Glossary / Terminology
ASIC
Australian Securities & Investments Commission
Call Option
A call Option is an agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.
It may help you to remember that a call option gives you the right to "call in" (buy) an asset. You profit on a call when the underlying asset increases in price.
CBOT
Chicago Board of Trade
CFD's
Contracts for Differences
Convergent strategies
Convergent strategy is based on the notion that every security has an intrinsic value. For equities, that value is based on the company's expected future earnings and dividend payments, the expected growth rate of those earnings and dividends and the degree of uncertainty surrounding these forecasts.
The convergent strategist believes that the intrinsic value of a security can be estimated and that the price of the security will eventually will converge to this intrinsic value. Thus the strategy searches for undervalued or overvalued securities, securities whose prices are out of line with their intrinsic values hoping to profit from the price correction. Examples include equity market neutral, relative value event driven and arbitrage strategies.
Divergent strategies
Divergent strategy is based on the premise that past patterns in security prices can reliably predict further price patterns. The divergent strategist believes that these patterns reflect the changing attitudes of investors to a variety of economic political and psychological factors. The strategy has been successfully applied to equities, equity indexes, foreign currencies, and many other commodities investments. Examples include managed futures and global macro strategies.
EMA
Exponential Moving Averages
E-minis
An E-Mini is a futures contract that can be traded electronically on the Chicago Mercantile Exchange and is based on the S&P 500 index. As opposed to normal S&P futures contracts, which have a point value of $250, the e-mini contract has a point value of $50. Short for Electronic Mini S&P 500.
E-mini® S&P 500® futures provide investors with an innovative tool for accessing and managing risks on stock market investments. Fully electronic and 1/5th the size of a standard CME S&P 500® futures contract, it closely tracks the price movements of the S&P 500® Index, the premier benchmark of stock market performance.
More than 1 million contracts traded on average per day in 2006, making it one of the most highly-traded futures contracts in the world and reinforcing CME's (Chicago Mercantile Exchange) position as the world's leading provider of stock-index futures.
E-Mini S&P, often abbreviated to "E-mini" and designated by the commodity ticker symbol ES, is a stock market index futures contract traded on the Chicago Mercantile Exchange's Globex electronic trading platform.
The notional value of one contract is US$50 times the value of the S&P 500 stock index.
It was introduced by the CME in 1998 after the value of the existing S&P contract (then valued at $500 times the index, or over $500,000 at the time) became too large for many small traders.
The E-Mini has quickly became the most popular equity index futures contract in the world.
The original ("big") S&P contract was subsequently split 2:1, bringing it to $250 times the index.
Hedge funds often prefer trading the E-Mini over the big S&P since the latter still uses the open-outcry pit trading method, with its inherent delays, versus the all-electronic Globex system.
Exit Strategies
Money management is one of the most important (and least understood) aspects of trading. Many traders, for instance, enter a trade without any kind of exit strategy and are therefore more likely to take premature profits or, worse, run losses. Traders need to understand what exits are available to them and know how to create an exit strategy that will help minimise losses and lock in profits.
Making an Exit
There are obviously only two ways you can get out of a trade: by taking a loss or by making a gain. When talking about exit strategies, we use the terms take-profit and stop-loss orders to refer to the kind of exit being made. Sometimes these terms are abbreviated as "T/P" and "S/L" by traders.
Stop-Loss (S/L)
Stop-losses, or stops, are orders you can place with your broker to sell equities automatically at a certain point, or price. When this point is reached, the stop-loss will immediately be converted into a market order to sell. These can be helpful in minimising losses if the market moves quickly against you.
Developing an Exit Strategy.
There are three things that must be considered when developing an exit strategy. The first question you should ask yourself is, "How long am I planning on being in this trade?" Secondly, "How much risk am I willing to take?" And finally, "Where do I want to get out?"
Conclusion Exit strategies
and other money management techniques can greatly enhance your trading by eliminating emotion and reducing risk. Before you enter a trade, consider the three questions listed above and set a point at which you will sell for a loss, and a point at which you will sell for a gain.
Fibonacci signals
After making sustained moves in one direction, markets tend to retrace a part of that move before resuming the move. Fibonacci levels provide insights used to forecast support levels and price targets, based on the strength of the move. Levels are generated using mathematical ratios discovered by Leonardo Fibonacci in the 12th century.
The Fibonacci series is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144... and so on. The sum of any 2 consecutive numbers is the same as the next bigger number. The ratio between any number and the next higher number approximates 0.618. The ratio between any number and the next lower number is roughly 1.618. The number 1.618 is known as the 'Golden Mean'. Elliot Waves are based on Fibonacci numbers.
The most commonly used Fibonnaci levels are 61.8%, 38% and 50%. In a strong market, the typical retracement will usually be at least 38% and may go as high as 62%.
A well known technical analyst has written, "If the market has shown
respect in the past to a Fibonacci grid drawn on the chart, the chances are much higher that it will also respect those levels in the future market
action."
Futures contracts
A futures contract is a standardised, transferable, exchange-traded contract that requires delivery of a commodity, bond, currency, or stock index, at a specified price, on a specified future date.
Unlike options, futures convey an obligation to buy. The risk to the holder is unlimited, and because the payoff pattern is symmetrical, the risk to the seller is unlimited as well. Dollars lost and gained by each party on a futures contract are equal and opposite. In other words, futures-trading is a zero-sum game.
Futures contracts are forward contracts, meaning they represent a pledge to make a certain transaction at a future date. The exchange of assets occurs on the date specified in the contract.
Futures are distinguished from generic forward contracts in that
they contain standardised terms, trade on a formal exchange, are regulated by overseeing agencies, and are guaranteed by clearinghouses.
Also, in order to insure that payment will occur, futures have a margin requirement that must be settled daily.
Finally by making an offsetting trade, taking delivery of goods, or
arranging for an exchange of goods, futures contracts can be closed.
Hedgers often trade futures for the purpose of keeping price risk in check.
Futures contracts guarantee a transaction at a date in the future. Learn the details behind futures trading, settling future contracts, and how to price futures.
Gann Predictions based on of price movements on three premises:
1. Price, time and range are the only three factors to consider.
2. The markets are cyclical in nature.
3. The markets are geometric in design and in function.
Based on these three premises, Gann's strategies revolved around three general areas of prediction:
1. Price study - This uses support and resistance lines, pivot points and angles.
2. Time study - This looks at historically reoccurring dates, derived by natural and social means.
3. Pattern study - This looks at market swings using trendlines and reversal patterns.
Gap
A break between prices on a chart that occurs when the price of a stock makes a sharp move up or down with no trading occurring in between. Gaps can be created by factors such as regular buying or selling pressure, earnings announcements, a change in an analyst's outlook or any other type of news release.
Gap Trading Strategies
Gap trading is a simple and disciplined approach to buying and shorting stocks. Essentially one finds stocks that have a price gap from the previous close and watches the first hour of trading to identify the trading range. Rising above that range signals a buy, and falling below it signals a short.
Indexes or indices
A stock market index is a listing of stocks and a statistics reflecting the composite value of its components. It is used as a tool to represent the characteristics of its component stocks, all of which bear some commonality such as trading on the same stock market exchange, belonging to the same industry, or having similar market capitalisation's. Many indices compiled by news or financial services firms are used to benchmark the performance of portfolios such as mutual funds.
- Some Australian Indexes
All Ordinaries, ASX 200, Industrial, Property
Some Overseas Indexes
Dow Jones (USA), Frankfurt DAX, Hang Seng (Hong Kong), London FTSE 100, NASDAQ (USA), Paris CAC 40, Russell 2000 (USA), S&P (USA), Tokyo NIKKEI 225
JOT
Jump on trend based on price
Leverage
Financial leverage. The degree to which an investor or business is utilising borrowed money. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future. Financial leverage is not always bad, however; it can increase the shareholders' return on their investment and often there are tax advantages associated with borrowing.
Long selling (or Long Position)
Long selling is the buying of a security such as a stock, commodity or currency, with the expectation that the asset will rise in value. In the context of options, it is the buying of an options contract.
Long selling is the opposite of "short (or short position). For example, an owner of shares in Westfield is said to be "long Westfield" or "has a long position in Westfield".
Buying a call (or put) options contract from an options writer entitles you the right, not the obligation to buy (or sell) a specific commodity or asset for a specified amount at a specified date.
MACD
The Moving Average Convergence/Divergence (MACD) was invented by Gerald Appel sometime in the sixties and comes in various flavours, but most are based on a technique developed by McClellan (which he based on a technique developed by Haurlan).
The technique is to take the difference between two exponential moving averages (EMA's) with different periods. This produces what's generally referred to as an oscillator. An oscillator is so named because the resulting curve swings back and forth across the zero line.
Appel's version used the difference between a 12-day EMA and a 25-day EMA to generate his primary series. This series was plotted as a solid line. Then he took a 9-day EMA of the difference and plotted that as a dotted line. The 9-day EMA trails the primary series by just a bit, and trades are signalled whenever the solid line crosses the dotted line.
PITT traders
Are large volume traders.
Pivot Point Trading
Floor Pivot Point Trading Method. Floor trader pivot points, or floor numbers, are specific support and resistance price points that have been calculated using what is referred to as the floor pivot point
formula.
Pivot traders
trade using pivot points
Price Gap
A break between prices on a chart that occurs when the price of a stock makes a sharp move up or down with no trading occurring in between. Gaps can be created by factors such as regular buying or selling pressure, earnings announcements, a change in an analyst's outlook or any other type of news release
Put Option
An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time. The buyer of a put option estimates that the underlying asset will drop below the exercise price before the expiration date.
When an individual purchases a put, they expect the underlying asset will decline in price. They would then profit by either selling the
put options at a profit, or by exercising the option. If an individual writes a put contract, they are estimating the stock will not decline below the exercise price, and will not increase significantly beyond the exercise price.
Consider if an investor purchased one put option contract for 100
shares of ABC Co. for $1, or $100 ($1*100). The exercise price of the
shares is $10 and the current ABC share price is $12. This contract has given the investor the right, but not the obligation, to sell shares of ABC at $10.
If ABC shares drop to $8, the investor's put option is in-the-money and he can close his option position by selling his contract on the open market. On the other hand, he can purchase 100 shares of ABC at the existing market price of $8, then exercise his contract to sell the shares for $10. Excluding commissions, his total profit for this position would be $100 [100*($10 - $8 - $1)]. If the investor already owned 100 shares of ABC, this is called a "married put" position and serves as a hedge against a decline in share price.
ROI
Return on Investment
SEM
Sudden exhaustive move, based on fear and greed
Short selling
Short selling involves the selling of a security that the seller does not
own, or any sale that is completed by the delivery of a security
borrowed by the seller. Short sellers assume that they will be able to
buy the stock at a lower amount than the price at which they sold
short.
Selling short is the opposite of going long. That is, short sellers make money if the stock goes down in price.
This is an advanced trading strategy with many unique risks and pitfalls. Novice investors are advised to avoid short sales.
Short selling is neither terribly complex nor entirely simple. In
other words, it's a concept that many investors have trouble understanding. In general, people think of investing as buying an asset, holding it while it appreciates in value, and then eventually selling to make a profit. Shorting is the opposite: an investor makes money only when a shorted security falls in value.
Short selling involves many unique risks and pitfalls to be wary of. The mechanics of a short sale are relatively complicated compared to a normal transaction. And, as always, the investor faces high risks for potentially high returns. It's essential that you understand how the whole process works before you get involved.
In finance, short selling or ‘shorting’ is a way to profit from the decline in price of a security, such as stock or a bond.
Most investors "go long" on an investment, hoping that price will rise. To profit from the stock price going down, a short seller can borrow a security and sell it, expecting that it will decrease in value so that they can buy it back at a lower price and keep the difference.
For example, assume that shares in XYZ Company currently sell for $10 per share. A short seller would borrow 100 shares of XYZ Company, and then immediately sell those shares for a total of $1000. If the price of XYZ shares later falls to $8 per share, the short seller would then buy 100 shares back for $800, return the shares to their original owner, and make a $200 profit.
This practice has the potential for an unlimited loss, for example, if the shares of XYZ that one borrowed and sold in fact went up to $25, the short seller would have to buy back all the shares at $2500, losing $1500.
However, the term "short selling" or "being short" is often used as a blanket term for all those strategies which allow an investor to gain from the decline in price of a security.
Those strategies include buying options known as puts. In fact, what is many times labelled short selling is options or futures activity, since this activity greatly magnifies the gain that results from a securities price loss.
For example, if the next earnings release of XYZ company is going to show that its profits declined somewhat in some of its divisions, its stock might decline only 5 percent when that information is released.
Someone within the company who wants to trade in inside information however would probably not be satisfied with only a 5 percent gain on his short sell and instead would buy put options or other derivatives or futures to gain possibly 20 or more percent on the decline in the stock price of XYZ.
Short selling concept
Short selling is the opposite of "going long". The short seller takes a fundamentally negative, or "bearish" stance, anticipating that the price of the shorted stock will fall (not rise as in long buying), and it will be possible to buy at a lower price whatever was sold, thereby making a profit ("selling high and buying low," to reverse the adage).
The act of buying back the shares that were sold short is called 'covering the short'. Day traders and hedge funds will often use short selling to allow them to profit on trading in stocks that they believe are overvalued, just as traditional long investors attempt to profit on stocks that are undervalued by buying those stocks.
The short seller owes his broker and must repay the shortage when he covers his position. Technically, the broker usually in turn has borrowed the shares from some other investor who is holding his shares long; the broker itself seldom actually purchases the shares to loan to the short seller.
Example: Borrowing 100 shares from someone, selling them immediately at $1.00 - when the stock drops, you buy them back for
$0.50 and give the 100 shares back to the original owner keeping the
profit.
In the U.S. in order to sell stocks short, the seller must arrange for a broker-dealer to confirm that it is able to make delivery of the shorted securities. This is referred to as a "locate", and it is a legal requirement that U.S. regulated broker-dealers not permit their customers to short securities without first obtaining a locate. Brokers have a variety of means to borrow stocks in order to facilitate locates and make good delivery of the shorted security.
The vast majority of stocks borrowed by U.S. brokers come from loans made by the leading custody banks and fund management companies. Sometimes, brokers are able to borrow stocks from their customers who own "long" positions.
In these cases, if the customer has fully paid for the long position, the broker can not borrow the security without the express permission of the customer, and the broker must provide the customer with collateral and pay a fee to the customer. In cases where the customer has not fully paid for the long position (meaning, the customer borrowed money from the broker in order to finance the purchase of the security), the broker will not need to inform the customer that the long position is being used to effect delivery of another client's short sale.
Most brokers will only allow retail customers to borrow shares to short a stock if one of their own customers has purchased the stock on margin. Brokers will only go through the "locate" process outside their own firm to obtain borrowed shares from other brokers for their large institutional customers.
Short selling Mechanism
Short selling stock consists of the following: An investor borrows shares, but since there is a general rule in the United States that one must only borrow money based on shares up to 50 percent of the shares' value, one must deposit 50 percent of the value of the shares in cash with one's brokerage firm.
The investor sells them and the proceeds are credited to his account at the brokerage firm. The investor must "close" the position by buying back the shares (called covering) - If the price drops, he makes a profit. Otherwise he makes a loss. The investor finally returns the shares to the lender.
SOQ
Special Opening Quotation
Stochastic process
In the mathematics of probability, a stochastic process or random process is a process that can be described by a probability distribution. The two most common types of stochastic processes are the time series, which has a time interval domain, and the random field, which has a domain over a region of space.
Familiar examples of processes modelled as stochastic time series include stock market and exchange rate fluctuations, signals such as speech, audio and video - medical data such as a patient's EKG, EEG, blood pressure or temperature; and random movement such as Brownian motion or random walks. Examples of random fields include static images, random terrain(landscapes), or composition variations of an inhomogeneous material.
Spread trading
Futures spread (or spread) is a long-short futures position that provides exposure to a spread or difference in two prices. If both futures are traded on the same exchange, two types of spreads are possible:
An intracommodity spread (or calendar spread) is long one future and short another. Both have the same underlier, but they have different maturities.
An intercommodity spread is a long-short position in futures on different underliers. Both typically have the same maturity. Spreads can also be constructed with futures traded on different exchanges. Typically this is done using futures on the same underlier, either to earn arbitrage profits or, in the case of commodity or energy underliers, to create an exposure to price spreads between two geographically separate delivery points.
Spread trading is the trading of futures spreads. For speculators,spread-trading offers reduced risk compared to trading outright futures. This is because the long and short futures that comprise a spread are usually correlated, so they tend to hedge one another. For this reason, exchanges generally have less strict margin requirements for futures spreads.
Stop-Loss Order
An order placed with a broker to sell a security when it reaches a certain price. It is designed to limit an investor's loss on a security position. Also known as a "stop order" or "stop-market order". In other words, setting a stop-loss order for 10% below the price you paid for the stock would limit your loss to 10%. It is also a great idea to use a stop order before you leave for holidays or enter a situation in which you will be unable to watch your stocks for an extended period of time.
Stop-Loss Orders - Positives and Negatives The advantage of a stop order is you don't have to monitor on a daily basis how a stock is performing. This is especially handy when you are on vacation or in a situation that prevents you from watching your stocks for an extended period of time.
The disadvantage is that the stop price could be activated by a short-term fluctuation in a stock's price. The key is picking a stop-loss percentage that allows a stock to fluctuate day to day while preventing as much downside risk as possible.
Setting a 5% stop loss on a stock that has a history of fluctuating 10% or more in a week is not the best strategy: you'll most likely just lose money on the commissions generated from the execution of your stop-loss orders.
There are no hard and fast rules for the level at which stops should be placed. This totally depends on your individual investing style: an active trader might use 5% while a long-term investor might choose 15% or more.
Another thing to keep in mind is that once your stop price is reached, your stop order becomes a market order and the price at which you sell may be much different from the stop price. This is especially true in a fast-moving market where stock prices can change rapidly.
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