tradable within a specified time period.
Volume Price Trend (VPT)
In which a running sum is maintained when a day’s total volume is added if the market closes positive or the day’s total volume is subtracted if the market closes lower. See On-balance volume.
A double-bottom formation.
A company-issued certificate that represents an option to buy stock shares at a given time.
A term depicting how an option’s value decreases over time; as each day after acquisition passes a portion of the option’s time value is lost or wasted.
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.
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.
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.
Alternating buy and sell signals that result in losses.
Losing money on both sides of a price swing.
Characters in a quote symbol or Dos file name that indicates an undefined, but categorized, value.
Overbought and oversold indicator that is used to determine market entry and exit points.
Set period of time such as a lookback period for market indicator in question.
A preprogrammed step-by-step procedure to aid the user in accomplishing a specific task.
When a small amount of data is available for testing, the chi-square formula is adjusted to account for the small sample base.
Zero-Coupon Government Bonds
Government bonds that are purchased at a deep discount and pay no cash dividend, unlike regular bonds.
The percentage change in an options price per 1% change in implied volatility.
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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