General Market/Investing Terms | Technical Analysis Terms
A coefficient measuring a security's price volatility caused by factors other than the stock market in its entirety. Alpha calculates the amount of return expected from an investment's intrinsic value, such as the rate of growth in earnings per share. For instance, an alpha of 1.35 infers that a security is projected to increase 35% in price when the security's "beta" is zero. A security, whose price is low in relation to its alpha, is considered undervalued.
- Bear Market
- 20% or more drop lasting about a year or longer.
- A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
A beta less than 1 means that the security will be less volatile than the market. A beta greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market. Many utilities stocks have a beta of less than 1. Conversely, most hi-tech Nasdaq-based stocks have a beta greater than 1. See also Standard Deviation.
- 8-10% or more drop in price over a short period (a few weeks to a few months)
- Stocks which go through cycles of ups and downs. Cyclical stocks typically flourish in good economic times and suffer during downturns. Examples are: Airlines, Apparel, Appliance, Tool, Audio & Video, Auto, Footwear, Furniture & Fixtures, Jewelry, Photography, Recreational Products, Tires
- A financial instrument derriving its valuse form an underlying asset such as a stock, bond, commodity or currency.
Options, Futures, and Swaps are examples. These instruments are often used to hedge risk.
- Exchange Traded Funds - A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange, thus experiencing price changes throughout the day as it is bought and sold. Introduced in 1993
Examples are: (SPY - S&P Dep Receipts or SPDR, which tracks the S&P 500, QQQQ which tracks the Nasdaq, etc) or sector funds (e.g. Biotech HOLDR (BBH), Vanguard Emerging Markets VIPERs ETF (VWO) ...)
- Fair Value
- The price of an asset or service as determined by the buyer and seller of the asset or service, where both parties have sufficient information to make a rational decision.
The theoretical value of what an option should be worth usually generated by an option pricing model such as the Black-Scholes option pricing model.
Fair value reported on some Investing news programs such as CNBC report it as: "S&P futures vs fair value is plus 10". This means futures contract needs to be 10 points above the cash index's close the previous day to be at its fair value relationship to cash.
FV = S [1 + (I - D)]
Where S = Index value, I = Interest you pay to borrow money, D = Dividends paid to you from the companies in the index.
- Floor Trader
- A member of an exchange who trades on the floor of the exchange for his own account.
- When an opening price is above the previous day's high or below the previious day's low.
- Index Fund
- A mutual fund that buys securities to match that of a broad-based index such as the Standard & Poor's Index. Introduced in 1975. The fund aims to achieve the same return as the general market. Some people consider ETF's as a type of Index fund but there are some differences. See Mutual Funds.
Examples for the S&P 500 are Vanguard's VFINX, Fidelities FSMKX and T. Rowe Prices PREIX.
- Load Fund
- A mutual fund with shares sold at a price including a sales charge (from 2-6%).
Back-End Load is a fee that an investor pays when selling a mutual fund within a certain number of years - usually seven.
- Moving Average Convergence/Divergence (MACD)
- The standard MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.
The shorcut for this version is 12,26,9 MACD. (Sometimes indicated as 9,26,12)
See MACD in Technical Analysis
- Market Maker
- Securities dealer in a specific over-the-counter stock who makes a market--that is, one who maintains firm bid and asked prices in a given security by standing ready to buy or sell round lots.
- PIP - Price Interest Point
- The smallest price increment a currency can make.
- Traditionally defined as two consecutaive quarters of negative GDP growth. It actually is more complicated and includes things like: real income, employment, industrial production and wholesale-retail sales."
See Macro Economics.
- Relative Strength Index (RSI)
- The calculation for RSI is 100-(100/ 1+(U/D)) where U=avg upward price change and D=avg downward price change.
RSI is a oscillator that ranges between 0 and 100.
n RSI reading over 70 indicates an overbought situation, below 30 is an oversold situation.
A period of 14 days is typical for traders and 21-50 days for investors.
- A celing on increases which a stock price or index may have difficulty pushing through.
- SAR - Stop and Reverse
- An indicator to predict trend reversals.
- Sharpe Ratio
- A ratio of return to volatility; useful in comparing two portfolios in terms of risk-adjusted return. This ratio was developed by Nobel Laureate William Sharpe. The higher the Sharpe Ratio, the better - a high Sharpe ratio implies the portfolio or stock is achieving good returns for each unit of risk. Because we earn returns by accepting risk, it is great when we get more return for less risk. The Sharpe Ratio or the Risk-Adjusted Return score allows us to compare different assets or different portfolios. It is calculated by first subtracting the risk free rate from the return of the portfolio, and then dividing by the standard deviation of the portfolio. For more, see our tutorial on Risk-Adjusted Returns.
- A member of an exchange who is responsible for maintaining a fair and orderly market in those securities for which he is registered. The specialist accomplishes this by buying and selling for his own account to reduce any temporary disparities between supply and demand, to the extent possible. The specialist may also act as a broker's broker by executing orders for other members in return for a share of the commission.
- SMA - Simple Moving Average
- A bottom price (e.g. a previous low) where the market stops dropping.
Technical Analysis Terms
- Average Directional Index (ADX)
- ATR - Average Trading range
- Introduced by Welles Wilder in "New Concepts in Technical Trading Systems"
True Range is defined as the largest difference of:
-current high minus the current low.
-the absolute value of the current high minus the previous close.
-the absolute value of the current low minus the previous close.
Average True Range (ATR) is a moving average of true range calculated over a series of days, usually 15.
A multiple of ATR is frequently used for setting stop loss levels by setting the price at some multiple of ATR below the current price. e.g. a 4 ATR (4 X ATR) is used for long term trading and a 2 ATR for short-term trading.
- Bollinger Bands
- Similar to moving average envelopes, Bollinger Bands are placed two standard deviations above and below the moving average, normally a 20 day average. Standard deviation is measure of the dispersion of a set of data from its mean, in this case the moving average.
Using two standard deviation ensures that the price will remain within the bands 95% of the time.
Prices touching the upper band signals overbought market conditions, prices touching the lower band signals oversold conditions.
- Elliot waves
- EMA - Exponential Moving Average or Exponentially weighted moving average (EWMA)
- A type of moving average that is similar to a simple moving average, except that more weight is given to the latest data. Also known as "exponentially weighted moving average".
Investopedia Says... This type of moving average reacts faster to recent price changes than a simple moving average. The 12- and 26-day EMAs are the most popular short-term averages, and they are used to create indicators like the moving average convergence divergence (MACD) and the percentage price oscillator (PPO). In general, the 50- and 200-day EMAs are used as signals of long-term trends.
Exponential Moving Averages can be specified in two ways - as a percent-based EMA or as a period-based EMA. A percent-based EMA has a percentage as it's single parameter while a period-based EMA has a parameter that represents the duration of the EMA.
The formula for an exponential moving average is:
EMA(current) = ( (Price(current) - EMA(prev) ) x Multiplier) + EMA(prev)
= P x Multiplier + EMA(prev) x (1 - Multiplier)
For a percentage-based EMA, "Multiplier" is equal to the EMA's specified percentage. For a period-based EMA, "Multiplier" is equal to 2 / (1 + N) where N is the specified number of periods.
For example, a 10-period EMA's Multiplier is calculated like this:
(2 / (Time periods + 1) ) = (2 / (10 + 1) ) = 0.1818 (18.18%)
This means that a 10-period EMA is equivalent to an 18.18% EMA.
A Primer on Moving Averages
Macro Economics for Financial terms (GDP, CPI, ...)
See Investment Glossaries at: investopedia.com/terms/, Yahoo! Finance, FXTrade,
Glossary of Financial Market Technical Indicators at TradersLog.com
CEO --Chief Embezzlement Officer
CFO-- Corporate Fraud Officer.
BULL MARKET -- A random market movement causing an investor to mistake
himself for a financial genius.
BEAR MARKET -- A 6 to 18 month period when the kids get no allowance, the
wife gets no jewelry, and the husband gets no sex.
VALUE INVESTING -- The art of buying low and selling lower.
P/E RATIO -- The percentage of investors wetting their pants as the market
BROKER -- What my broker has made me.
STANDARD & POOR -- Your life in a nutshell.
STOCK ANALYST -- Idiot who just downgraded your stock.
STOCK SPLIT -- When your ex-wife and her lawyer split your assets equally
FINANCIAL PLANNER -- A guy whose phone has been disconnected.
MARKET CORRECTION -- The day after you buy stocks.
CASH FLOW-- The movement your money makes as it disappears down the toilet.
YAHOO -- What you yell after selling it to some poor sucker for $240 per
WINDOWS -- What you jump out of when you're the sucker who bought Yahoo @
$240 per share.
INSTITUTIONAL INVESTOR -- Past year investor who's now locked up in a
PROFIT -- An archaic word, no longer used.
GLossary - InvestorWords.com
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last updated 22 Mar 2008