Glossary of technical terms and topics

---

( A-C )( D-F )( G-J )( K-M )( N-S )( T-Z )

Naked Put

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

Narrow Range Day

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

Near-Month Contract/Far-Month Contract

Contract whose expiration is near/far.

Near-the-Money

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

Neckline

A 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).

Negative Divergence

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

Net Asset Value

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

Neural Network

An artificial intelligence program that is capable of learning through a training process of trial and error.

No-Load

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

Noise

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

Noisy Signal

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.

Nonlinear Statistics

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.

Non-Seasonal Autocorrelation

Autocorrelation that shows up other than at 12-month lag intervals.

Non-Trend Day

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

Normal Distribution

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

Normalized

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

Notice Day

The day that a notice of intent to deliver is issued to a futures contract holder.

Null Hypothesis

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.

Observer

A concept used in radar research, applicable to trading, in how often and what manner detection or radar contact is achieved.

OBV

See On-Balance Volume.

Odd Lot

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

On-Balance Volume

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.

One-Tailed T-Test

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.

Open Trades

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

Opening Call

A period at the opening of a futures market in which the price for each contract is established by outcry.

Opening Range

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

Opportunity Costs

Income foregone by the commitment of resources to another use.

Order

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

Oscillator

Technical indicator used to identify overbought and oversold price regions. An indicator that detrends data, such as price.

Out-of-Sample

An item within the range of a sample that does not conform to the mean of the sample.

Out-of-the-Money

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

Outdata

The result (singular) stemming from a statistical test.

Outlier

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.

Overbought

Market prices that have risen too steeply and too fast.

Overfitting

The parameters of a trading system are selected to return the highest profit over the historical data.

Overfitting

A model developed with rules tailored to fit the historical data precisely.

Oversold

Market prices that have declined too steeply and too fast.

Overbought/Oversold Indicator

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

Par

The full principal amount of an investment instrument.

Parabolic

Of, having the form of or relating to a parabola.

Parameter

A variable, set of data, or rule that establishes a precise format for a model.

Pareto's Law

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

PASCAL

Block-structured programming language developed originally as an aid to instruction, now widely used for applications development.

Percentile

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

Perceptron

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

Phase Delay

The time lag that a filter falls behind the pre-filtered data.

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.

Premium

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

Preprocessing

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.

Prewhitening

Removing the bulk of first, second and possibly third order autocorrelations using non-linear regres sion.

Price/Earnings Ratio

Stock price divided by annual earnings per share.

Price to Sales Ratio

The price of a stock divided by sales-per-share of the company in the most recent fiscal year.

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.

Program Trading

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

Put Option

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

Pyramid

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.

Quick Ratio

Indicates a company's financial strength; a company's cash and equivalent divided by current liabili ties.

Quotron

A proprietary financial data service.

R-squared

The percentage of variation in the dependent variable that is explained by the regression equation. A relative measure of fit.

Rally Tops

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

Random Shock

The unexplained component of an equation that models a time series (e forecast errors).

Random Walk

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.

Range

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

Range Extension

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.

Ratio

The relation that one quantity bears to another of the same kind, with respect to magnitude or numerical value.

Reaction

A short-term decline in price.

RBAR-squared

The R-squared value adjusted for the number of degrees of freedom.

Recursive

A process that is repetitive and usually dependent upon the results of the previous repetition.

Regression (simple)

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

Relative Strength

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

Relative Strength Index

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

Residual Value

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

Resistance

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

Response

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

Retracement

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

Return on Assets

(%ROA) The net earnings of a company divided by its assets.

Return on Equity

(%ROE) the net earnings of a company divided by its equity.

Reward-Risk Ratio

Monthly excess return to risk comparison, calculated by dividing alpha by standard deviation. (A ratio better than 0.4 is excellent.)

Reward-Risk Rank

Stocks ranked in descending order by reward-risk ratio.

Reversal Gap

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

Reversal Stop

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

Rich

Price higher than expected.

Risk (Implied)

In which the formula produces the percentage overbought/oversold for a contract using the price, a moving average and the option's implied volatility.

Roll

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

Root Mean Square Percentage Error

(Rmspe) Square root of the average sum of squared errors experessed as a percentage.

Rotation

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

Running Market

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

Running Total

Each day's value is added to yesterday's total or subtracted if the value is negative.

Saucer Base

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.

Scalp

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.

Schwarz-a-tron

A dedicated computer system for options calculations and simulations.

Seasonal Autocorrelation

Autocorrelation that shows up at 12-, 24-, 36- and 48-month lag intervals or at four, eight, 12 and 16 quarterly lags.

Seasonal Trend

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

Seasonality

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

Sector Fund

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

Secular Trend

Pertaining to a long indefinite period of time.

Seed

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.

Self-Affine Transformation

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 Short

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

Semilog

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.

Sensitivity

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.

Serial Correlation

The systematic relationship between successive observation of a time series.

Serially Independent

A number that is unrelated to the previous number in a given series in any way.

Settlement

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

Shapiro-Wilkes Test

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.

Shaved Candlestick

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.

Short Interest

Shares that have been sold short but not yet repurchased.

Short Interest Ratio

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

Signal

In the context of stock or commodity time series historical data, this is usually daily or weekly prices.

Signal Line

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.

Significance

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.

Simple Regression

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

Sinewave

A wave whose amplitude varies as the sine of a linear function of time.

Skew

A descriptive measure of lopsidedness in a distribution.

Slippage

The difference between estimated transaction costs and actual transaction costs.

SMASee

Simple Moving Average.

Smoothing

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

Specialist

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.

Specify

To set the parameters and variables of a given model.

Spectrum

The frequency decomposition of time series data. This is used to detect periodic fluctuations or cycles in historical price data.

Spike

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

Spline

The linear interpolation between two adjacent points on a curve.

Spot Month

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

Spot Prices

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

Spread

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

Spread Rolls

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

Spring

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.

Spring

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.

Stair-stepping

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

Standard Deviation

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

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.

Stationarity

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.

Step Function

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.

Stochastic

Literally means random.

Stochastics Oscillator

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

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.

Stops

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

Stop and Reverse (SAR)

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

Stop Loss

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

Straddle

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.

Strange Attractor

A balance point between a set of conflicting forces.

Strangle

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.

Strike Price

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

Strips

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.

Struck

The price at which an exercised option delivers the underlying securities.

Student

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.

Support

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

Swaps

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

Swing Chart

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.

Swings

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.

Synthetic Securities

Security created by buying and writing a combination of options that imitate the risk and profit profile of a security.