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Glossary of terms used in Trading and Technical Analysis.

Advance Decline Line A widely used indicator to measure the breadth of a stock market advance or decline by tracking the net difference between advancing issues (stocks with rising prices) and declining issues. When the AD line is compared with the prices, a divergence between the two may be an early sign of a possible trend reversal.

Arbitrage The simultaneous buying and selling of two different but closely related securities to take advantage of price discrepancies. These discrepancies often occur in different geographic locations.

Ask Price Also known as the offer, the price or prices at which sellers have listed their stocks to sell.

At the Money In Options, when the strike price of the option is equal to the current price of the underlying stock.

Basis Point In Bonds and Notes, a measure of yield. One basis point equals 0.01 (1/100th) percent of yield.

Beta Measures the volatility of an investment compared to the overall market. Instruments with a beta of one move in line with the market. A beta value below one means the instrument is less affected by market moves and a value above one means the instrument is more volatile than the overall market.

Bear Market A period in which prices are generally declining. There are varying requirements of time and or price decline to determine when a price correction becomes a bear market.

Bid Price The price or prices at which Buyers are willing to pay and show this by listing their Buy orders.

Bond A bond is a debt instrument in which the issuer promises to pay to the bondholder principal and interest according to the terms and conditions of the bond.

Bull Market A period in which prices are generally rising over an extended period of time.

Call In Options, an Option that gives the buyer the right, but not the obligation, to buy the underlying at a specified price within a specified time. The Call seller is obligated to sell the underlying when the buyer exercises his or her right.

Call Date When a bond is issued, the issuer may have the option to call (redeem) the bond on specified dates and prices prior to maturity. The list of dates on which a specified bond can be called is shown in a Call Schedule.

Callable If a bond can be called (redeemed) prior to maturity, the bond is said to be callable. If a bond can not be called prior to maturity, it is said to be non-callable.

Carrying Costs The costs associated with holding an investment that include interest, dividends, and the opprtunity costs associated, eg: what else you could have done with the money.

Closing Price The last sale price for a trading session. Sometimes can be the Official price determined from a range of prices deemed to have traded at or on the close.

Coupon A coupon is the stated interest rate for a bond. Most bonds have a fixed coupon that does not change during the life of the bond. Most bonds have two coupon payments per year. For example, a bond with a face value of $1,000 and a 5.0% coupon will pay $25 twice per year, for total interest of $50.

Current Yield In Bonds, Current yield is the rate of return an investor will get, without taking into account the value of the premium or discount of the purchase price. It is calculated by dividing the coupon by the price. The current yield is not a good indication of your return on investment. Yield to maturity and yield to call take into account the value of the discount or premium paid for the bond, and as such they offer a much better indication of the value of the bond.

Cusip CUSIP historically refers to the Committee on Uniform Security Identification Procedures. This 9-character alphanumeric code identifies any North American security for the purposes of facilitating clearing and settlement of trades.

Day Trader A trader who takes short term positions and who exits the market of all positions by the close of trading for the session, and therefore does not carry the risk of adverse price movement while the market is closed.

Delta The ratio in movement of an Option price for every point move in the underlying. For example, an option price that moves half a point for every point move in the underlying price is said to have a Delta of 0.5.

Divergence When new highs (or lows) of an indicator are not realized in price or against another comparable indicator.

Ex-Dividend The day on which the dividend of a stock is no longer payable on stock purchased. Usually the stock price reduces by the amount of the dividend.

Flag A chart pattern formed during price congestion after a trending move. It is expected price will eventually continue in the direction of the prior trend.

Front Month The first expiration month in a series of months.

Gamma The change in Delta relative to a change in the underlying market. Unlike Delta, which is highest for deep in the money options, gamma is highest for at the money options and lowest for deep in the money AND out of the money options.

Gap On a price chart, when the price bars do not overlap because the lowest price for one period is higher than the highest price for the prior period (or vice versa).

Geberal Obligation Bonds The interest and principal payments for a municipal bond are typically either guaranteed by the issuer or by the revenue from a specific project. If they are guaranteed by a specific project, the bondholder is relying on revenue from the project to pay principal and interest, and the bonds are known as revenue bonds. If the issuer guarantees the repayment of principal and interest, the bonds are known as a general obligation of the issuer.

Greeks A set of ratios used in Option pricing. See Delta, Gamma, Rho, Theta and Vega.

Hedge To take a counterbalancing market position to one already held. For the purpose of reducing risk.

High Yield Bonds Also known as Junk Bonds. High Yield Bonds are typically corporate bonds that are rated below investment grade by the major rating services. These bonds pay much higher interest than investment grade bonds, but there is usually a substantial risk of default.

In the Money In Options, when the current price of the underlying is above the strike price.

Inside Day A day in which the range of prices is totally within the price range of the prior day.

Junk Bonds Also called High Yield Bonds. These Bonds are typically corporate bonds that are rated below investment grade by the major rating services. These bonds pay much higher interest than investment grade bonds, but there is usually a substantial risk of default.

Leverage The increase in buying power associated with borrowing money when buying an instrument. For example, if you borrow $100 from your broker at the same time as you puchase $200 worth of stock, you are only using $100 of your money, but you now CONTROL the change in value of $200 worth of the stock. This means you would recieve double the increase in value compared to purchasing without borrowing from the broker, however, if there is a loss in value, you would also suffer double the loss of the same investment without any leverage.

Limit move A change in price which equalls the limits set by an exchange for the security traded.

Limit Order An order to buy up to a maximum price, or sell to some minimum price.

MACD Is an abbreviation of Moving Average Convergence/Divergence. It is a trend following momentum indicator that shows the relationship between a 12 and 26 bar exponential moving average of price and has a second line (or signal) applied usually a 9 bar exponential moving average of the MACD. The MACD was developed by Gerald Appel, publisher of Systems and Forecasts.

Margin The minimum amount of capital required to buy or sell a market product. Some margin requirements are set by government, while others are set by exchanges and individual brokers. For stocks, the unpaid amount is considered a loan and interest is usually charged. For a commodity, margin is treated as a good faith payment, and the broker does not lend the difference so interest is not incurred.

Market Order An order to buy or sell immediately at the best price offered or bid at the exchange.

Moving Average The average price of an instrument over a user defined number of periods. There are several differnt calculations used for the average calculation. A simple average is the sum of n price periods divided by n. Other averages include (but are not limited to) Exponential, Weighted, Variable, Time series and Volume adjusted.

Option The right, but not the obligation to buy or sell at a fixed price up to a specified time. The Option seller is paid a nonrefundable premium by the buyer.

Oscillator A form of chart indicator that measures momentum or rate of change of price. Usually varies in value above and below a center line, or between 0 and 100%.

Out of the Money In Options, when the current price of the underlying is below the strike price.

Premium The price paid for an Option.

 

Program trading Trades based on signals from various computer programs usually placed directly by the computer to the exchange. Often blamed as the cause for sudden volatility in prices.

Put In Options, an Option that gives the buyer the right, but not the obligation, to sell the underlying at a specified price within a specified time. The put seller is obligated to sell the underlying when the buyer ‘Exercises’.

Redemption When the principal of the bond is paid off, the bond is said to be redeemed. Bonds can be redeemed at maturity, or on a call date or put date.

Resistance A price level at which the previous direction of price movement is stopped at least briefly. Often caused by an overhang of supply at that level after previous price action.

Rho The change in option price relative to the change in the interest rate.

Round trip the completion of a trade entry and trade exit.

RSI The Relative Strength Index is an Oscillator indicator first introduced by Welles Wilder in June 1978. The comparison of strength is to the strength n bars ago, where n is a value set by the user. The most common value of n is 14 and the value oscillates between +100 and -100.

Short interest The number of shares (or contracts) that have been sold short, but not yet repurchased.

Short sale A trade entry where a stock or commodity is sold first with the plan to purchase it back some time in the furture, hopefully at a better price. For stocks, shares need to be borrowed from a broker to be sold short. In Futures, margin is used from the traders account balance. The term arose due to the fact a trader is Short the number of shares required to balance their account.

Stop An order placed to buy if the stop price is above the current market, or sell if it is below the current market. As soon as the market price trades at the stop price, the stop order immediately becomes a market order. A stop order can be used to enter or exit the market. One common use of a stop order is to place it together with an entry order (on condition the entry order is activated) as a protection against the market moving against the new position.

STRIPS A Zero Coupon Treasury Security which stands for Separate Trading of Registered Interest and Principal of Securities. (See Zero Coupon Bond).

Theta The rate at which an option loses value each day (rate of time decay). Theta is relatively larger for out of the money than in the money options, and increases as the option gets closer to its expiration date.

Trend The tendency for price to continue in the same direction for a period of time even though there may be short term movement in the opposite direction.

Trendline A straight line drawn on a price chart connecting the lower price extremes for an uptrend, and the upper price extremes in a downtrend. There are differing opinions among technical analysts over how many pionts are required for the line to touch to form a valid trendline, or even if a trend line can overlap a price bar by a small amount.

Underlying In Options and Futures, the security or commodity on which the Option or Future is based.

Vega How much an Option’s price changes per every one percent change in volatility.

Volatility The measure of a stock's tendancy to change in price. Stocks with a greater amount of movement in a given time are said to be more volatile.

Volume The number of shares (in stocks) or contracts (in options and futures) traded in a specified time period.

Zero Coupon Bond Zero Coupon Bonds are bonds that do not pay interest during the life of the bond. They are bought at a discount to the maturity value. For example, you might pay $700 today to get back $1,000 in 5 years. The difference between what you pay now and what you receive in the future is your return.


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