Forex Trading Definitions The Information You Need To Make The Right Investment Choice

Forex - FX:

The foreign exchange (also known as "forex" or "FX") market is the place where currencies are traded. The overall forex market is the largest, most liquid market in the world with an average traded value that exceeds $1.9 trillion per day and includes all of the currencies in the world.

There is no central marketplace for currency exchange, rather, trade is conducted over-the-counter. The forex market is open 24 hours a day, five days a week, with currencies being traded worldwide among the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney - spanning most time zones. The forex is the largest market in the world in terms of the total cash value traded, and any person, firm, or country may participate in this market.

Accredited Investor:

A term used by the Securities and Exchange Commission (SEC) under Regulation D to refer to investors who are financially sophisticated and have a reduced need for the protection provided by certain government filings. Also known as "qualified purchaser".

In order for an individual to qualify as an accredited investor, he or she must accomplish at least one of the following:

  1. Earn an individual income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain the same level of income.
  2. Have a net worth exceeding $1 million, either individually or jointly with his or her spouse.
  3. Be a general partner, executive officer, director or a related combination thereof for the issuer of a security being offered.
Actual Return:

The actual gain or loss of an investor. This can be expressed in the following formula: expected return (ex-ante) plus the effect of firm-specific and economy-wide news. As opposed to expected return, actual return is what investors actually receive from their investments. The discrepancy between actual and expected return is due to systematic and unsystematic risk.

American Currency Quotation:

A direct quotation in the foreign exchange markets whereby the value of the American dollar is stated as a per-unit measure of a foreign currency. This type of quotation shows how much U.S. currency it takes to purchase one unit of foreign currency.

For example, an American currency quote would be US$0.85 per C$1. This shows that it will take only 0.85 U.S. dollars to purchase a single unit of Canadian currency. If you wanted to purchase C$1,000, it would cost you US$850.

Ask:

The price a seller is willing to accept for a security, also known as the offer price. Along with the price, the ask quote will generally also stipulate the amount of the security willing to be sold at that price. Sometimes called "the ask".

This is the opposite of bid, which is the price a buyer is willing to pay for a security, and the ask will always be higher than the bid. The terms "bid" and "ask" are used in nearly every financial market in the world covering stocks, bonds, currency and derivatives. An example of an ask in the stock market would be $5.24 x 1,000 which means that someone is offering to sell 1,000 shares for $5.24.

Auto trading:

A trading strategy where buy and sell orders are placed automatically based on an underlying system or program. The buy or sell orders are sent out to be executed in the market when a certain set of criteria is met.

Back testing:

The process of testing a trading strategy on prior time periods. Instead of applying a strategy for the time period forward, which could take years, a trader can do a simulation of his or her trading strategy on relevant past data in order to gauge the its effectiveness.

Most technical-analysis strategies are tested with this approach.

Bid Price:

The price a buyer is willing to pay for a security. This is one part of the bid with the other being the bid size, which details the amount of shares the investor is willing to purchase at the bid price. The opposite of the bid is the ask price, which is the price a seller is looking to get for his or her shares.

Bid-Ask Spread:

The amount by which the ask price exceeds the bid. This is essentially the difference in price between the highest price that a buyer is willing to pay for an asset and the lowest price for which a seller is willing to sell it. For example, if the bid price is $20 and the ask price is $21 then the "bid-ask spread" is $1.

Breakout:

A price movement through an identified level of support or resistance, which is usually followed by heavy volume and increased volatility. Traders will buy the underlying asset when the price breaks above a level of resistance and sell when it breaks below support.

Broker:

An individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor.

Bull Market:

A financial market of a certain group of securities in which prices are rising or are expected to rise. The term "bull market" is most often used in respect to the stock market, but really can be applied to anything that is traded, such as bonds, currencies, commodities, etc

The use of "bull" and "bear" to describe markets comes from the way in which each animal attacks its opponents. That is, a bull thrusts its horns up into the air, and a bear swipes its paws down. These actions are metaphors for the movement of a market: if the trend is up, it is considered a bull market. And if the trend is down, it is considered a bear market.

Bollinger Band:

A band plotted two standard deviations away from a simple moving average.

Because standard deviation is a measure of volatility, Bollinger bands adjust themselves to the market conditions. When the markets become more volatile, the bands widen (move further away from the average), and during less volatile periods, the bands contract (move closer to the average). The tightening of the bands is often used by technical traders as an early indication that the volatility is about to increase sharply.

This is one of the most popular technical analysis techniques. The closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market.

Buy Stop Order:

An order to buy a security which is entered at a price above the current offering price. It is triggered when the market price touches or goes through the buy stop price. People using a buy stop hope to gain if momentum gains on a particular stock. If the price exceeds the price you have set, it will automatically trigger a market order.

Consumer Confidence Index - CCI:

A survey by the Conference Board that measures how optimistic or pessimistic consumers are with respect to the economy in the near future. The idea is that if the consumers are optimistic, they will tend to purchase more goods and services. This increase in spending will inevitably stimulate the whole economy.

Commodity Channel Index - CCI:

An oscillator used in technical analysis to help determine when an investment vehicle has been overbought and oversold. The Commodity Channel Index, first developed by Donald Lambert, quantifies the relationship between the asset's price, a moving average (MA) of the asset's price, and normal deviations (D) from that average. It is computed with the following formula:

The CCI, when used in conjunction with other oscillators, can be a valuable tool to identify potential peaks and valleys in the asset's price, and thus provide investors with reasonable evidence to estimate changes in the direction of price movement of the asset.

Candlestick:

A price chart that displays the high, low, open, and close for a security each day over a specified period of time.

There are many trading strategies based upon patterns in candlestick charting.

Chande Momentum Oscillator:

A technical momentum indicator invented by the technical analyst Tushar Chande. It is created by calculating the difference between the sum of all recent gains and the sum of all recent losses and then dividing the result by the sum of all price movement over the period. This oscillator is similar to other momentum indicators such as the Relative Strength Index and the Stochastic Oscillator because it is range bounded (+100 and -100).

The security is deemed to be overbought when the momentum oscillator is above +50 and oversold when it is below -50. Many technical traders add a nine-period moving average to this oscillator to act as a signal line. Bullish signals are generated when the oscillator crosses above the signal, and bearish signals are generated when the oscillator crosses down through the signal.

Channel:

The technical range between support and resistance levels that a stock price has traded in for a specific period of time. A breakout of a technical channel is seen as a bullish (on an upward breakout) or bearish signal (on a downward breakout).

Chartist:

Another name for a technical analyst. This is a person who uses charts to identify patterns that can suggest future activity. Chartists use technical analysis for just about any type of financial security, especially stocks and commodities.

Compounding:

The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.

Suppose you invest $10,000 into Cory's Tequila Company (ticker: CTC). The first year, the shares rises 20%. Your investment is now worth $12,000. Based on good performance, you hold the stock. In Year 2, the shares appreciate another 20%. Therefore, your $12,000 grows to $14,400. Rather than your shares appreciating an additional $2,000 (20%) like they did in the first year, they appreciate an additional $400, because the $2,000 you gained in the first year grew by 20% too. If you extrapolate the process out, the numbers can start to get very big as your previous earnings start to provide returns. In fact, $10,000 invested at 20% annually for 25 years would grow to nearly $1,000,000 (and that's without adding any money to the investment)!

Consumer Price Index - CPI:

A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.

CPI is one of the most frequently used statistics for identifying periods of inflation or deflation. This is because large rises in CPI during a short period of time typically denote periods of inflation and large drops in CPI during a short period of time usually mark periods of deflation.

Correlation:

In the world of finance, a statistical measure of how two securities move in relation to each other.

Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities is said to have no correlation, it is completely random. If one security moves up or down there is as good a chance that the other will move either up or down, the way in which they move is totally random.

Currency Pair:

The quotation and pricing structure of the currencies traded in the forex market: the value of a currency is determined by its comparison to another currency. The first currency of a currency pair is called the "base currency", and the second currency is called the "quote currency". The currency pair shows how much of the quote currency is needed to purchase one unit of the base currency.

All forex trades involve the simultaneous buying of one currency and selling of another, but the currency pair itself can be thought of as a single unit, an instrument that is bought or sold. If you buy a currency pair, you buy the base currency and sell the quote currency. The bid (buy price) represents how much of the quote currency is needed for you to get one unit of the base currency. Conversely, when you sell the currency pair, you sell the base currency and receive the quote currency. The ask (sell price) for the currency pair represents how much you will get in the quote currency for selling one unit of base currency.

For example, if the USD/EUR currency pair is quoted as being USD/EUR = 1.5 and you purchase the pair, this means that for every 1.5 euros that you sell, you purchase (receive) US$1. If you sold the currency pair, you would receive 1.5 euros for every US$1 you sell. The inverse of the currency quote is EUR/USD, and the corresponding price would be EUR/USD = 0.667, meaning that US$0.667 would buy 1 euro.

Daily Chart:

A line graph that displays the intraday movements of a given security. This contrasts to longer term charts, such as those that show a security's movement over a period of days, months or even years.

Because the forex operates 24 hours a day, there is technically no stoppage of trading between one trading day and the next as there is in other markets. As a result, the convention is to consider a forex day to be from 5pm EST to the same time on the following day, and most daily charts are displayed this way.

Day Trader:

A trader who holds positions for a very short time (from minutes to hours) and makes numerous trades each day. Most trades are entered and closed out within the same day.

Divergence:

A situation in which the price of an asset and an indicator, index or other related asset move in opposite directions. In technical analysis traders make transaction decisions by identifying situations of divergence, where the price of a stock and a set of relevant indicators, such as the money flow index (MFI), are moving in opposite directions.

In technical analysis, divergence is considered either positive or negative, both of which are signals of major shifts in the direction of the price. Positive divergence occurs when the price of a security makes a new low while the indicator starts to climb upward. Negative divergence happens when the price of the security makes a new high, but the indicator fails to do the same and instead closes lower than the previous high.

Downtrend:

Describes the price movement of a financial asset when the overall direction is downward. A formal downtrend occurs when each successive peak and trough is lower than the ones found earlier in the trend.

Drawdown:

The peak-to-trough decline during a specific record period of an investment or fund. It is usually quoted as the percentage between the peak and the trough. Basically a drawdown is from the time a retrenchment begins to when a new high is reached (because you won't know the valley until the new high is reached).

Due Diligence - DD:

An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale. Due diligence is essentially a way of preventing unnecessary harm to either party involved in a transaction.

Elliott Wave Theory:

Theory named after Ralph Nelson Elliott, who concluded that the movement of the stock market could be predicted by observing and identifying a repetitive pattern of waves.

Based on rhythms found in nature, the theory suggests that the market moves up in a series of five waves and down in a series of three waves.

Euro:

The official currency of the European Union's (EU) member states. The euro was introduced by the EU in to the financial community in 1999 and physical euro coins and paper notes were introduced in 2002. Euros are printed and managed by the European System of Central Banks (ESCB).

The euro is abbreviated by the symbol "EUR".

The euro is the national currency of the EU member states who have adopted it, including Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. Together, these countries create what is called the Eurozone, a region where the euro serves as a common national currency for all of the separate nations.

This has important benefits, such as removing exchange rate risk from businesses and financial institutions operating in an increasingly globalized economy. On the other hand, critics of the euro system argue that it produces negative consequences, such as concentrating the power to set monetary policy in the European Central Bank. This removes the ability of the EU's member nations to implement monetary policies specific to them, locking them into the monetary policy established for the entire Eurozone, even though local monetary conditions may differ substantially from the overall Eurozone.

Evening Star:

A bearish candlestick pattern consisting of three candles that have demonstrated the following characteristics:

  1. The first bar is a large white candlestick located within an uptrend.
  2. The middle bar is a small-bodied candle (red or white) that closes above the first white bar.
  3. The last bar is a large red candle that opens below the middle candle and closes near the center of the first bar's body.
Exchange Rate:

The price of one country's currency expressed in another country's currency. In other words, the rate at which one currency can be exchanged for another. For example, the higher the exchange rate for one euro in terms of one yen, the lower the relative value of the yen.

In most financial papers, currencies are expressed in terms of U.S. dollars, while the dollar is commonly compared to the Japanese yen, the British pound and the euro. As of the beginning of 2006, the exchange rate of one U.S. dollar for one euro was about 0.84, which means that one dollar can be exchanged for 0.84 euros.

Exhaustion:

Traders can identify periods of exhaustion by looking at the Commitments of Traders Report. This report is published every week and shows levels of open interest in the futures markets. An excessively high number of long contracts could indicate that everybody who wishes to be long has already taken a position, leaving few investors to buy these assets back at a higher price.

Exit Strategy:

In the context of an active trader, a plan as to when a trade will be closed out. For example, a trader might set a stop-loss order to exit a trade if a stock drops a certain percentage.

Exponential Moving Average - EMA:

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.

Fibonacci Retracement:

A term used in technical analysis that refers to the likelihood that a financial asset's price will retrace a large portion of an original move and find support or resistance at the key Fibonacci levels before it continues in the original direction. These levels are created by drawing a trend line between two extreme points and then dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%.

Gann Angles:

Created by W.D. Gann, a method of predicting price movements through the relation of geometric angles in charts depicting time and price. The ideal balance between time and price exists when prices move identically to time, which occurs when the Gann angle is at 45 degrees. In total, there are nine different Gann angles that are important for identifying trend lines and market actions. When one of these trend lines is broken, the following angle will provide support or resistance.

Gross National Product - GNP:

An economic statistic that includes GDP, plus any income earned by residents from overseas investments, minus income earned within the domestic economy by overseas residents. GNP is a measure of a country's economic performance, or what its citizens produced (i.e. goods and services) and whether they produced these items within its borders.

Hammer:

A price pattern in candlestick charting that occurs when a security trades significantly lower than its opening, but rallies later in the day to close either above or close to its opening price. This pattern forms a hammer-shaped candlestick.

A hammer occurs after a security has been declining, possibly suggesting the market is attempting to determine a bottom.

The signal does not mean bullish investors have taken full control of a security, it simply indicates that the bulls are strengthening.

Hanging Man:

A bearish candlestick pattern that forms at the end of an uptrend. It is created when there is a significant sell-off near the market open, but buyers are able to push this stock back up so that it closes at or near the opening price. Generally the large sell-off is seen as an early indication that the bulls (buyers) are losing control and demand for the asset is waning.

This formation does not mean that the bulls have definitively lost control, but it may be an early sign that the momentum is decreasing and the direction of the asset may be getting ready to change. The reliability of this signal is drastically improved when the price of the asset decreases the day after the signal. Hanging man formations can be more easily identified in intraday charts than daily charts and are a very popular formation used by day traders.

If this pattern is found at the end of a downtrend, it is known as a "hammer".

Head And Shoulders Pattern:

A technical analysis term used to describe a chart formation in which a stock's price:

  1. Rises to a peak and subsequently declines.
  2. Then, the price rises above the former peak and again declines.
  3. And finally, rises again, but not to the second peak, and declines once more.

The first and third peaks are shoulders, and the second peak forms the head.

The "head-and-shoulders" pattern is believed to be one of the most reliable trend-reversal patterns.

Heikin-Ashi Technique:

A type of candlestick chart that shares many characteristics with standard candlestick charts, but differs because of the values used to create each bar. Instead of using the open-high-low-close (OHLC) bars like standard candlestick charts, the Heikin-Ashi technique uses a modified formula:

Close = (Open+High+Low+Close)/4
Open = [Open (previous bar) + Close (previous bar)]/2
High = Max (High,Open,Close)
Low = Min (Low,Open, Close)

The Heikin-Ashi technique is used by technical traders to identify a given trend more easily. Hollow candles with no lower shadows are used to signal a strong uptrend, while filled candles with no higher shadow are used to identify a strong downtrend.

Histogram:

A graphical representation, similar to a bar chart in structure, that organizes a group of data points into user-specified ranges. The histogram condenses a data series into an easily interpreted visual by taking many data points and grouping them into logical ranges or bins.

The MACD histogram is a very common technical indicator that illustrates the difference between the MACD line and the trigger line. This difference is then plotted on a chart in the form of a histogram to make it easy for a trader to determine a specific asset's momentum.

Histograms are commonly used in statistics to demonstrate how many of a certain type of variable occurs within a specific range. For example, a census focused on the demography of a country may use a histogram of how many people there are between the ages of 0 and 10, 11 and 20, 21 and 30, 31 and 40, 41 and 50 etc. This histogram would look similar to the graph above.

MACD histograms are a popular tool used in technical analysis to gauge the strength of an asset's momentum. An increasing MACD histogram signals an increase in upward momentum while a decreasing histogram is used to signal downward momentum.

Historical Volatility - HV:

The realized volatility of a financial instrument over a given time period. Generally, this measure is calculated by determining the average deviation from the average price of a financial instrument in the given time period. Standard deviation is the most common but not the only way to calculate historical volatility.

Horizontal Channel:

Two parallel horizontal trend lines acting as very strong support and resistance. The upper trend line connects a stock's highs over a period of time, and each high is equal to the previous high. Similarly, the lower trend line connects the stock's lows, and each low is also equal to the previous. Once the price of a stock breaks out of the upper or lower part of a horizontal channel, a large price movement in the direction of the break usually follows. Once through the upper area of resistance, this level will now become support. Horizontal channels are mainly used in range-bound trading, where the investor will buy the stock at the bottom of the channel and sell it near the top.

Individual Retirement Account - IRA:

An IRA is a retirement investing tool that can be either an "individual retirement account" or an "individual retirement annuity". There are several types of IRAs: Traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP IRAs.

Traditional and Roth IRAs are established by individual taxpayers, who are allowed to contribute 100% of compensation (self-employment income for sole proprietors and partners) up to a set maximum dollar amount. Contributions to the Traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status, and coverage by an employer-sponsored retirement plan. Roth IRA contributions are not tax-deductible.

SEPs and SIMPLEs are retirement plans established by employers. Individual participant's contributions are made to SEP IRAs and SIMPLE IRAs.

Eventual withdrawal is taxed as income, including the capital gains, but since your income is likely to be less once you retire, you will be taxed at a lower rate. Combined with potential tax savings at the time of contribution, IRAs can prove to be very valuable tax management tools for individuals. Also, depending upon an individual's income, they may be able to fit themselves into a lower tax bracket with tax-deductible contributions during their working years while still enjoying a low tax bracket during retirement.

Ichimoku Kinko Hyo:

A technical indicator that is used to gauge momentum along with future areas of support and resistance. The Ichimoku indicator is comprised of five lines called the tenkan-sen, kijun-sen, senkou span A, senkou span B and chickou span. This indicator was developed so that a trader can gauge an asset's trend, momentum and support and resistance points without the need of any other technical indicator.

"Ichimoku" is a Japanese word that means "one look." This charting technique was created by a Japanese newspaper writer. It does look very complicated when a trader sees the indicator for the first time, but don't hesitate to give this indicator a try because the complexity quickly disappears once you gain an understanding of what the various lines mean and why they are used.

Indicator:

Statistics used to measure current conditions as well as to forecast financial or economic trends. Indicators are used extensively in technical analysis to predict changes in stock trends or price patterns. In fundamental analysis, economic indicators that quantify current economic and industry conditions are used to provide insight into the future profitability potential of public companies.

In the context of technical analysis, an indicator is a mathematical calculation based on a securities price and/or volume. The result is used to predict future prices. Common technical analysis indicators are the moving average convergence-divergence (MACD) indicator and the relative strength index (RSI).

In an economic context, an indicator could be a measure such as the unemployment rate, which can be used to predict future economic trends. Common general economic indicators are the unemployment rate, new housing starts and the consumer price index (CPI).

Interest Rate Swap:

An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps often exchange a fixed payment for a floating payment that is linked to an interest rate (most often the LIBOR). A company will typically use interest rate swaps to limit, or manage, its exposure to fluctuations in interest rates, or to obtain a marginally lower interest rate than it would have been able to get without the swap.

Intraday:

Another way of saying "within the day". Intraday price movements are particularly important to short-term traders looking to make many trades over the course of a single trading session. The term intraday is occasionally used to describe securities that trade on the markets during regular business hours, such as stocks and ETFs, as opposed to mutual funds, which must be bought from a dealer.

This term is often used to refer to the new highs and lows of a security. For example, "a new intraday high" means a security reached a new high relative to all other prices during a trading session. In some cases, an intraday high can be equal to the closing price. Traders pay close attention to intraday price movement by using real-time charts in an attempt to benefit from the short-term price fluctuations.

Joseph Effect:

The idea that movements in a time series tend to be part of larger trends and cycles more often than they are completely random. The Joseph Effect is quantified by the Hurst component, where movements fall between a Hurst range of 0 to 1. The term was coined by Benoit Mandelbrot.

If a series of movements is calculated to be between 0 and 0.5 in the Hurst range, then the movement is larger and more random than what are thought to be normal random movements. If the measure is 0.5, then the movements are thought to be random movements. If it is between 0.5 and 1, the movements are thought to be part of a long-term trend. The term "Joseph Effect" alludes to an Old Testament story about Joseph, where Egypt would experience seven years of feast followed by seven years of famine.

Keltner Channel:

A volatility based 'envelope' indicator that measures the movement of stocks in relation to an upper and lower moving-average band. This indicator, named after Chester W. Keltner, is used by sophisticated investors to predict the trend of the market. An overbuy occurs when prices move above the upper band, and an oversell occurs when prices move below the lower band.

Klinger Oscillator:

A technical indicator developed by Stephen Klinger that is used to determine long-term trends of money flow while remaining sensitive enough to short-term fluctuations to enable a trader to predict short-term reversals. This indicator compares the volume flowing in and out of a security to price movement, and it is then turned into an oscillator.

A signal line (13-period moving average) is used to trigger transaction decisions. This technique is very similar to signals that are created with other indicators such as the 'moving average convergence divergence'.

The Klinger Oscillator also uses divergence to identify when price and volume are not confirming the direction of the move. It is considered to be a bullish sign when the value of the indicator is heading upward while the price of the security continues to fall. Traders will use other tools such as trend lines, moving averages and other indicators to confirm the reversal.

Large Trader:

A futures trader who holds or controls a single position that is equal to or greater than the CFTC specified reporting levels. Reporting levels, which require either the firm or the large trader to provide the necessary reporting documentation, change for different underlying commodities. These surveillance measures are meant to protect investors, to maintain speculation levels, to facilitate orderly markets, and to prevent price manipulation.

Law of Demand:

A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease and vice versa.

Law of Supply:

As the price of goods increases, suppliers will attempt to maximize profits by increasing the quantity of the product sold.

Leverage:

The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.

Leverage helps both the investor and the firm to invest or operate. However, it comes with greater risk. If an investor uses leverage to make an investment and the investment moves against the investor, his or her loss is much greater than it would've been if the investment had not been leveraged - leverage magnifies both gains and losses. In the business world, a company can use leverage to try to generate shareholder wealth, but if it fails to do so, the interest expense and credit risk of default destroys shareholder value.

Limit Order:

An order placed with a brokerage to buy or sell a set number of shares at a specified price or better. Limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled.

Line Chart:

A style of chart that is created by connecting a series of data points together with a line. This is the most basic type of chart used in finance and it is generally created by connecting a series of past prices together with a line.

As you can see from the chart above, a line chart can give the reader a fairly good idea of where the price of an asset has traveled over a given time frame. Since the closing prices are often seen as the most important ones to keep track of, it is not difficult to see why line charts have become so popular. Other popular styles of charts include bar charts, candlestick charts and point and figure charts.

Linearly Weighted Moving Average:

A type of moving average that assigns a higher weighting to recent price data than does the common simple moving average. This average is calculated by taking each of the closing prices over a given time period and multiplying them by its certain position in the data series. Once the position of the time periods have been accounted for they are summed together and divided by the sum of the number of time periods.

For example, in a 15-day linearly-weighted moving average, today's closing price is multiplied by 15, yesterdays by 14, and so on until day 1 in the period's range is reached. These results are then added together and divided by the sum of the multipliers (15 + 14 + 13 + ... + 3 + 2 + 1 = 120).

The linearly weighted moving average was one of the first responses to placing a greater importance on recent data. The popularity of this moving average has been diminished by the exponential moving average, but none the less it still proves to be very useful.

Liquidity:

The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity.

London Interbank Bid Rate - LIBID:

This is the rate bid by banks on Eurocurrency deposits. This would be the international rate that banks lend to other banks.

Long Term:

Holding an asset for an extended period of time. Depending on the type of security, a long-term asset can be held for as little as one year or for as long as 30 years or more.

Loonie:

A slang term for a Canadian dollar. It is derived from the picture of a loon on one side of the coin. Just like in the U.S. where the dollar is referred to as the "greenback", the loonie is a often used to refer to the Canadian dollar. For example one may hear in a news report that the loonie was up in today's trade.

Lot:

In general, any group of goods or services making up a transaction. In the financial markets, a lot represents the standardized quantity of a financial instrument as set out by an exchange or similar regulatory body. For exchange-traded securities, a lot may represent the minimum quantity of that security that may be traded.

The concept of lots allows the financial markets to standardize price quotes. For example, equity options are priced such that each contract (or lot) represents exercise rights for 100 underlying shares of common stock. With such standardization, investors always know exactly how many units they are buying with each contract and can easily assess what price per unit they are paying. Without such standardization, valuing and trading options would be needlessly cumbersome and time consuming.

Moving Average - MA:

An indicator frequently used in technical analysis showing the average value of a security's price over a set period. Moving averages are generally used to measure momentum and define areas of possible support and resistance.

Moving Average Convergence Divergence - MACD:

A trend-following momentum indicator that shows the relationship between two moving averages of prices. The 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.

Management Fee:

A charge levied by an investment manager for managing an investment fund. The management fee is intended to compensate the managers for their time and expertise. It can also include other items such as investor relations expenses and the administration costs of the fund.

The management fee is the cost of having your assets professionally managed. The fee pays other people to select which securities your money (along with that of the other investors in the fund) is invested into, to do all the paperwork needed and to provide information about the fund's holdings and performance.

Momentum:

The rate of acceleration of a security's price or volume. Once a momentum trader sees an acceleration in a stock's price, earnings, or revenues, the trader will often take a long or short position in the stock with the hope that its momentum will continue in either an upwards or downwards direction. This strategy relies more on short-term movements in price rather then fundamental particulars of companies, and is not recommended for novices.

Monetary Base:

The total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves. This measure of the money supply typically only includes the most liquid currencies.

Money Management:

The process of budgeting, saving, investing, spending or otherwise in overseeing the cash usage of an individual or group. The predominant use of the phrase in financial markets is that of an investment professional making investment decisions for large pools of funds, such as mutual funds or pension plans.

Moving Average Ribbon:

A technique used in technical analysis to identify changing trends. It is created by placing a large number of moving averages onto the same chart. When all the averages are moving in the same direction, the trend is said to be strong. Reversals are confirmed when the averages crossover and head in the opposite direction.

National Futures Association - NFA:

An independent self-regulatory non-profit organization that regulates the futures market. The NFA began operating in 1982. Through the implementation and enforcement of regulatory programs, the NFA protects investors from fraudulent futures activities. It also provides arbitration and mediation services for resolving investor complaints. Since the NFA is independent, its regulations are unbiased towards any one member.

Negative Directional Indicator - -DI:

A component of the average directional index that is used to measure the presence of an uptrend. When the -DI is sloping downward, it is a signal that the strength of the downtrend is increasing. This indicator is nearly always plotted together with the positive directional indicator (+DI) Many traders will watch for the negative directional indicator (-DI) to cross above the positive directional indicator (+DI) to signal the beginning of a new downtrend. The -DI is a key factor used in the calculation of the popular average directional index (ADX).

Noise:

Price and volume fluctuations in the market that can confuse one's interpretation of market direction. Used in the context of equities, it is stock market activity caused by program trading, dividend payments or other phenomena that is not reflective of overall market sentiment. Also known as "market noise". In general, the shorter the time frame, the more difficult it is to separate the meaningful market movements from the noise. Noise traders attempt to take advantage of market noise by entering buy and sell transactions without the use of fundamental data.

Nominal GDP:

A gross domestic product (GDP) figure that has not been adjusted for inflation.

Also known as "current dollar GDP" or "chained dollar GDP".

It can be misleading when inflation is not accounted for in the GDP figure because the GDP will appear higher than it actually is. The same concept that applies to return on investment (ROI) applies here. If you have a 10% ROI and inflation for the year has been 3%, your real rate of return would be 7%. Similarly, if the nominal GDP figure has shot up 8% but inflation has been 4%, the real GDP has only increased 4%.

NY Empire State Index:

The NY Empire State Index is a regional economic indicator published by the Federal Reserve Bank of New York and released around the middle of the month. It's considered to be an indicator of economic conditions in one of the most populated states in the U.S.

OHLC Chart:

Short for "Open, High, Low, Close chart." This is a securities chart that clearly shows the opening, high, low and closing prices for a security. This type of chart is often used by technical analysts to spot trends and view stock movements, particularly on a shorter term basis.

On-Balance Volume - OBV:

A method used in technical analysis to detect momentum, the calculation of which relates volume to price change. OBV provides a running total of volume and shows whether this volume is flowing in or out of a given security. This indicator was developed by Joe Granville.

OBV attempts to detect when a financial instrument (stock, bond, etc.) is being accumulated by a large number of buyers or sold by many sellers. Traders will use an upward sloping OBV to confirm an uptrend, while a downward sloping OBV is used to confirm a downtrend. Finding a downward sloping OBV while the price of an asset is trending upward can be used to suggest that the "smart" traders are starting to exit their positions and that a shift in trend may be coming.

Online Trading:

The act of placing buy/sell orders for financial securities and/or currencies with the use of a brokerage's internet-based proprietary trading platforms. The use of online trading increased dramatically in the mid- to late-'90s with the introduction of affordable high-speed computers and internet connections.

Another benefit of online trading is the improvement in the speed of which transactions can be executed and settled, because there is no need for paper-based documents to be copied, filed and entered into an electronic format.

Open:

An unexecuted order that is still valid.

Open Order:

An order to buy or sell a security that remains in effect until it is either canceled by the customer or executed.

Order:

The instruction, by a customer to a brokerage, for the purchase or sale of a security with specific conditions.

Order Management System - OMS:

An electronic system developed to execute securities orders in an efficient and cost-effective manner. Brokers and dealers use OMSs when filling orders for various types of securities and are able to track the progress of each order throughout the system.

Oscillator:

A technical analysis tool that is banded between two extreme values and built with the results from a trend indicator for discovering short-term overbought or oversold conditions. As the value of the oscillator approaches the upper extreme value the asset is deemed to be overbought, and as it approaches the lower extreme it is deemed to be oversold.

Overbought:

In technical analysis, this term describes a situation in which the price of a security has risen to such a degree - usually on high volume - that an oscillator has reached its upper bound. This is generally interpreted as a sign that the price of the asset is becoming overvalued and may experience a pullback.

Technicians use indicators such as the relative strength index, the stochastic oscillator or the money flow index to identify securities that are becoming overbought.

An overbought security is the opposite of one that is oversold.

Overnight Trading:

The buying or selling of currencies between 9pm and 8am local time. This type of transaction occurs when an investor takes a position at the end of the trading day in a foreign market that will be open while the local market is closed. The trade will be executed sometime that evening or early morning.

For example, the forex market trades 24 hours a day in exchanges around the world. The overlap of trading hours between North American, Australia, Asia and European currency exchanges makes this possible. However, investors must be aware of the significant level of risk involved with trading overnight, which includes foreign-exchange risk and overnight delivery risk.

Oversold:

A situation in technical analysis where the price of an asset has fallen to such a degree - usually on high volume - that an oscillator has reached a lower bound. This is generally interpreted as a sign that the price of the asset is becoming undervalued and may represent a buying opportunity for investors.

Oversold is the opposite of overbought.

Paper Profit (Paper Loss):

Unrealized capital gain (or capital loss) in an investment. It is calculated by comparing the market price of a security to the original purchase price. Gains or losses only become realized when the security is sold.

Paper Trade:

Simulated trading that investors use to practice mimicking trades (buys and sells) without actually entering into any monetary transactions. Paper trading is a good way to learn the ropes without risking any money. You can do it simply by pretending to buy and sell stock, bonds, commodities and mutual funds and keeping notes of paper profits or losses. Or you can open an account with an online market simulator.

Parabolic Indicator:

A technical analysis strategy that uses a trailing stop and reverse method called "SAR," or stop-and-reversal, to determine good exit and entry points.

This method was developed by J. Wells Wilder. Basically, if the stock is trading below the parabolic SAR you should sell. If the stock price is above the SAR then you should buy (or stay long).

Pattern:

In technical analysis, the distinctive formation created by the movement of security prices on a chart. It is identified by a line connecting common price points (closing prices, highs, lows) over a period of time. Chartists try to identify patterns to try to anticipate the future price direction.

Also known as "trading pattern".

Pearson Coefficient:

Numerically, the Pearson coefficient is represented the same way as a correlation coefficient that is used in linear regression; ranging from -1 to +1. A value of +1 is the result of a perfect positive relationship between two or more variables. Conversely, a value of -1 represents a perfect negative relationship. It has been shown that the Pearson coefficient can be deceptively small when it is used with a non-linear equation.

Pennant:

A continuation pattern in technical analysis formed when there is a large movement in a stock, the flagpole, followed by a consolidation period with converging trend lines, the pennant, followed by a breakout movement in the same direction as the initial large movement, the second half of the flagpole.

Pennants, which are similar to flags in terms of structure, have converging trend lines during their consolidation period and they last from one to three weeks. The volume at each period of the pennant is also important. The initial move must be met with large volume while the pennant should have weakening volume, followed by a large increase in volume during the breakout.

Percentage Price Oscillator - PPO:

A technical momentum indicator showing the relationship between two moving averages. To calculate the PPO, subtract the 26-day exponential moving average (EMA) from the nine-day EMA, and then divide this difference by the 26-day EMA. The end result is a percentage that tells the trader where the short-term average is relative to the longer-term average.

The PPO and the moving average convergence divergence (MACD) are both momentum indicators that measure the difference between the 26-day and the nine-day exponential moving averages. The main difference between these indicators is that the MACD reports the simple difference between the exponential moving averages, whereas the PPO expresses this difference as a percentage. This allows a trader to use the PPO indicator to compare stocks with different prices more easily. For example, regardless of the stock's price, a PPO result of 10 means the short-term average is 10% above the long-term average.

Pip:

The smallest price change that a given exchange rate can make. Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point - for most pairs this is the equivalent of 1/100th of one percent, or one basis point.

For example, the smallest move the USD/CAD currency pair can make is $0.0001, or one basis point. The smallest move in a currency does not always need to be equal to one basis point, but this is generally the case with most currency pairs.

Pivot Point:

A technical indicator derived by calculating the numerical average of a particular stock's high, low and closing prices.

Point & Figure Chart:

A chart that plots day-to-day price movements without taking into consideration the passage of time. Point and figure charts are composed of a number of columns that either consists of a series of stacked Xs or Os. A column of Xs is used to illustrate a rising price, while Os represent a falling price. As you can see from the chart below, this type of chart is used to filter out non-significant price movements, and enables the trader to easily determine critical support and resistance levels. Traders will place orders when the price moves beyond identified support/resistance levels.

Additional points are added to the chart once the price changes by more than a predefined amount (known as the box size). For example, if the box size is set to equal one and the price of the asset is $15, then another X would be added to the stack of Xs once the price surpasses $16. Each column consists of only one letter (either X or O) - never both. New columns are placed to the right of the previous column and are only added once the price changes direction by more than a predefined reversal amount.

Portfolio:

The group of assets - such as stocks, bonds and mutuals - held by an investor. To reduce their risk, investors tend to hold more than just a single stock or other asset. Think of the portfolio as a pie: each piece is divided up into specific assets such as bonds, equities, etc.

Position:

The amount of a security either owned (which constitutes a long position) or borrowed (which constitutes a short position) by an individual or by a dealer. In other words, it's a trade an investor currently holds open.

Positive Directional Indicator - +DI:

A component of the average directional index that is used to measure the presence of an uptrend. When the +DI is sloping upward, it is a signal that the uptrend is getting stronger. This indicator is nearly always plotted along with the negative directional indicator. Many technical traders will watch for the positive directional indicator to cross above the negative directional indicator to signal the beginning of an uptrend. The +DI is a key factor in the calculation of the popular average directional index.

Positive Volume Index - PVI:

An index that focuses on days where the volume has significantly increased from the previous days trading. It tries to determine what smart investors are doing. When trading volume is high it is thought that inexperienced investors are involved. Whereas on slow days, "shrewd investors" quietly buy or sell the stock.

Profit and Loss Statement - P&L:

A financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time - usually a fiscal quarter or year. These records provide information that shows the ability of a company to generate profit by increasing revenue and reducing costs. The P&L statement is also known as a "statement of profit and loss", an "income statement" or an "income and expense statement".

Protective Stop:

A strategy that aims to limit potential losses to a desired amount by using a stop-loss or stop-limit order. For example, a trader or investor may execute a protective stop by setting a stop-loss order for 10% below what he or she paid for the stock, therefore limiting the loss to 10%.

Pullback:

A falling back of a price from its peak. This type of price movement might be seen as a brief reversal of the prevailing upward trend, signaling a slight pause in upward momentum. Often pullbacks are seen as buying opportunities after a security has had a large upward price movement. It is important, however, to analyze closely any pullback as it may be a sign of a definite trend reversal or a slight pause in the upward trend, each having very different trading implications.

Qstick Indicator:

A technical indicator developed by Tushar Chande to numerically identify trends in candlestick charting. It is calculated by taking an 'n' period moving average of the difference between the open and closing prices. A Qstick value greater than zero means that the majority of the last 'n' days have been up, indicating that buying pressure has been increasing.

Qualified Institutional Buyer - QIB:

Primarily referring to institutions that manage at least $100 million in securities including banks, savings and loans institutions, insurance companies, investment companies, employee benefit plans, or an entity owned entirely by qualified investors. Also included are registered broker-dealers owning and investing, on a discretionary basis, $10 million in securities of non-affiliates.

Quote Currency:

The second currency quoted in a currency pair in forex. In a direct quote, the quote currency is the foreign currency. In an indirect quote, the quote currency is the domestic currency.

Also known as the "secondary currency" or "counter currency".

Understanding the quotation and pricing structure of currencies is essential for anyone wanting to trade currencies in the forex market. If you were looking at the CAD/USD currency pair, the U.S. dollar would be the quote currency, and the Canadian dollar would be the base currency.

Major currencies that are usually shown as the quote currency include the U.S. dollar, the British pound, the euro, the Japanese yen, the Swiss franc and the Canadian dollar.

Range:

A stock's low price and high price for a particular trading period, such as the close of a day's trading, the opening of a day's trading, a day, a month, or a year.

Rate of Change:

The speed at which a variable changes over a specific period of time. Rate of change is often used when speaking about momentum and it can generally be expressed as a ratio between changes in one variable relative to a corresponding change in another. Graphically, the rate of change is represented by the slope of a line.

Rate of Return:

The gain or loss of an investment over a specified period, expressed as a percentage increase over the initial investment cost. Gains on investments are considered to be any income received from the security, plus realized capital gains.

Real Body:

In candlestick charting this is the wide part of a candle that represents the range between the opening and the closing prices over a specific time period.

Realized Gain:

A gain resulting from selling an asset at a price higher than the original purchase price.

Realized Loss:

A loss recognized when assets are sold for a price lower than the original purchase price.

Retracement:

A reversal in the movement of a stock's price, countering the prevailing trend.

An example might be market risk causing a stock's price to pull back. The Fibonacci retracement tool is favored by many traders because of its ability to identify a price level that a correction may reach before it is able to reverse and continue in the direction of the original trend.

Return on Investment - ROI:

A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

Reuters:

A global information provider headquartered in London, England, and serving professionals in the financial services, media and corporate markets. The news agency provides text, graphics, video and pictures to subscribers around the world, including general and economic news. Reuters Group trades on the London Stock Exchange and NASDAQ as 'RTR' and 'RTRSY'.

Risk:

The chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. It is usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment.

Rollover:

A charge that is incurred by Forex investors who rollover their positions to the following delivery date

Roth IRA:

An individual retirement plan that bears many similarities to the Traditional IRA. Contributions are never deductible, and qualified distributions are tax-free.

Sell:

A recommendation to sell a particular security.

Senkou Span A:

The trend is deemed to be downward when Senkou span A is located below senkou span B. In practice, the indicator is most commonly used to predict the reversal of a current trend when the senkou spans cross over each other.

Senkou Span B:

Senkou span B is generally regarded as the slowest moving component of the Ichimoku indicator because it is created by using the greatest number of time periods in its calculation (generally 52 time periods).

Sentiment Indicator:

Sentiment indicators are employed in technical analysis to quantify the levels of optimism or pessimism present in various markets. For example, some indicators will account for all the long and short positions on a particular exchange in order to determine a bearish or bullish market.

Shadow:

A small line found on a candle in a candlestick chart that is used to indicate where the price of a stock has fluctuated relative to the opening and closing prices. Essentially, these shadows illustrate the highest and lowest prices at which a security has traded over a specific time period. A shadow can be located either above the opening price or below the closing price. When there is a long shadow on the bottom of the candle (like that of a hammer) there is a suggestion of an increased level of buying and, depending on the pattern, potentially a bottom.

Sharpe Ratio:

A ratio developed by Nobel Laureate William F. Sharpe to measure risk-adjusted performance. It is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.

Shooting Star:

A type of candlestick formation that results when a security's price, at some point during the day, advances well above the opening price but closes lower than the opening price.

In order for a candlestick to be considered a shooting star, the formation must be on an upward or bullish trend. Furthermore, the distance between the highest price for the day and the opening price must be more than twice as large as the shooting star's body. Finally, the distance between the lowest price for the day and the closing price must be very small or nonexistent.

Spike:

The comparatively large upward or downward movement of a price or value level in a short period.

Spot Market:

A commodities or securities market in which goods are sold for cash and delivered immediately. Contracts bought and sold on these markets are immediately effective.

Standard Deviation:

A measure of the dispersion of a set of data from its mean. The more spread apart the data is, the higher the deviation. Standard deviation can also be calculated as the square root of the variance.

Star:

A type of candlestick formation that is identified when a small bodied-candle is positioned above the price range of the previous candle as a result of a gap in the underlying assets price.

Small bodied candles in the star position often suggest that market participants are becoming indecisive and that the strength of the current trend could be reversing. For a valid star pattern, most traders will watch for small bodied candles to follow a large bodied candle because this setup generally leads to a higher probability of a true trend reversal than when the body of the first candle is small.

Stop Order:

An order to buy or sell a security when its price surpasses a particular point, thus ensuring a greater probability of achieving a predetermined entry or exit price, limiting the investor's loss or locking in his or her profit. Once the price surpasses the predefined entry/exit point, the stop order becomes a market order.

Also referred to as a "stop" and/or "stop-loss order".

Stop-Limit Order:

An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will be executed at a specified price (or better) after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy (or sell) at the limit price or better. The primary benefit of a stop-limit order is that the trader has precise control over where the order should be filled. The downside, as with all limit orders, is that the trade is not guaranteed to be executed if the stock/commodity does not reach the limit price.

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".

Stopped Out:

A situation where a stock price decreases and, consequently, an investor's stop order is executed. If you place a stop loss order instructing to sell the stock if the price moves below $20 per share, and it does, you've been stopped out.

Swing High:

A term used in technical analysis that refers to the peak reached by an indicator or an asset's price. A swing high is formed when the high of a price is greater than a given number of highs positioned around it. A series of consecutively higher swing highs indicates that the given asset is in an uptrend.

Swing highs can be used by traders to identify possible areas of support and resistance, which can then be used to determine optimal positions for stop-loss orders. If an indicator fails to create a new swing high while the price of the security does reach a new high, there is a divergence between price and indicator, which could be a signal that the trend is reversing.

Swing Low:

A term used in technical analysis that refers to the troughs reached by an indicator or an asset's price. A swing low is created when a low is lower than any other point over a given time period. Successively lower swing lows indicate that the underlying asset is in a downtrend, while higher lows mean it is in an uptrend.

Swing lows are useful for an investor who holds a long position in an asset because swing lows can be used to determine strategic positions for a stop-loss order. One main tenet of the Dow Theory is that a if a major average breaks below a previous low, this movement can be interpreted as the beginning of a downtrend. In the case of an indicator, if it fails to make a new swing low while the price continues to decline, a divergence occurs which could mean that the downtrend is coming to an end.

Swing Trading:

A style of trading that attempts to capture gains in a stock within one to four days. To find situations in which a stock has this extraordinary potential to move in such a short time frame, the trader must act quickly. This is mainly used by at-home and day traders. Large institutions trade in sizes too big to move in and out of stocks quickly. The individual trader is able to exploit the short-term stock movements without the competition of major traders. Swing traders use technical analysis to look for stocks with short-term price momentum. These traders aren't interested in the fundamental or intrinsic value of stocks but rather in their price trends and patterns.

Swissie:

A slang term for the Swiss franc. The Swiss franc, or Swissie, has often been considered a safe-haven currency during times of geopolitical unrest. This is mainly due to the country's neutral stance in global conflicts.

Technical Analysis:

A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, his or her decision would be based on the patterns or activity of people going into each store.

Technical Indicator:

Any class of metrics whose value is derived from generic price activity in a stock or asset. Technical indicators look to predict the future price levels, or simply the general price direction, of a security by looking at past patterns. Examples of common technical indicators include Relative Strength Index, Money Flow Index, Stochastic, MACD and Bollinger Bands.

Technical indicators, collectively called "technicals", are distinguished by the fact that they do not analyze any part of the fundamental business, like earnings, revenue and profit margins. Technical indicators are used most extensively by active traders in the market, as they are designed primarily for analyzing short-term price movements. To a long-term investor, most technical indicators are of little value, as they do nothing to shed light on the underlying business. The most effective uses of technicals for a long-term investor are to help identify good entry and exit points for the stock by analyzing the long-term trend.

Tenkan-Sen:

The Tenkan-sen is generally used in combination with the Kijun-sen to create predications of future momentum. A buy signal is created when the Tenkan-sen line moves above the Kijun-sen, while a sell signal is created when the Tenkan-sen line moves below the Kijun-sen line.

Many technical traders use the Tenkan-sen as a tool for predicting levels where the price of the asset will find short-term support.

Tick:

The minimum upward or downward movement in the price of a security. Historically, stocks didn't trade in decimals. A stock would move in amounts of 1/8, 1/16, or 1/32 of a dollar (the tick). This changed when the decimal system was brought in.

Trading Account:

An account similar to a traditional bank account, holding cash and securities, and is administered by an investment dealer.

Trailing Stop:

A stop-loss order set at a percentage level below the market price - for a long position. The price is adjusted as the price fluctuates. This is such a useful tool, yet many fail to use it. Using a trailing stop allows you to let profits run while cutting losses at the same time.

Transparency:

The extent to which investors have ready access to any required financial information about a company such as price levels, market depth and audited financial reports. Classically defined as when "much is known by many", transparency is one of the silent prerequisites of any free and efficient market.

When transparency relates to information flow from the company to investors, it is also known as "full disclosure".

Trend Analysis:

An aspect of technical analysis that tries to predict the future movement of a stock based on past data. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future.

There are three main types of trends: short-, intermediate- and long-term.

Trend Trading:

A trading strategy that attempts to capture gains through the analysis of an asset's momentum in a particular direction. The trend trader enters into a long position when a stock is trending upward (successively higher highs). Conversely, a short position is taken when the stock is in a down trend (successively lower highs).

This strategy assumes that the present direction of the stock will continue into the future. It can be used by short-, intermediate- or long-term traders. Regardless of their chosen time frame, traders will remain in their position until they believe the trend has reversed - but reversal may occur at different times for each time frame.

Trend line:

A line on the price or value chart of a security depicting the general direction in which the security is headed. This chart shows an example of an upward trend line:

Many people believe that prevailing trends, either up or down, will determine where a security is headed. Trend lines can be used to analyze individual securities, such as stocks, commodities or indexes, among other things.

Triple Bottom:

A pattern used in technical analysis to predict the reversal of a prolonged downtrend. The pattern is identified when the price of an asset creates three troughs at nearly the same price level. The third bounce off the support is an indication that buying interest (demand) is outweighing selling interest (supply) and that the trend is in the process of reversing.

Once the first bottom is created, the price reaches a peak and retraces back toward the prior support. This is when buyers enter again and push the price of the asset higher, creating bottom No.2. The price of the asset then creates another peak and heads lower for its final test of the support. The final bounce off the support level creates bottom No.3 and traders will get ready to enter a long position once the price breaks above the previous resistance (illustrated by the black line on the chart). This pattern is considered to be a very reliable indication that the downtrend has reversed and that the new trend is in the upward direction.

Triple Top:

A pattern used in technical analysis to predict the reversal of a prolonged uptrend. This pattern is identified when the price of an asset creates three peaks at nearly the same price level. The bounce off the resistance near the third peak is a clear indication that buying interest is becoming exhausted. It is used by traders to predict the reversal of the uptrend.

The three consecutive tops make this pattern visually similar to the head and shoulders pattern but, in this case, the middle peak is nearly equal to the other peaks rather than being higher. Many traders will enter into a short position once the price of the asset falls below the identified support level (shown by the black line in the chart above).

Ultimate Oscillator:

A technical indicator invented by Larry Williams that uses the weighted average of three different time periods to reduce the volatility and false transaction signals that are associated with many other indicators that mainly rely on a single time period.

This is a range-bound indicator, which means the value fluctuates between 0 and 100. Similar to the RSI, levels below 30 are deemed to be oversold, and levels above 70 are deemed to be overbought. Transaction signals are derived by finding situations where the price is going in opposite directions than the indicator. Once this divergence has been identified the trader will wait to confirm the transaction by using other technical indicators.

Unemployment Rate:

The percentage of the total labor force that is unemployed but actively seeking employment and willing to work. From 1948 to 2004, the monthly U.S. unemployment rate has ranged between about 2.5% to 10.8%, averaging approximately 5.6%. The unemployment rate is considered a lagging indicator, confirming but not foreshadowing long-term market trends.

Unified Managed Account - UMA:

A professionally managed private investment account that is rebalanced regularly and can encompass every investment vehicle (e.g. mutual funds, stocks, bonds and exchange traded funds) in an investor's portfolio, all in a single account.

The unified managed account is an evolution of the separate account, which is similar in that it is a professionally managed account which is rebalanced often but only contains one type of investment instrument (such as mutual funds). If an investor wanted to have a well-diversified portfolio of stocks, bonds and mutual funds, he or she would need to open three separate accounts. The UMA removes the need to have more than one account and combines all of the assets into one account with a single registration.

Unrealized Gain:

A profit that results from holding on to an asset rather than cashing it in and using the funds. Let's say you own a stock that has doubled, but you haven't sold it yet. This is said to be an unrealized gain.

Unrealized Loss:

A loss that results from holding onto an asset rather than cashing it in and officially taking the loss. Let's say you own a stock that is down 50%, but you haven't sold it to realize the loss yet. This is said to be an unrealized loss.

Up Volume:

A stock's volume when the security closes at a price higher than the previous day's close. In other words, if a stock increases in price during the day, the volume for that day is considered to be up volume.

Uptrend:

Describes the price movement of a financial asset when the overall direction is upward. A formal uptrend is when each successive peak and trough is higher than the ones found earlier in the trend.

Notice how each successive peak and trough is located above the previous ones. For example, the peak at Point 4 is higher than the peak at Point 2. The uptrend will be deemed broken if the next low on the chart falls below Point 5.

Uptrend is the opposite of downtrend

The goal of most technical traders is to identify a strong uptrend and to profit from it until it reverses. Selling an asset once it has failed to create a new peak or trough is one of the best ways to avoid the large losses that can result from a reversed trend. Many technical traders will also draw trend lines to identify an uptrend and will use this tool as a guide for when to sell as it can also be an early indication of a trend reversal.

US Dollar Index - USDX:

A measure of the value of the U.S. dollar relative to majority of its most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.

Currently, this index is calculated by factoring in the exchange rates of six major world currencies: the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. This index started in 1973 with a base of 100 and is relative to this base. This means that a value of 120 would suggest that the U.S. dollar experienced a 20% increase in value over the time period.

Venture Capital:

Financing for new businesses. In other words, money provided by investors to startup firms and small businesses with perceived, long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.

Venture capital can also include managerial and technical expertise. Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. This form of raising capital is popular among new companies, or ventures, with limited operating history, which cannot raise funds through a debt issue. The downside for entrepreneurs is that venture capitalists usually get a say in company decisions, in addition to a portion of the equity.

Volatility:

A statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.

A variable in option-pricing formulas showing the extent to which the return of the underlying asset will fluctuate between now and the option's expiration. Volatility, as expressed as a percentage coefficient within option-pricing formulas, arises from daily trading activities. How volatility is measured will affect the value of the coefficient used.

In other words, volatility refers to the amount of uncertainty or risk about the size of changes in a security's value. A higher volatility means that a security's value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. Whereas a lower volatility would mean that a security's value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.

Volume:

Volume is an important indicator in technical analysis as it is used to measure the worth of a market move. If the markets have made strong price move either up or down the perceived strength of that move depends on the volume for that period. The higher the volume during that price move the more significant the move.

Volume Price Trend Indicator - VPT:

A technical indicator consisting of a cumulative volume line that adds or subtracts a multiple of the percentage change in share price trend and current volume, depending upon their upward or downward movements. This indicator is used to determine the balance between a stock's demand and supply. The percentage change in the share price trend denotes the relative supply or demand of a particular security, while volume indicates the actual size of the forces.

Wave:

A metaphor for daily market activity that goes against the weekly market tide.

An investor trading daily would measure the market waves, or the daily market trends, with various oscillators from the triple screen trading system.

The ocean metaphors for market trends were coined by one of the markets first technical analysts, Robert Rhea.

Wedge:

A technical chart pattern composed of two converging lines connecting a series of peaks and troughs.

Falling wedges indicate temporary interruptions of upward price rallies. Rising wedges indicate interruptions of a falling price trend. Technical analysts see a 'breakout' of this wedge pattern as either bullish (on a breakout above the upper line) or bearish (on a breakout below the lower line).

Whipsaw:

A condition where a security's price heads in one direction, but then is followed quickly by a movement in the opposite direction. The origins of term are derived from the push and pull action used by lumberjacks to cut wood with a type of saw with the same name.

There are two types of whipsaw patterns. The first involves an upward movement in the share price, which is then followed by a drastic downward move, which causes the share's price to fall relative to its original position. The second type involves the share price to drop for a little while, and then suddenly, the price abruptly surges towards positive gains relative to the stock's original position.

Williams %R:

In technical analysis, this is a momentum indicator measuring overbought and oversold levels, similar to a stochastic oscillator. It was developed by Larry Williams and compares a stock's close to the high-low range over a certain period of time, usually 14 days. It is used to determine market entry and exit points. The Williams %R produces values from 0 to -100, a reading over 80 usually indicates a stock is oversold, while readings below 20 suggests a stock is overbought.

Business Reporting Language - XBRL:

A standard that was developed to improve the way in which financial data is communicated, making it easier to compile and share this data. XBRL is a type of XML (extensible markup language), which is a specification that is used for organizing and defining data. XBRL uses tags to identify each piece of financial data, which then allows it to be used programmatically by an XBRL-compatible program.

Imagine that you are looking at a company's financial statements online on the company's website. Traditionally, these statements would simply be in plain text. If you wanted to put these numbers into a spreadsheet file to run analysis on the statements, you would have to either manually type or copy and paste each account and corresponding number into the spreadsheet. However, if the data on the site was available in XBRL, you could simply convert this data from the website into a spreadsheet program (usually instantaneously) that is XBRL compatible.

Xenocurrency:

A currency that trades in markets outside of its domestic borders. "Xeno" is a prefix meaning foreign or strange.

An example of a xenocurrency is the Chinese yuan when it is traded in the United States. When currency is deposited by national governments or corporations in banks outside their home market, it is sometimes referred to as a "eurocurrency" (this applies to any currency and to banks in any country).

Yard:

Slang for one billion units in currency. The term also refers to "milliard," which is a European term for 1,000 million (a billion).

If a person wanted to buy one billion U.S. dollars, he or she might say, "I would like to buy a yard of U.S. dollars." By using the word "yard" in place of "billion," the person ensures that the counter-party will not misunderstand billion for "million" or "trillion."

Yo-Yo:

Slang for a very volatile market. Basically, a yo-yo market moves up and down like its toy namesake.

Zaraba method:

A method of matching orders that involves using an auction-like process to trade securities. The orders are organized by both their prices and the time that they were taken. As soon as an order for a security is delivered, it is compared and matched with orders already in the order book. When a bid comes in that matches the price requested by another order, the two orders are executed and taken out of the order book.

The zaraba method is most often associated with the Japanese stock exchanges. Typically, the zaraba method is used during normal trading sessions, whereas a different order matching method, which is called the itayose method, is used to determine the opening and closing prices for each morning and afternoon trading session.

Zero Plus Tick:

A transaction at the same price as the preceding trade, but at a higher price than the last different trade.

Also known as a "zero uptick".

For example, when trades are executed at $10, $11, and $11, the last trade at $11 is a zero-plus tick. A short sale is only permitted on a zero plus tick.

Zig Zag:

A technical analysis indicator that filters out changes in an underlying plot that are less than a specified amount. In other words, it helps to show only significant changes.

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