Glossary of Technical Analysis and
Trading Terms
Technical
analysis, which involves the evaluation of stocks based on historical market
statistics and chart patterns, has become extremely popular in recent
years. However, with literally hundreds of different technical
indicators in existence and a wide variety of terms to sort through, it is
by no means a simple subject.
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| The following glossary of technical
analysis and trading terms should provide you with a handy reference guide
for those instances when you run into a term you don't fully
understand. As such, we'd urge you review the terms listed below and
to bookmark this page for future reference. |
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A
- B - C - D - E
- F - G - H - I
- J - K - L - M
- N - O - P - Q
- R - S - T - U
- V - W - X - Y
- Z
A
ADX -- ADX
is one of the most powerful and reliable technical indicators I've
found. The
indicator gives a basic buy signal when
+DI (green)
cross above –DI (red),
and the reverse for a sell.
The signal is that much more potent if the ADX line is (or soon
after) begins trending up.
If you go to stockcharts.com, you'll find the color coding I've
mentioned. ADX
gives a somewhat late signal, but it is typically very reliable.
I like to filter it with other tools such as MACD, Wilder's
parabolic, etc. Subscribers to stockcharts premium ($19.95 a
month) can scan in candleglance for the ADX and pick up on the
crossovers quite quickly.
The chart should then be examined in detail. The more
technical messages you see that are saying the same thing, the more
successful your trade is likely to be.
B
BUY AT OPEN -- If you'd like to implement this
type of trading order, then you should place a market order before the
market opens up for trading (9:30 AM ET). When placing a market order,
your trade will be filled at whatever the opening price is on that
morning.
BUY ON STOP ORDER -- A buy on stop order is one
that is triggered when a stock hits a specific price. At this point it
then becomes a market order. (Note: this is the opposite of a "sell
on stop," or stop loss.) A buy on stop order is useful to place if
you only want to buy on a breakout above resistance or to ensure the
previous trend is continuing.
D
DAY TRADING -- Day traders typically enter several
trading positions for just a fraction of a trading day. The typical day
trader might hold a stock for only a few hours and may aim for a profit
of, say, 30 or 40 cents. The percentage gains that day traders attempt
to capture are often miniscule, but when these gains are multiplied by
large volumes of hundreds -- or even thousands -- of shares, they can be
quite profitable. The typical day trader will usually trade several
different stocks in a single day. For more information on different
trading styles, please see the first installment of our swing trading
course by clicking here (if you're not already a member, you'll need to
subscribe to our Swing Trader newsletter first in order to gain access
to the course).
DISCLOSURE -- I will always provide a
disclosure in our Swing Trader newsletter whenever I personally hold any
of the stocks I mention in the report.
G
GOOD FOR THE DAY -- This is a type of trading
order that expires immediately after the day for which it is set.
GOOD UNTIL CANCELLED -- A good until cancelled
order will remain on the broker's books until you actively cancel the
order. Traders should keep careful track of all outstanding good until
cancelled orders they have put in place.
L
LIMIT ORDER -- A limit order states the maximum
price you are willing to pay for a stock. You can use this type of order
to avoid entering a position if a stock gaps up or down at the opening
and you want to avoid entering at an extreme price. Limit orders can be
combined with "buy" or "sell on stop" orders as
well.
LONG POSITION -- When you buy a stock from the
long side, you are purchasing the shares with the hope that they will
rise in price. This is the exact opposite of a short
sale.
LONG-TERM TREND -- (See "Primary
Trend" below.)
M
MEASURING PRINCIPLE -- This concept allows
you to set a specific minimum price target for a particular stock
movement and works with any well-defined technical analysis pattern such
as a head and shoulders, rectangle or triangle. As an example, let's say
the S&P has been in a clear four-month topping pattern with
resistance at 945 and support at 868. Now, let's assume we notice a
clear break below support on a closing basis. To
calculate the minimum target for the S&P based on the measuring
principle, first establish the height of the pattern. This calculation
is as follows: Top: 950 Bottom: 868 (support) Difference: 82
points
Once you've established the height of the pattern, next subtract that
amount from the breakout level (if the break has been below support) or
add it to the breakout level (if the break has been above resistance).
In this example, the break was below support, so we will subtract:
Breakout level: 868 Less: Height of pattern:
82 = Minimum Target: 786
The measuring principle may have no fully logical explanation, yet in my
experience it works uncannily well in most cases.
MINOR TREND -- (see "Short-Term
Trend" below)
O
ON BALANCE VOLUME (OBV) -- On Balance Volume
is an indicator created by Joseph Granville. It is calculated by
starting with an arbitrary figure for a volume line. On days when price
closes up all volume is added to the line; when prices close down the
reverse is true. The theory behind OBV is that volume precedes price.
Many times it is just a coincident indicator, but there are certainly
occasions when it does warn a breakout is coming.
P
PRICE PATTERNS -- The idea of price patterns
is that they repeat themselves over and over again throughout time. If
you can recognize the price pattern and accurately predict it, then
you're likely to make substantial swing trading profits. The vast
majority of price patterns are formed by combining a trendline with a
support or resistance level. Two of the most important price patterns to
recognize are the ascending triangle and the descending triangle.
PRIMARY TREND --
Each of my weekly Swing Trader
newsletters begins with a review of what I like to call the
"Primary" trend in the stock market -- the big picture.
Technical analysts usually distinguish between three market trends: the
Primary trend, which lasts for a year or more, the Intermediate trend,
which lasts several weeks to several months, and the Short-Term trend,
which typically last several days. Profitable swing trading starts with
understanding the market's Primary trend.
R
REAL BODY -- The difference between the open
and the close as shown on a candlestick chart.
S
SELL ON STOP -- A "sell on stop"
order is one that is triggered only when the stock hits a specific
price. At this point it then it becomes a market order. I often use this
type of trade in situations where I do not want to enter the short
position unless the stock breaks down from support.
SHORT SALE -- When you
short a stock, you are temporarily borrowing the shares with the
intention of returning them at a future date. Short sellers borrow
shares, then sell them immediately in the open market in the hopes of
repurchasing those same shares at a lower price in the future. If you
short a stock, you will only make money if it declines in value.
SHORT-TERM TREND -- In
this section of my weekly Swing Trader
newsletter, I examine the market's most recent trading action in great
detail by focusing on the hourly S&P chart. The key here is to
determine the very short-term messages this chart is communicating.
SWING TRADING -- This term is typically used to
imply a style where one takes a position for several days to a few
weeks. A swing trade might be completed in less than a week, or if the
stock consolidates it might take several weeks. While a swing trader
will watch the market very closely, this style does not require the
trader to be in front a computer screen while the market is open. A
swing trader will typically aim for a 10-15% profit on all trades.
T
TARGET PRICE -- In my Swing Trader newsletter,
the "target price" is the price objective I set for each
trade. I often set this target based on the next highest support or
resistance level, and I frequently use the "measuring
principle" to determine an appropriate price.
TECHNICAL ANALYSIS -- Technical analysis is the
science and art of interpreting a stock chart. It is based on the belief
that all of the market's hopes, fears and decisions are already
expressed in this chart. Decode the chart's message and predict whether
a stock will go up or down. Make a correct prediction and be rewarded by
making money. For more information on this topic, please visit my Swing
Trading course by clicking here (if you're
not already a member, you'll need to subscribe
to my weekly Swing Trader newsletter first in order to gain access to
the course).
U
UPTHRUST -- An "upthrust" occurs
when prices break out above important resistance and then retreat below
this same resistance level. The pattern implies that eventually the
previous support level will be tested.
The glossary above was written by Dr. Melvin Pasternak -- editor of StreetAuthority.com's
weekly trading newsletter -- the StreetAuthority
Swing Trader. Dr. Pasternak comes to us
with more than 40 years of investing experience, having made his first trade
in 1961. Along the way, he has spent more than a decade teaching classes in
technical analysis for TD Waterhouse and has designed and taught stock
market classes at the college level. On the educational and journalistic
front, Melvin holds both Ph D. and MBA degrees and has previously written
regular financial columns for a leading international publisher.
If
you're interested in receiving informative technical analysis
commentary, as well as a variety of short-term trading ideas, delivered to
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