Glossary of financial transaction terms

The reasonably accomplished chart analyst can recognize the state of the market and view the performance of number-driven indicators from a more informed perspective. Thus, the reader should keep this in mind while reading about the Average Directional Movement Index and suchlike.

 

  • ACCUMULATION—The first phase of a Bull Market. The period when farsighted investors begin to buy shares from discouraged or distressed sellers. Financial reports are usually at their worst and the public is completely disgusted with the stock market. Volume is only moderate but beginning to increase on the rallies.
  • ACTIVITY—See Volume.
  • ADX (Average Directional Movement Index)—The ADX is a trend-following indicator devised by Welles Wilder (Wilder Relative Strength Index) and is based on the concept of directional movement. It is designed to evaluate the trending characteristics of a security. The ADX is frequently used to avoid trendless markets, and signals when a trend reaches a profitable trading level. In a trendless market, the ADX indicates avoidance.

Directional movement is a measure of the net total price movement during a set period of time. First, the positive and negative directional movements are determined by summing the daily up and down moves. The values obtained are next normalized by dividing them by the “True Range,” the absolute value of the total move for the period; this difference between normalized values (expressed as a percentage) is the directional movement.

  • The ADX is then obtained from directional movement by the use of exponential average and ratios. The ADX is often charted with a second line, the ADXR Indicator. ADXR is a smoothed average of the ADX.
  • A rising ADX indicates significant directional movement and the beginning of a good trading period. The declining ADX is shown during a poor period for trend following. Normally, an ADX Indicator above 25 signals significant directional movement and good trading.
  • APEX—The highest point; the pointed end, tip, of a Triangle.
  • ARBITRAGE—The simultaneous buying and selling of two different, but closely related, instruments to take advantage of a disparity in their prices in one market or different markets.
  • EN: Those who buy the acquirer and sell the acquired in takeover situations—sometimes called “arbs” or arbitrageurs—are ersatz or faux arbitrageurs; they are really spreaders. Arbitrageur is a solecism used in that sense. It is also a false cognate to the French.
  • AREA GAP—See Common Gap.
  • AREA PATTERN—When a stock or commodity’s upward or downward momentum has been temporarily exhausted, the ensuing sideways movement in the price usually traces out a design or arrangement of form called an Area Pattern. The shape of some of these Area Patterns, or Formations, has predictive value under certain conditions. (See also  Ascending Triangle, Broadening Formations, Descending Triangle, Diamond, Flag, Head- and-Shoulders Pattern, Inverted Triangle, Pennant, Rectangle, Right-Angle Triangles, Symmetrical Triangles, and Wedges.)
  • ARITHMETIC SCALE—Price or volume scale where the distance on the vertical axis (i.e., space between horizontal lines) represents equal amounts of dollars or number of shares.
  • ASCENDING (PARALLEL) TREND CHANNEL—When the tops of the rallies composing an advance develop along a line (sometimes called a Return Line), which is also parallel to the basic Up Trendline (i.e., the line that slopes up across the wave bottoms in an advance); the area between the two lines is called an Ascending or Up Channel.
  • ASCENDING (UP) TRENDLINE—The advancing wave in a stock or commodity is composed of a series of ripples. When the bottoms of these ripples form on, or very close to, an upward-slanting straight line, a basic Ascending or Up Trendline is formed.
  • ASCENDING TRIANGLE—One of a class of Area Patterns called Right-Angle Triangles. The class is distinguished by the fact that one of the two boundary lines is practically horizontal, whereas the other slants toward it. If the top line is horizontal and the lower slants upward  to  an intersection point  to  the right,  the resulting Area Pattern is called Ascending Triangle. The implication is Bullish, with the expectant breakout through the horizontal line. Measuring Formula: add the broadest part of triangle to the breakout point.
  • AT-THE-MONEY—An option, the strike price of which is equal to the market price of the underlying instrument.
  • AVERAGES—See Dow–Jones Industrial Averages, Moving Averages, Dow–Jones Transportation Averages, and Dow–Jones Utility Averages.
  • AVERAGING COST—An investing technique in which the investor buys a stock or commodity at successively lower prices, thereby “averaging down” his average cost of each stock share or commodity contract. Purchases at successively higher prices would “average up” the price of stock shares or commodity contracts.
  • EN: A very foolish technique for the amateur.
  • AXIS—In the graphic sense, an axis is a straight line for measurement or reference. It is also the line, real or imagined, on which a formation is regarded as rotating.
  • BALANCED PROGRAM—Proportioning capital, or a certain part of capital, equally between the long side and the short side of the market.
  • BAR CHART—Also called a Line Chart. A graphic representation of prices using a vertical bar to connect the highest price in the time period to the lowest price. Opening prices  are noted with a small horizontal line to the left. Closing prices are shown with a small horizontal line to the right. Bar charts can be constructed for any time period in which prices are available. The most common time periods found in bar charts are hourly, daily, weekly, and monthly; however, with the growing number of personal computers and the availability of “real-time” quotes, it is not unusual for traders to use some period of minutes to construct a bar chart.
  • BASIC TRENDLINES—See Trendlines.
  • BASING POINT—The price level in the chart that determines where a stop-loss point is placed. As technical conditions change, the Basing Point, and stops, can be advanced (in a rising market), or lowered (in a falling market). (See Progressive Stops.)
  • BASIS POINTS—The measure of yields on bonds and notes. One Basis Point equals 0.01% of yield.
  • BASKET TRADES—Large transactions made up of a number of various stocks.
  • BEAR MARKET—In its simplest form, a Bear Market is a period when prices are primarily declining, usually for a long period of time. Bear Markets generally consist of three phases. The first phase is distribution, the second is panic, and the third is akin to a washout, during which those investors who have held through the first two phases finally give up and liquidate.
  • BENT NECKLINE—See Neckline.
  • BETA—A measurement of an individual stock’s sensitivity to market swings.
  • BETA (COEFFICIENT)—A measure of the market or non-diversifiable risk associated with any given security in the market.
  • BLOCK TRADES—Large transactions of a particular stock sold as a unit. BLOW-OFF—See Climactic Top.
  • BLUE CHIPS—The nickname given to high-priced companies with good records of earnings and price stability; also called gilt-edged securities. Examples include IBM, AT&T, General Motors, and General Electric.
  • BLUE PARALLEL—A line drawn parallel to the trendline (Blue Trendline) that connects at least two highs. The Blue Parallel is started off a low and used to estimate the next low point.
  • BLUE TRENDLINE—A straight line connecting two or more Tops together. To avoid  confusion, Edwards and Magee use a blue line for Top Trendlines and a red line for Bottom Trendlines.
  • BOLLINGER BANDS (BB)—An envelope, in the form of two lines, that surrounds the price bars on a chart. Bollinger Bands are plotted two standard deviations away from a Simple Moving Average. This is the primary difference between Bollinger Bands and other envelopes. Envelopes are plotted a fixed percentage above and below a Moving Average. As standard deviation is a measure of volatility, Bollinger Bands adjust themselves to differing market conditions. The bands grow wider during volatile market periods and narrower during less volatile periods.

Bollinger’s premise is to ask the market what it is doing, rather than to tell it what to do. He focused on volatility with the use of standard deviation to set the bandwidth. The bands are normally plotted two deviations away from the standard deviation, which is effectively a 20-day Moving Average Line. The plot is valid if an average acts as a Support Line on market corrections. If the average is penetrated on corrections, it is too short. Bollinger recommends 10-day Moving Averages for short-term trading, 20-day for intermediate-term trading, and 50-day for long-term trading. Deviations also need to be adjusted: 10 days can use 1.5 deviations, 20 days use 2 deviations, and 50 days use 2.5 deviations. The nature of the time periods does not matter; the bands can be used on monthly, weekly, daily, and even intraday figures.

Bollinger Bands do not usually generate buy and sell signals alone. Most often, they provide a framework within which price may be related to other indicators. Bollinger recommends using the bands in relation to other buy and sell signals. However, the bands can be an integral part of the signal. If a price touches an upper band and indicator action confirms it, no sell signal is generated (it is a continuation signal if a buy signal was in effect). If a price touches an upper band and an indicator does not confirm (diverges), it is a sell signal. If a Top Price Chart Formation is formed outside the bands and is followed by a second Top inside the bands, a sell signal is generated. The exact opposite is true on the buy side.

When combined with other indicators, such as the Relative Strength Index (RSI),    the Bollinger Bands become quite powerful. RSI is an excellent indicator with respect to overbought and oversold conditions. Generally, when price touches the upper Bollinger Band and RSI is below 70, it is an indication that the trend will continue. Conversely, when price touches the lower Bollinger Band, and RSI is above 30, it is an indication the trend should continue. If a situation occurs in which price touches the upper Bollinger Band and RSI is above 70 (possibly approaching 80), it is an indication that the trend may reverse itself and move downward. On the other hand, if price touches the lower Bollinger Band and RSI is below 30 (possibly approaching 20), the trend may reverse itself and move upward. (See also Multicolincarity, Percent B, Wilder Relative Strength Index.)

  • BOOK VALUE—The conventional accounting measure of what a stock is worth based on the value of the company’s assets less the company’s debt. Eminently manipulable.
  • BOTTOM—See Ascending Triangle, Dormant Bottom, Double Bottom, Head-and-Shoulders Bottom, Rounding Bottom, and Selling Climax.
  • BOUNDARY—The edges of a pattern. BOWL—See Rounding Bottom. BRACKETING—A trading range market or a price area that is non-trending.
  • BREAKAWAY GAP—The hole or gap in the chart created when a stock or commodity breaks out of an Area Pattern.
  • BREAKOUT—When a stock or commodity exits an area pattern.
  • BROADENING FORMATION—Sometimes called Inverted Triangles, these are formations that start with narrow fluctuations that widen out between diverging, rather than converging, boundary lines. (See also Broadening Top, Diamond Patterns, Head-and- Shoulders Pattern, and Right-Angled Broadening Formations.)
  • BROADENING TOP—An Area Reversal Pattern that may evolve in any one of three forms, comparable in shape, respectively, to inverted Symmetrical, Ascending, or Descending Triangles. Unlike Triangles, the Tops and Bottoms of these patterns do not necessarily stop at clearly marked diverging boundary lines. Volume tends to be unusually high and irregular throughout pattern construction. No Measuring Formula is available.
  • BULL MARKET—A period when prices are primarily rising, normally for an extended period. Usually, but not always, divisible into three phases. The first phase is accumulation. The second phase is one of fairly steady advance with increasing volume. The third phase is marked by considerable activity as the public begins to recognize and attempt to profit from the rising market.
  • CALL OPTION—An option that gives the buyer the right to buy the underlying contract at a specific price within a certain period, and that obligates the seller to sell the contract for the premium received before expiration of the designated time period.
  • CANDLESTICKS—A Japanese graphic representation of price action using the same data as bar charts, but that adds color to the candlestick (or data) to indicate the direction of prices from the opening (see Nison, Bibliography.)
  • CATS AND DOGS—Low-priced stocks of no investment value.
  • CHANNEL—If the Tops of the rallies and Bottoms of the reactions develop lines that are approximately parallel to one another, the area between these lines is called a Channel. (See also Ascending Trend Channel, Descending Trend Channel, and Horizontal Trend Channel.)
  • CHART—A graphic representation of a stock or commodity in terms of price and/or volume. (See also Bar Chart and Point and Figure Chart.)
  • CLEAN-OUT DAY—See Selling Climax.
  • CLIMACTIC TOP—A sharp advance, accompanied by extraordinary volume, that is, much larger volume than the normal increase, which signals the final “blow-off” of the trend, followed by either a Reversal, or at least by a period of stagnation, formation of Consolidation Pattern, or a Correction.
  • CLIMAX DAY—See One-Day Reversal. CLIMAX, SELLING—See Selling Climax.
  • CLOSING PRICE—The last sale price of the trading session for a stock. In a commodity, it represents an official price determined from a range of prices deemed to have traded at or on the close; also called a settlement price.
  • CLOSING THE GAP—When a stock or commodity returns to a previous gap and retraces the range of the gap. Also called covering the gap or filling the gap. (See also Gap.)
  • COIL—Another term for a Symmetrical Triangle.
  • COMMISSION—The amount charged by a brokerage house to execute a trade in a stock, option, or commodity. In a stock, option, or commodity, a commission is charged for each purchase and each sale. In a commodity, a commission is charged only when the original entry trade has been closed with an offsetting trade. This is called a round turn commission.
  • COMMON GAP—Also called Area Gap. Any hole or gap in the chart occurring within an Area Pattern. The forecasting significance of the Common Gap is nil. (See also Gap.)
  • COMPARATIVE RELATIVE STRENGTH—Compares the price movement of a stock with that of its competitors, industry group, or the whole market.
  • COMPLEX HEAD-AND-SHOULDERS—Also called Multiple Head-and-Shoulders. It is a Head-and-Shoulders Pattern with more than one right and left shoulder and/or head. (See also Head-and-Shoulders Pattern.)
  • COMPOSITE AVERAGE—A stock average composed of the 65 stocks that make up the Dow–Jones Industrial Average and the Dow–Jones Utility Average.
  • COMPOSITE LEVERAGE—In Edwards and Magee, it is a formula for combining the principal factors affecting a given sum of capital used (i.e., sensitivity, price, and margin) into one index figure.
  • CONFIRMATION—In a pattern, it is the point at which a stock or commodity exits an Area Pattern in the expected direction by an amount of price and volume sufficient to meet minimum pattern requirements for a bona fide breakout. In the Dow Theory, it means both the Industrial Average and the Transportation Average have registered new highs or lows during the same advance or decline. If only one of the Averages establishes a new high (or low) and the other one does not, it would be a non-confirmation, or Divergence. This is also true of oscillators. To confirm a new high (or low) in a stock or commodity, an oscillator needs to reach a new high (or low) as well. Failure of the oscillator to confirm a new high (or low) is called a Divergence and would be considered an early indication of a potential Reversal in direction.
  • CONGESTION—The sideways trading from which Area Patterns evolve. Not all Congestion periods produce a recognizable pattern, however.
  • CONSOLIDATION PATTERN—Also called a Continuation Pattern, it is an Area Pattern that breaks out in the direction of the previous trend. (See also Ascending Triangle, Descending Triangle, Flag, Head-and-Shoulders Continuation, Pennant, Rectangle, Scallop, and Symmetrical Triangle.)
  • CONTINUATION GAP—See Runaway Gap. CONTINUATION PATTERN—See Consolidation Pattern.
  • CONVERGENT PATTERN (TREND)—Those patterns with upper and lower boundary lines that meet, or converge, at some point if extended to the right. (See also Ascending Triangle, Descending Triangle, Symmetrical Triangle, Wedges, and Pennants.)
  • CORRECTION—A move in a commodity or stock that is opposite to the prevailing trend, but not sufficient to change that trend. Called a rally in a downtrend and a reaction in an uptrend. In the Dow Theory, a Correction is a Secondary Trend against the Primary Trend, which usually lasts from three weeks to three months and retraces from one-third to two- thirds of the preceding swing in the Primary Direction.
  • COVERING THE GAP—See Closing the Gap.
  • CRADLE—The intersection of the two converging boundary lines of a Symmetrical Triangle. (See also Apex.)
  • DAILY RANGE—The difference between the high and low price during one trading day. DEMAND—Buying interest for a stock at a given price.
  • DESCENDING (PARALLEL) TREND CHANNEL—When the Bottoms of the reactions comprising a decline develop along a line (sometimes called a Return Line), which is also parallel to the basic down trendlines (i.e., the line which slopes down across the wave tops in a decline), the area between the two lines is called a Descending or Down Channel.
  • DESCENDING TRENDLINE—The declining wave in a stock or commodity is composed of a series of ripples. When the tops of these ripples form on, or very close to, a downward slanting straight line, a basic Descending or Down Trendline is formed.
  • DESCENDING TRIANGLE—One of a class of Area Patterns called Right-Angle Triangles. The class is distinguished by the fact one of the two boundary lines is practically horizontal, while the other slants toward it. If the bottom line is horizontal and the upper slants downward to an intersection point to the right, the resulting Area Pattern is called a Descending Triangle. The implication is Bearish, with the expectant breakout through the flat (horizontal) side. Minimum Measuring Formula: add the broadest part of the Triangle to the breakout point.
  • DIAMOND—Usually a Reversal Pattern, but it will also be found as a Continuation Pattern. It could be described as a Complex Head-and-Shoulders Pattern with a V-shaped (bent) Neckline, or a Broadening Pattern that, after two or three swings, changes into a regular Triangle. The overall shape is a four-point Diamond. Since it requires a fairly active market, it is more often found at Major Tops. Many Complex Head-and-Shoulders Tops are borderline Diamond Patterns. The major difference is in the right side of the pattern. It should clearly show two converging lines with diminishing volume as in a Symmetrical Triangle. Minimum Measuring Formula: add the greatest width of the pattern to the breakout point.
  • DISTRIBUTION—The first phase of a Bear Market, which really begins in the last stage of a Bull Market. The period when farsighted investors sense that the market has outrun its fundamentals and begin to unload their holdings at an increasing pace. Trading volume is still high; however, it tends to diminish on rallies. The public is still active but beginning to show signs of caution as hoped-for profits fade away.
  • DIVERGENCE—When new highs (or lows) in one indicator are not realized in another comparable indicator. (See also Confirmation.)
  • DIVERGENT PATTERN (TREND)—Those patterns with upper and lower boundary lines that meet at some point if extended to the left. (See also Broadening Formation.)
  • DIVERSIFICATION—The concept of placing your funds in different industry groups and investment vehicles to spread risk. Not to put all your financial eggs in one basket.
  • DIVIDENDS—A share of the profits, in cash or stock equivalent, paid to stockholders.
  • DORMANT BOTTOM—A variation of a Rounding (Bowl) Bottom, but in an extended, flat- bottomed form. It usually appears in “thin” stocks (i.e., those issues with a small number of shares outstanding) and characteristically will show lengthy periods during which no sales will be registered for days at a time. The chart will appear “fly-specked” due to the missing days. The technical implication is for an upside breakout.
  • DOUBLE BOTTOM—Reversal Pattern. A Bottom formed on relatively high volume that is followed by a rally (of at least 15%), and then a second Bottom (possibly rounded) at the same level (plus or minus 3%) as the first Bottom on lower volume. A rally back though the apex of the intervening rally confirms the Reversal. More than a month should separate the two Bottoms. Minimum Measuring Formula: take the distance from the lowest bottom to the apex of the intervening rally and add it to the apex.
  • DOUBLE TOP—A high-volume Top is formed, followed by a reaction (of at least 15%) on diminishing activity. Another rally back to the previous high (plus or minus 3%) is made, but on lower volume than the first high. A decline through the low of the reaction confirms the Reversal. The two highs should be more than a month apart. Minimum Measuring Formula: add to the breakout point the distance from the highest peak to the low of the reaction. Also called an “M” Formation.
  • DOUBLE TRENDLINE—When two relatively close Parallel Trendlines are needed to define the true trend pattern. (See also Trendline.)
  • DOW–JONES INDUSTRIAL AVERAGE—Developed by Charles Dow in 1885 to study market trends. Originally composed of 14 companies (12 railroads and 2 industrials), the Rails, by 1897, were separated into their own Average, and 12 industrial companies of the day were selected for the Industrial Average. The number was increased to 20 in 1916 and to 30 in 1928. The stocks included in this Average have  been changed from time to time  to keep the list up to date or to accommodate a merger. The only original issue still in the Average is General Electric.
  • DOW–JONES TRANSPORTATION AVERAGE—Established at the turn of the century with the new Industrial Average, it was originally called the Rail Average and was composed of 20 railroad companies. With the advent of the airlines industry, the Average was updated in 1970 and the name changed to Transportation Average.
  • DOW–JONES UTILITY AVERAGE—In 1929, utility companies were dropped from the Industrial Average and a new Utility Average of 20 companies was created. In 1938, the number of issues was reduced to the present 15.
  • DOWNTICK—A securities transaction at a price lower than the preceding transaction. DOWNTREND—See Descending Trendline and Trend.
  • DRAWDOWN or RETRACEMENT—The ebb, or loss, of a portfolio’s equity from a relative high to a relative low. Maximum drawdown equals retracement from maximum high point to minimum low point.
  • END RUN—When a breakout of a Symmetrical Triangle Pattern reverses its direction and trades back through axis Support (if an upside breakout) or Resistance (if a downside breakout), it is termed an end run around the line, or end run for short. The term is sometimes used to denote breakout failure in general.
  • EQUILIBRIUM MARKET—A price area that represents a balance between demand and supply.
  • EXCHANGE-TRADED FUND (ETF)—Funds tracking indexes (e.g., SPY, DIA) or baskets of stocks that trade like stocks and do not involve the investor in membership in a mutual fund. An ideal way to replace mutual fund investing.
  • EX-DIVIDEND—The day when the dividend is subtracted from the price of the stock.
  • EX-DIVIDEND GAP—The gap in price caused when the price of a stock is adjusted downward after the dividend payment is deducted.
  • EXERCISE—The means by which the holder of an option purchases or sells shares of the underlying security.
  • EXHAUSTION GAP—Relatively wide gap in the price of a stock or commodity that occurs near the end of a strong directional move in the price. These gaps are quickly closed, most often within two to five days, which helps to distinguish them from Runaway Gaps, which are not usually covered for a considerable length of time. An Exhaustion Gap cannot be read as a Major Reversal, or even necessarily a Reversal. It signals a halt in the prevailing trend, which is ordinarily followed by some sort of area pattern development.
  • EXPIRATION—The last day on which an option can be exercised.
  • EXPONENTIAL SMOOTHING—A mathematical method of forecasting that assumes future price action may be forecast by using a weighted average of past periods; a mathematical series in which greater weight is given to more recent price action. A method of trend identification.
  • FALLING WEDGE—An Area Pattern with two downward-slanting, converging trendlines. Normally, it takes more than three weeks to complete, and volume will diminish as prices move toward the apex of the pattern. The anticipated direction of the breakout in a Falling Wedge is up. Minimum Measuring Formula: a retracement of all the ground lost within the Wedge. (See also Wedge.)
  • FALSE BREAKOUT or FALSE SIGNAL—A breakout that is confirmed but quickly reverses and eventually leads the stock or commodity to a breakout in the opposite direction. Indistinguishable from premature breakout or genuine breakout when it occurs.
  • FAN LINES—A set of three secondary trendlines drawn from the same starting high or low that spread out in a Fan shape. In a Primary Uptrend, the fan would be along the tops of the Secondary (Intermediate) Reaction. In a Primary Downtrend, the fan would be along the bottoms of the Secondary (Intermediate) Rally. When the third Fan Line is broken, it signals the resumption of the Primary Trend.
  • DAY MOVING AVERAGE LINE—Is determined by taking the closing price over the past 50 trading days and dividing by
  • EN: Simple Moving Average for n days consists of summing prices for n days and dividing by n. On n + 1 drop the first day and add the new day to the formula, etc.
  • FIVE-POINT REVERSAL—See Broadening Pattern.
  • FLAG—A Continuation Pattern. A flag is a period of congestion, less than four weeks    in duration, that forms after a sharp, near-vertical change in price. The upper and lower boundary lines of the pattern are parallel, though both may slant up, down, or sideways. In an uptrend, the pattern resembles a Flag flying from a mast, hence the name. Flags are also called Measuring or Half-Mast Patterns because they tend to form at the midpoint of the rally or reaction. Volume tends to diminish during the formation and increase on the breakout. Minimum Measuring Formula: add the distance from the breakout point, which started the preceding “Mast” rally or reaction, to the breakout point of the Flag.
  • FLOATING SUPPLY—The number of shares available for trading at any given time. Generally, the outstanding number of shares less shares closely held and likely to be unavailable to the public. Shares of a company held by its employee pension fund, for example, would not generally enter the trading stream and could be subtracted from the outstanding shares.
  • FORMATION—See Area Pattern.
  • FRONT-MONTH—The first expiration month in a series of months.
  • FUNDAMENTALS—Information on a stock pertaining to the business of the company and how it relates to earnings and dividends. In a commodity, it would be information on any factor that would affect supply or demand.
  • EN: Also, earnings, profits, profit margins, cash flow, sales, and other statistics sometimes used to obfuscate the value of the issue.
  • GAP—A hole in the price range that occurs when either (1) the lowest price at which a stock or commodity is traded during any time period is higher than the highest price at which it was traded on the preceding time period, or (2) the highest price of one time period is lower than the lowest price of the preceding time period. When the ranges of the two time periods are plotted, they will not overlap or touch the same horizontal level on the chart— there will be a price gap between them. (See also Common or Area Gap, Ex-Dividend Gap, Breakaway Gap, Runaway Gap, Exhaustion Gap, and Island Reversal.)
  • GRAPH—See Chart.
  • HALF-MAST—See Flag. Edwards said, “The Flag flies at half-mast,” referring to the tendency of prices to consolidate halfway through a surging vertical run.
  • HEAD-AND-SHOULDERS BOTTOM—Area Pattern that reverses a decline. (See also  Head-and-Shoulders Pattern.) EN: An upside-down name for an upside-down pattern. (See Kilroy Bottom.) 
  • HEAD-AND-SHOULDERS CONSOLIDATION—Area Pattern that continues the previous trend. (See also Head-and-Shoulders Pattern.)
  • HEAD-AND-SHOULDERS PATTERN—Although occasionally an Inverted Head-and- Shoulders Pattern (called a Consolidation Head-and-Shoulders) will form, which is a Continuation Pattern, in its normal form, this pattern is one of the more common and more reliable of the Major Reversal Patterns. It consists of the following four elements (a Head-and-Shoulders Top will be described for illustration): (1) a rally that ends a more or less extensive advance on heavy volume, and that is then followed by a Minor Reaction on less volume; this is the left shoulder; (2) another high-volume advance that exceeds the high of the left shoulder, followed by another low-volume reaction that takes prices down to near the bottom of the preceding reaction, and below the top of the left shoulder high; this is the head; (3) a third rally, but on decidedly less volume than accompanied either  of the first two advances, and that fails to exceed the high established on the head; this   is the right shoulder; and (4) a decline through a line drawn across the proceeding two reaction lows (the neckline), and a close below that line equivalent to 3% of the stock’s market price. This is the confirmation of the breakout. A Head-and-Shoulders Bottom,   or any other combination Head-and-Shoulders Pattern, contains the same four elements. The main difference between a Top Formation and a Bottom Formation is in the volume patterns. The breakout in a Top can be on low volume. The breakout in a Bottom must show a “conspicuous burst of activity.” Minimum Measuring Formula: add the distance between the head and neckline to the breakout point.
  • HEAD-AND-SHOULDERS TOP—Area Pattern that reverses an advance. (See also Head- and-Shoulders Pattern.)
  • HEAVY VOLUME—The expression “heavy volume,” as used by Edwards and Magee, means heavy only with respect to the recent volume of sales in the stock you are watching.
  • HEDGING—To try to lessen risk by making a counterbalancing investment. In a stock portfolio, an example of a hedge would be to buy 100 shares of XYZ stock, and to buy one put option of the same stock. The put would help protect against a decline in the stock, but it would also limit potential gains on the upside. (See also Natural Hedge.)
  • HISTORICAL DATA—A series of past daily, weekly, or monthly market prices.
  • HOOK DAY—A trading day in which the open is above/below prior day’s high/low and the close is below/above prior day’s close with narrow range.
  • HORIZONTAL CHANNEL—When the Tops of the rallies and Bottoms of the reactions form along lines that are horizontal and parallel to one another, the area in between is called a Horizontal Trend Channel. It may also be called a Rectangle during the early stages of formation.
  • HORIZONTAL TRENDLINE—A horizontal line drawn across either the Tops or Bottoms in a sideways trending market.
  • HYBRID HEAD-AND-SHOULDERS—A small Head-and-Shoulders Pattern within a larger Head-and-Shoulders Pattern. (See also Head-and-Shoulders Pattern.)
  • INDUSTRIAL AVERAGE—See Dow–Jones Industrial Average.
  • INSIDE DAY—A day in which the daily price range is totally within the prior day’s daily price range.
  • INSIDERS—Individuals who possess fundamental information likely to affect the price of a stock, but which is unavailable to the public. An example would be an individual who knows about a merger before it is announced to the public. Trading by insiders on this type of information is illegal.
  • INTERMEDIATE TREND—In Edwards and Magee, the term Intermediate or Secondary refers to a trend (or pattern indicating a trend) against the Primary (Major) Trend, which is likely to last from three weeks to three months, and which may retrace one-third to two- thirds of the previous Primary Advance or Decline.
  • INVERTED BOWL—See Rounding Top.
  • INVERTED TRIANGLE—See Right-Angled Broadening Triangle.
  • ISLAND REVERSAL—A compact trading range, usually formed after a fast rally or reaction, which is separated from the previous move by an Exhaustion Gap, and from the move in the opposite direction that follows by a Breakaway Gap. The result is an Island of prices detached by a gap before and after. If the trading range contains only one day, it is called a One-Day Island Reversal. The two gaps usually occur at approximately the same level. By itself, the pattern is not of major significance, but it does frequently send prices back for a complete retracement of the Minor Move which preceded it.
  • KILROY BOTTOM—The editor’s contribution to the nomenclature. A more descriptive term for the undescriptive “Head-and-Shoulders Bottom.”
  • LADDERING—A practice some Wall Street underwriters used in the Tulipomania of the 1990s. Consists of selling initial public offering (IPO) shares for the pre-opening price to insider customers in exchange for their agreement to buy more in the public offering at higher prices. Caused extreme volatility and big run ups in early days of IPOs. An unethical form of price manipulation.
  • LEVERAGE—Using a smaller amount of capital to control an investment of greater value. For example, exclusive of interest and commission costs, if you buy a stock on 50% margin, you control $1.00 of stock for every $0.50 invested or leverage of 2-to-1.
  • LEVERAGE SPACE PORTFOLIO—Ralph Vince uses drawdown as the risk metric for portfolios (as does this editor) instead of variance in returns. A sophisticated method for determining portfolio risk and trade size and optimizing portfolio growth.
  • LIMIT MOVE—A change in price that exceeds the limits set by the exchange on which the futures contract is traded.
  • LIMIT ORDER—A buy or sell order limited in some way,  usually in price. For example,  if you placed a limit order to buy IBM at 100, the broker would not fill the order unless he could do so at your price or better (i.e., at 100 or lower).
  • LIMIT UP, LIMIT DOWN—Commodity exchange restrictions on the maximum upward or downward movements permitted in the price for a commodity during any trading session day.
  • LINE, DOW THEORY—A Line in the Dow Theory is an Intermediate Sideways Movement in one or both of the Averages (Industrial and/or Transportation) in the course of which prices fluctuate within a range of 5% (of mean price) or less.
  • LOGARITHMIC SCALE—See Semilogarithmic Scale.
  • MAJOR TREND—In Edwards and Magee, the term Major (or Primary) refers to a trend (or pattern leading to such a trend) that lasts at least one year and shows a rise or decline of at least 20%.
  • MARGIN—The minimum amount of capital required to buy or sell a stock. The rate, 50% of value in 2005, is set by the government. In a commodity, margin is also the minimum, usually about 10%, needed to buy or sell a contract. The rate is set by the individual exchanges. The two differ in cost as well. In a stock, the broker lends the investor the balance of the money due and charges interest for the loan. In a commodity, margin is treated as a good faith payment. The broker does not lend the difference, so no interest expense is incurred.
  • MARKET ON CLOSE—An order specification that requires the broker to get the best price available on the close of trading.
  • MARKET ORDER—An instruction to buy or sell at the price prevailing when the order reaches the floor of the exchange.
  • MARKET RECIPROCAL—Normal average range of a stock based on the average range for a number of years, divided by the current average range. The result is the reciprocal of the market movement for the period. Wide market activity, for example, would show a small decimal, less than 1. Dull trading would be a larger number.
  • MAST—The vertical rally or reaction preceding a Flag or Pennant Formation.
  • McCLELLAN OSCILLATOR—An Index based on New York Stock Exchange net advances over declines. It provides a measure of such conditions as overbought/oversold and market direction on a short- to intermediate-term basis. The McClellan Oscillator measures a Bear Market Selling Climax when registering a very negative reading like −150. A sharp buying pulse in the market is indicated by a very positive reading, well above 100.
  • MEASURING FORMULAE—There are certain patterns that do allow the chartist the opportunity to project at least an interim target level of the direction of the Primary Trend. The most important of these patterns are found to be Triangles, Rectangles, Head-and- Shoulders, and Pennants and Flags.
  • Triangles—When a stock breaks out of a Symmetrical Triangle (either up or down), the ensuing move should carry at least as far as the height of the Triangle as measured along its first
  • Rectangles—The minimum you would expect from a breakout (up or down) out of a Rectangle Pattern would be the distance equal to the height of the
  • Head-and-Shoulders Tops/Bottoms—The Head-and-Shoulders Pattern has one of the better measuring sticks. In either a Top or Bottom, the interim target, once the neckline is penetrated, is the distance from the Top (or Bottom) of the head to the level of the neckline directly below (above) the
  • Pennants and Flags—The one thing to remember about these Continuation Patterns is they “fly at half-mast.” In other words, the leg in equals the leg
  • MEASURING GAP—See Runaway Gap.
  • MEGAPHONES—Megaphones are Broadening Tops. The Broadening Formation may evolve in any one of the three forms comparable, respectively, to Inverted Symmetrical, Inverted Ascending, or Descending Triangles. The symmetrical type, for example, consists of a series of price fluctuations across a horizontal axis, with each Minor Top higher and each Minor Bottom lower than its predecessor. The pattern may thus be roughly marked off by two diverging lines, the upper sloping up from left to right, the lower sloping down. These Broadening Patterns are characteristically loose and irregular, whereas Symmetrical Triangles are regular and compact. The converging boundary lines of Symmetrical Triangles are clearly defined, as a rule. Tops and Bottoms within the formation tend to fall within fair precision on these boundary lines. In the Broadening Formation, the rallies and declines usually do not all stop at clearly marked boundary lines and are subject to spikes. We could call this a Megaphone Spike because the formation keeps on crowding at the lines to look like a megaphone. It has a tendency to spike down more than up.
  • MELON—A handsome rich dividend.
  • MINOR TREND—In Edwards and Magee, the term Minor refers to brief fluctuations (usually less than six days and rarely longer than three weeks) that, in total, make up the Intermediate Trend.
  • MOMENTUM INDICATOR—A market indicator utilizing volume statistics for predicting the strength or weakness of a current market and any overbought or oversold conditions and to distinguish turning points within the market.
  • MOVING AVERAGE—A mathematical technique to smooth data. It is called moving because the number of elements are fixed, but the time interval advances. Old data must be removed when new data are added, which causes the average to “move along” with the progression of the stock or commodity.
  • EN: Simple Moving Average for n days consists of summing prices for n days and dividing by n. On n + 1, drop the first day and add the new day to the formula, etc.
  • MOVING AVERAGE CONVERGENCE/DIVERGENCE (MACD)—An oscillator derived by dividing one Moving Average by another. Basically, it combines three Moving Averages into two lines. In today’s computer programs, the Moving Averages are usually exponentially weighted, thus giving more weight to the more recent data. It is plotted in a chart with a horizontal Equilibrium Line.
  • The Equilibrium Line is important. When the two Moving Averages cross below the Equilibrium Line, it means the shorter Exponential Moving Average (EMA) is at a value less than the longer EMA. This is a Bearish signal. When the EMAs are above the Equilibrium Line, it means the shorter EMA has a value greater than the longer EMA. This is a Bullish signal.
  • The first line is the difference between a 12-period EMA and a 26-period EMA. The second line (signal line) is an approximate exponential equivalent of a nine-period Moving Average of the first line. The exponential values being 0.15, 0.075, and 0.20.
  • An MACD can be displayed as a line oscillator or a histogram.
  • Buy signals are generated when the faster Moving Average Line crosses the slower Moving Average Line from below. Sell signals come from the opposite, when the faster line crosses the slower line from above. Beware of mechanically trading every MACD crossover; it can lead to whipsaws and drawdowns with substance. The fact is, narrow trading ranges give many false signals that can be avoided with additional interpretation.
  • MOVING AVERAGE CROSSOVERS—The point at which the various Moving Average Lines pass through or over each other.
  • MULTICOLINCARITY—The flawed procedure of using the identical data to supply different types of indicators. The indicators will all confirm each other because they are based on the same data. Combining RSI, Moving Average Convergence/Divergence (MACD), and rate of change (where all indicators use the same closing prices and relative time periods) should provide the same signals, but they could easily be incorrect. Multicolincarity can be avoided by using one indicator based on closing prices, another from volume, and a third from price ranges. It can also be avoided by using data-generated indicators compared to chart patterns. (See also Bollinger Bands, MACD, Wilder Relative Strength Index.)
  • MULTIPLE HEAD-AND-SHOULDERS PATTERN—See Complex Head-and-Shoulders.
  • NARROW RANGE DAY—A trading day with a narrower price range relative to the previous day’s price range.
  • NATURAL and UNNATURAL METHODS or SYSTEMS—Bassetti’s half-humorous identification of “natural methods” of analysis, such as chart analysis, which looks directly at market data, as opposed to “unnatural methods,” which place an algorithm between the data and the analysis, such as Moving Averages, oscillators, and so on.
  • NATURAL HEDGE—Bassetti’s formulation of a technique recommended by Magee whereby a portfolio is always somewhat long and somewhat short. It is an imperfect hedge intended to cushion downside (or upside) risks—for example, long the DIA and short its members (or their proxies) which are in downtrends.
  • NECKLINE—In a Head-and-Shoulders Pattern, it is the line drawn across the two reaction lows (in a Top), or two rally highs (in a Bottom), which occur before and after the head. This line must be broken by 3% to confirm the Reversal. In a Diamond Pattern, which is similar to a Head-and-Shoulders Pattern, the neckline is bent in the shape of a V or inverted V. (See also Diamond and Head-and-Shoulders Pattern.)
  • NEGATIVE DIVERGENCE—When two or more Averages, indexes, or indicators fail to show confirming trends.
  • NORMAL RANGE FOR PRICE—EN: An analytical tool invented by Magee for measuring the volatility of stocks. Cumbersome in the modern context, but interesting. Described in Appendix A, ninth edition.
  • NUMBER-DRIVEN TECHNICAL ANALYSIS—The use of statistics and algorithms to analyze the market instead of pure chart analysis. Moving Averages and oscillators are examples as are stochastic. There are innumerable indicators of this type. Although having many virtues, it places an algorithm between the price and the analyst.
  • ODD LOT—A block of stock consisting of fewer than 100 shares.
  • ON BALANCE VOLUME (OBV)—OBV is a popular Volume Indicator, developed by Joseph Granville. Constructing an OBV line is very simple: the total volume for each day is assigned a positive or negative value depending on whether prices closed higher or lower that day. A higher close results in the volume for that day getting a positive value, whereas a lower close results in a negative value. A running total is kept by adding or subtracting each day’s volume based on the direction of the close. The direction of the OBV line is watched, not the actual volume numbers. Formula:

If Today’s Close > Yesterday’s Close, then OBV = Yesterday’s OBV + Today’s Volume

If Today’s Close < Yesterday’s Close, then OBV = Yesterday’s OBV − Today’s Volume

If Today’s Close = Yesterday’s Close, then OBV = Yesterday’s OBV

  • ONE-DAY REVERSAL—See Island Reversal.
  • OPTION—The right granted to one investor by another to buy (called a call option) or sell (called a put option) 100 shares of stock, or one contract of a commodity, at a fixed price for a fixed period of time. The investor granting the right (the seller of the option) is paid a nonrefundable premium by the buyer of the option.
  • OPTIONS RESEARCH, INC.—Founded by Blair Hull, later of Hull Trading Co. The first company to computerize the Black–Scholes Model.
  • ORDER—See Limit Order, Market Order, and Stop Order.
  • OSCILLATOR—A form of momentum or rate-of-change indicator usually valued from +1 to −1 or from 0% to 100%.
  • OVERBOUGHT—Market prices that have risen too steeply and too quickly.
  • OVERBOUGHT/OVERSOLD INDICATOR—An indicator that attempts to define when prices have moved too far and too quickly in either direction, and thus are liable to a reaction.
  • OVERSOLD—Market prices that have declined too steeply and too quickly.
  • PANIC—The second stage of a Bear Market when buyers thin out and sellers sell at any price. The downward trend of prices suddenly accelerates into an almost vertical drop, whereas volume rises to climactic proportions. (See also Bear Market.)
  • PANIC BOTTOM—See Selling Climax.
  • PASSIVE INDEXER—Investor who invests in a major index and holds it through up and down waves.
  • PATTERN—See Area Pattern. PEAK—See Top.
  • PENETRATION—The breaking of a pattern boundary line, trendline, or Support and Resistance Level.
  • PENNANT—A Pennant is a Flag with converging, rather than parallel, boundary lines. (See also Flag.)
  • POINT AND FIGURE CHART—A method of charting believed to have been created by Charles Dow. Each day the price moves by a specific amount (the arbitrary box size), an X (if up) or O (if down) is placed on a vertical column of squared paper. As long as prices do not change direction by a specified amount (the Reversal), the trend is considered to be in force and no new column is made. If a Reversal takes place, another vertical column is started immediately to the right of the first, but in the opposite direction. There is no provision for time on a Point and Figure Chart.
  • PREMATURE BREAKOUT—A breakout of an Area Pattern, and then a retreat back into the pattern. Eventually, the trend will break out again and proceed in the same direction. At the time they occur, false breakouts and premature breakouts are indistinguishable from each other or from a genuine breakout.
  • PRICE/EARNINGS RATIO—Price of stock divided by earnings (which may or may not be real) to give the P/E ratio. Sometimes an unnatural, or imaginary, number.
  • PRIMARY TREND—See Major Trend.
  • PROGRAM TRADING—Trades based on signals from various computer programs, usually entered directly from the trader’s computer to the market’s computer system.
  • EN: Usually indicates large volume transactions on large baskets of stocks by professional traders.
  • PROGRESSIVE STOP—A stop order that follows the market up or down. (See also Stop.)
  • PROTECTIVE STOP—A stop order used to protect gains or limit losses in an existing position. (See also Stop.)
  • PULLBACK—Return of prices to the boundary line of the pattern after a breakout to the downside. Return after an upside breakout is called a Throwback.
  • PUT—An option to sell a specified amount of a stock or commodity at an agreed time at the stated exercise price.
  • RAIL AVERAGE—See Dow–Jones Transportation Average.
  • RALLY—An increase in price that retraces part of the previous price decline. RALLY TOPS—A price level that finishes a short-term rally in an ongoing trend. RANGE—The difference between the high and low during a specific time period. REACTION—A decline in price that retraces part of the previous price advance. RECIPROCAL, MARKET—See Market Reciprocal.
  • RECOVERY—See Rally.
  • RECTANGLE—A trading area bounded on the Top and the Bottom with horizontal, or near horizontal, lines. A Rectangle can be either a Reversal or Continuation Pattern depending on the direction of the breakout. Minimum Measuring Formula: add the width (difference between Top and Bottom) of the Rectangle to the breakout point.
  • RED PARALLEL—A line drawn parallel to the trendline (Red Trendline) that connects at least two Bottoms. The Red Parallel (basically a Return Line) is started off a high and used to estimate the next high point.
  • RED TRENDLINE—A straight line connecting two or more Bottoms together. To avoid confusion, Edwards and Magee use a red line for Bottom Trendlines and a blue line for Top Trendlines.
  • RELATIVE STRENGTH (RS or RS INDEX)—A stock’s price movement over the past year as compared with a market index (most often the Standard & Poor’s 500 Index). Value below 1 means the stock shows relative weakness in price movement (underperformed the market); a value above 1 means the stock shows relative strength over the one-year period. Equation for Relative Strength:
  • Current Stock Price/Year-Ago Stock Price Current S&P 500/Year-Ago S&P 500
  • (See also Wilder Relative Strength Index.)
  • RESISTANCE LEVEL—A price level at which a sufficient supply of stock is forthcoming to stop, and possibly turn back for a time, an uptrend.
  • RETRACEMENT—A price movement in the opposite direction of the previous trend. RETURN LINE—See Ascending or Descending Trend Channels.
  • REVERSAL GAP—A chart formation where the low of the last day is above the previous day’s range with the close above midrange and above the open.
  • REVERSAL PATTERN—An Area Pattern that breaks out in a direction opposite to the previous trend. (See also Ascending Triangle, Broadening Formation, Broadening Top, Descending Triangle, Diamond, Dormant Bottom, Double Bottom or Top, Head-and- Shoulders Pattern, Rectangle, Rising or Falling Wedge, Rounding Bottom or Top, Saucer, Symmetrical Triangle, and Triple Bottom or Top.)
  • RIGHT-ANGLED BROADENING TRIANGLE—Area Pattern with one boundary line horizontal and the other at an angle that, when extended, will converge with the horizontal line at some point to the left of the pattern. Similar in shape to Ascending and Descending Triangles, except they are inverted and look like Flat-Topped or Bottomed Megaphones. Right-Angled Broadening Formations generally carry Bearish implications regardless of which side is flat. But any decisive breakout (3% or more) through the horizontal boundary line has the same forceful significance as does a breakout in an Ascending or Descending Triangle.
  • RIGHT-ANGLE TRIANGLES—See Ascending and Descending Triangles.
  • RISING WEDGE—An Area Pattern with two upward-slanting, converging trendlines. Normally, it takes more than three weeks to complete and volume will diminish as prices move toward the apex of the pattern. The anticipated direction of the breakout in a Rising Wedge is down. Minimum Measuring Formula: a retracement of all the ground gained within the wedge.
  • ROUND LOT—A block of stock consisting of 100 shares of stock.
  • ROUND TRIP—The cost of one complete stock or commodity transaction, that is, the entry cost and the offset cost combined.
  • ROUNDING BOTTOM—An Area Pattern that pictures a gradual, progressive, and fairly symmetrical change in the trend from down to up. Both the Price Pattern (along its lows) and the Volume Pattern show a concave shape often called a Bowl or Saucer. There is no minimum measuring formula associated with this Reversal Pattern.
  • ROUNDING TOP—An Area Pattern that pictures a gradual, progressive, and fairly symmetrical change in the trend from up to down. The Price Pattern, along its highs, shows a convex shape sometimes called an Inverted Bowl. The Volume Pattern is concave shaped (a bowl) as trading activity declines into the peak of the Price Pattern and increases when prices begin to fall. There is no measuring formula associated with this Reversal Pattern.
  • RUNAWAY GAP—A relatively wide gap in prices that occurs in an advance or decline gathering momentum. Also called a “Measuring Gap” because it frequently occurs at just about the halfway point between the breakout that started the move and the Reversal Day that calls an end to it. Minimum Measuring Formula: take the distance from the original breakout point to the start of the gap and add it to the other side of the gap.
  • RUNNING MARKET—A market wherein prices are moving rapidly in one direction with very few or no price changes in the opposite direction.
  • SAUCER—See Rounding Bottom and Scallop.
  • SCALLOPS—A series of Rounding Bottom (Saucer) Patterns where the rising end always carries prices a little higher than the preceding Top at the beginning of the pattern. Net gains will vary from stock to stock, but there is a strong tendency for it to amount to 10%–15% of the price. The total reaction, from the left-hand Top of each Saucer to its Bottom, is usually in the 20%–30% area. Individual Saucers in a Scallop series are normally five to seven weeks long, and rarely less than three weeks. The volume will show a convex or Bowl Pattern.
  • SECONDARY TREND—See Intermediate Trend.
  • SECULAR TREND—A major long-lived trend based in solid economic conditions, as opposed to cyclic or technical.
  • SELLING CLIMAX—A period of extraordinary volume that comes at the end of a rapid and comprehensive decline that exhausts the margin reserves of many speculators or patience of investors. Total volume turnover may exceed any single day’s volume during the previous upswing as Panic Selling sweeps through the stock or commodity. Also called a Clean-Out Day, a Selling Climax reverses the technical conditions of the market. Although it is a form of a One-Day Reversal, it can take more than one day to complete.
  • SEMILOGARITHMIC SCALE—Price or volume scale in which the distance on the vertical axis (i.e., space between horizontal lines) represents equal percentage changes.
  • SENSITIVITY—An index used by Edwards and Magee to measure the probable percentage movement (sensitivity) of a stock during a specified percentage move in the stock market as a whole.
  • EN: More or less equivalent, or with the same intent as beta.
  • SHAKEOUT—A corrective move large enough to “shake out” nervous investors before the Primary Trend resumes.
  • SHORT INTEREST—The number of shares that have been sold short and not yet repurchased. This information is published monthly by the New York Stock Exchange.
  • SHORT SALE—A transaction in which the entry position is to sell a stock or commodity first and to repurchase it (hopefully at a lower price) at a later date. In the stock market, shares you do not own can be sold by borrowing shares from the broker and replacing them when the offsetting repurchase takes place. In the commodity market, contracts are created when a buyer and seller get together through a floor broker. As a result, the procedure to sell in the commodity market is the same as it is to buy.
  • SHOULDER—See Head-and-Shoulders Pattern.
  • SMOOTHING—A mathematical approach that removes excess data variability while maintaining a correct appraisal of the underlying trend.
  • SPIKE—A sharp rise in price in a single day or two. STOCHASTIC—Random.
  • STOCHASTICS—The Stochastic Oscillator, developed by George Lane, compares a security’s price closing level to its price range over a specific period of time. This indicator shows, Lane theorized, in an upward-trending market, prices tend to close near their high; and during a downward-trending market, prices tend to close near their low. As an upward trend matures, prices tend to close further away from their high; as a downward trend matures, prices tend to close away from their low. The Stochastic Indicator attempts to determine when prices start to cluster around their low of the day in an uptrending market, and cluster around their high in a downtrend. Lane theorizes these conditions indicate a Trend Reversal is beginning to occur. The Stochastic Indicator is plotted as two lines, the
  • %D Line and %K Line. The %D Line is more important than the %K Line. The Stochastic is plotted on a chart with values ranging from 0 to 100. The value can never fall below 0 or above 100. Readings above 80 are considered strong and indicate a price is closing near its high. Readings below 20 are strong and indicate a price is closing near its low. Ordinarily, the %K Line will change direction before the %D Line. However, when the %D Line changes direction prior to the %K Line, a slow and steady Reversal is often indicated. When both %K and %D Lines change direction, and the faster %K Line changes direction to retest a crossing of the %D Line, though does not cross it, the incident confirms stability of the prior Reversal. A powerful move is under way when the Indicator reaches its extremes around 0 and 100. Following a Pullback in price, if the Indicator retests extremes, a good entry point is indicated. Many times, when the %K or %D Lines begin to flatten out, the action becomes an indication the trend will reverse during the next trading range.
  • STOCK SPLIT—A procedure used by management to establish a different market price for its shares by changing the common stock structure of the company. Usually a lower price is desired and established by canceling the outstanding shares and reissuing a larger number of new certificates to current shareholders. The most common ratios are 2-to-1, 3-to-1, and 3-to-2. Occasionally, a higher price is desired and a reverse split takes place where one new share is issued for some multiple number of old shares.
  • STOP—A contingency order placed above the current market price if it is to buy, or below the current market price if it is to sell. A stop order becomes a market order only when the stock or commodity moves up to the price of the buy stop, or down to the price of a sell stop. A stop can be used to enter a new position or exit an old position. (See also Protective or Progressive Stop.)
  • STOP LOSS—See Protective  Stop. SUPPLY—Amount of stock available at a given price. SUPPLY LINE—See Resistance.
  • SUPPORT LEVEL—The price level at which a sufficient amount of demand is forthcoming to stop, and possibly turn higher for a time, a downtrend.
  • SYMMETRICAL TRIANGLE—Also called a Coil. Can be a Reversal or Continuation Pattern. A sideways congestion in which each Minor Top fails to attain the height of the previous rally and each Minor Bottom stops above the level of the previous low. The result is upper and lower boundary lines that converge, if extended, to a point on the right. The upper boundary line must slant down and the lower boundary line must slant up, or it would be a variety of a Wedge. Volume tends to diminish during formation. Minimum Formula: add the widest distance within the Triangle to its breakout point.
  • TANGENT—See Trendline.
  • TAPE READER—One who makes trading decisions by watching the flow of New York Stock Exchange and American Stock Exchange price and volume data coming across the electronic ticker tape.
  • TEKNIPLAT™ PAPER—A specially formatted, two-cycle, semilogarithmic graph paper, with sixth-line vertical accents, used to chart stock or commodity prices. Check http:// www.edwards-magee.com.
  • TEST—A term used to describe the activity of a stock or commodity when it returns to, or “tests,” the validity of a previous trendline, or Support or Resistance Level.
  • THIN ISSUE—A stock with a low number of floating shares and is lightly traded.
  • THREE-DAYS-AWAY RULE—An arbitrary time period used by Edwards and Magee in marking suspected Minor Tops or Bottoms.
  • THROWBACK—Return of prices to the boundary line of the pattern after a breakout to the upside. Return after a downside breakout is called a Pullback.
  • TOP—See Broadening Top, Descending Triangle, Double Top, Head-and-Shoulders Top, Rounding Top, and Triple Top.
  • TREND—The movement of prices in the same general direction, or the tendency or proclivity to move in a straight line. (See also Ascending, Descending, and Horizontal Parallel Trend Channels, Convergent Trend, Divergent Trend, Intermediate Trend, Major Trend, and Minor Trend.)
  • TREND CHANNEL—A parallel probable price range centered about the most likely price line.
  • TRENDING MARKET—Price continues to move in a single direction, usually closing strongly for the day.
  • TRENDLINE—If we actually apply a ruler to a number of charted price trends, we quickly discover the line most often really straight in an uptrend trend is a line connecting the lower extremes of the Minor Recessions within these lines. In other words, an advancing wave in the stock market is composed of a series of ripples, and the bottoms of each of these ripples tend to form on, or very close to, an upward-slanting straight line. The tops of the ripples are usually less even; sometimes they also can be defined by a straight line, but more often, they vary slightly in amplitude, and so any line connecting their upper tips would be more or less crooked. On a descending price trend, the line most likely to be straight is the one that connects the tops of the Minor Rallies within it, while the Minor Bottoms may or may not fall along a straight edge. These two lines—the one that slants up along the successive wave bottoms within a broad up-move and the one that slants down across successive wave tops within a broad down-move—are the Basic Trendlines. You draw an Up Trendline by drawing the line on the inner side. You draw a Down Trendline by drawing it on the outside. You draw a Sideways Trendline on the bottom.
  • TRIANGLE—See Ascending Triangle, Descending Triangle, Right-Angled Broadening Triangle, and Symmetrical Triangle.
  • TRIPLE BOTTOM—Similar to a flat Head-and-Shoulders Bottom, or Rectangle, the three Bottoms in a Triple Bottom.
  • TRIPLE TOP—An Area Pattern with three Tops widely spaced and with quite deep, and usually rounding, reactions between them. Less volume occurs on the second peak than the first peak, and still less on the third peak. Sometimes called a “W” Pattern, particularly if the second peak is below the first and third. The Triple Top is confirmed when the decline from the third Top penetrates the Bottom of the lowest valley between the three peaks.
  • 200-DAY MOVING AVERAGE LINE—Determined by taking the closing price over the past 200 trading days and dividing by 200, then repeating the process each succeeding day, always dropping off the earliest day.
  • UPTICK—A securities transaction made at a price higher than the preceding transaction. UPTREND—See Ascending Trendline and Trend.
  • UTILITY AVERAGE—See Dow–Jones Utility Average.
  • V/D VOLUME—Is the ratio between the daily up-volume to the daily down-volume. It is a 50-day ratio determined by dividing the total volume on those days when the stock closed up from the prior day by the total volume on days when the stock closed down.
  • VALIDITY OF TRENDLINE PENETRATION—The application of the following three tests when a trendline is broken to determine whether the break is valid or whether the trendline is still basically intact: (1) the extent of the penetration, (2) the volume of trading on the penetration, and (3) the trading action after the penetration.
  • VALLEY—The V-shaped price action that occurs between two peaks. (See also Double Top and Triple Top.)
  • VINCE, RALPH—Author of Handbook of Portfolio Mathematics where optimal f is described as a quantitative way to achieve optimal allocation and leverage of a portfolio. The Leverage Space Model achieves optimal bet sizing for maximizing gains while minimizing risk.
  • VOLATILITY—A measure of a stock’s tendency to move up and down in price, based on its daily price history over the latest 12-month period. (See Appendix B, Resources, for the formula.)
  • VOLUME—The number of shares in stocks or contracts in commodities traded over a specified period of time.
  • “W” FORMATION—See Triple Top.
  • WEDGE—A chart formation in which the price fluctuations are confined within converging straight (or practically straight) lines.
  • WILDER RELATIVE STRENGTH INDICATOR (RSI)—Although relative strength, comparing a security price to a benchmark index price, has been around for some time, this indicator was developed by J. Welles Wilder, as explained in his 1978 book, New Concepts in Technical Trading.

Relative Strength is often used to identify price Tops and Bottoms by keying on specific levels (usually “30” and “70”) on the RSI chart, which is scaled from 0 to 100. The RSI can also be useful to show the following:

  1. Movement that might not be as readily apparent on the bar
  2. Failure Swings above 70 or below 30, warning of coming
  3. Support and Resistance Levels appear with greater
  4. Divergence between the RSI and price can often be a useful Reversal

The RSI requires a certain amount of lead-up time to operate successfully.

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