ABC Wave
A term used in Elliott Wave that describes a simple correction after a
trending move. It is comprised of three-wave (waves A, B and C) forming a
corrective or countertrend price movement.
Account Balance (Account Information)
The section of a trading screen that shows the amount of money in a trader’s
account, including net profit or loss of any open positions.
Account Information (Account Balance)
The section of a trading screen that shows the amount of money in a trader’s
account, including net profit or loss of any open positions.
Adaptive Techniques
These represent the alternative to fixed parameter techniques. Most indicators
will include look back periods in their calculation. By considering factors
such as adjustments in recent volatility, or the error between the forecasted
price and real price, mathematical algorithms can be used to continually
adjust formula weights to smooth the price series.
Adverse Excursion
Developed by John Sweeney, adverse excursion reviews past trades and scans for
the largest open loss and typical open loss occurring in a trading system.
This information can be used to determine stop loss points.
All or None
A limit price order that instructs the broker to fill the whole order at the
stated price or not at all.
Alternation
(Elliott Wave)
Alternation is one of Elliott’s observations. He noticed that it was common
that if Wave 2 in an impulsive wave is short and fast, then Wave 4 is sideways
(flat) and slow. If Wave 2 retraces a large percentage of Wave 1 then Wave 4
will tend to be a shallow retracement.
Andrews Method
Also known as the Andrews pitchfork and developed by Dr. Alan Andrews, this is
a technique for identifying upper and lower parallel lines for a trend. By
identifying key first moves in a trend and the correction, a potential trend
channel can be drawn.
Ascending Triangle
A pattern of corrective trading that develops between two converging lines
where the support line is rising and the resistance line is horizontal. This
pattern is generally described as a continuation pattern but can also be a
reversal pattern.
Ask (Offer)
The price at which a dealer or trader is willing to sell a currency; also the
price at which a trader can buy a currency.
Ask Price/ Ask Rate
The price at which a currency is offered for sale (as in bid/ask spread).
Ask Size
The number of lots being offered for sale at the ask rate.
Back Office
The department and processes related to the settlement of financial
transactions, including written confirmation and settlement of trades, and
record keeping.
Back-Testing
The process of testing a set of rules that constitutes a mechanical trading
system on historical data to determine the viability of the method. This
normally involves optimization of the parameters for the trading rules
employed and should also include Walk Forward testing to ensure the optimized
parameters are stable.
Balance
Amount of money in a trading account.
Balance of Payments
A record of a nation’s claims and transactions with the rest of the world over
a particular time period. These include imports and exports, services and
capital flows.
Bandpass Filter
An algorithm that rejects high and low frequencies and passes only the
frequencies in a predetermined range.
Bar Chart
A chart of price bars. Each bar shows the opening, closing, high and low price
of a currency for a specific time period, with the length of the bar
representing the range of prices traded for that time period.
Base Currency
(Traded Currency)
The first currency in a currency pair. The base currency is the currency
against which the second or pricing currency is quoted. In the Forex market
the U.S. Dollar is most frequently the base currency.
Basis Points
One basis point equals 0.01% yield of a bond or note and therefore 100 basis
points equals 1% of yield.
Bear Market
A period of sustained declining prices.
Bear Trap
This occurs when prices decline through a previously identified key support
level (perhaps a triangle base) but is immediately reversed causing short
positions to be stopped out and therefore is considered as providing a false
bearish signal.
Bearish
If the market is “Bearish” it implies that the underlying price data has
conditions that suggest the price should decline.
Bid
The price at which a dealer or trader is willing to buy a currency; also the
price at which a trader can sell a currency.
Bid/Ask Spread
The difference between the bid and ask (offer) prices.
Big Figure
100 basis points of the underlying foreign exchange rate. This equates to 1.00
in USDJPY and 0.0100 in EURUSD.
Blow Off Top
This is a dramatic rise in price that resembles a rising exponential curve. It
is generally accompanied by strong volume and is often followed by a complete
collapse in prices.
Boolean
George Boole, English logician (1815-1864), is credited with the invention of
'Boolean logic' in which information is represented as only one of two choices
available such as true or false, 0 or 1, on or off.
Breakaway Gap
As a consolidation period or reversal formation is completed, price will exit
the pattern with an opening price that causes a gap from that pattern. This
could be a break through a trend line, a support or resistance line or even
through a key point of the pattern such as the neckline of a head and
shoulders pattern. Breakaway gaps are often filled during a brief correction
after the break.
Breakeven Stop
Guards against a profitable trade turning into a loss. When the profit on a
trade exceeds a certain amount, a breakeven stop order is generated at the
trade entry price.
Breakout
The price point when the market price moves through key level of support of
resistance and causes a sustained move in the direction of the break. This
could be generated by break of a band of sideways trading or of a price
pattern.
Broker
A firm that matches buyers and sellers in the currency market.
Bull Market
A period of sustained rising prices.
Bull Trap
This occurs when prices rally through a previously identified key resistance
level (perhaps a triangle top) but is immediately reversed causing long
positions to be stopped out and therefore is considered as providing a false
bullish signal.
Bullish
If the market is “Bullish” it implies hat the underlying price data has
conditions that suggest the price should rise.
Buy Order
An order to purchase the first, or base currency in terms of the pricing, or
quote currency.
Buy Limit Order
Placed below the current market price, in an attempt to buy a currency for
less than its current price.
“Buying the Dips”
The process of buying retracements or pullbacks in an uptrend.
Buyline
A number below which an indicator must fall before an upturn is considered
significant.
Candlestick Charts
This is a form of price presentation similar to bar charts which is used to
identify localized price patterns that represent market psychology that
Japanese originated in the 1600s to analyze the price of rice contracts. As
with bar charts, Candlestick charts use an open, high, low and close in which
the high and low are plotted as a single vertical line while the range between
the open and the close is plotted as a rectangle and is referred to as the
body. The lines above and below the body are referred to as “shadows”. If the
close is above the open, the body is white. If the close is below the open,
the body is black.
Capital Account
Measures short and long-term movements of financial assets between countries.
Capital Risk Limit
Limits on the amount of trading capital that is risked.
Central Bank
Controls a country’s money supply and is responsible for monetary policy and
the maintenance of financial stability within a country. The U.S. Federal
Reserve Bank is an example of a central bank.
Channel
Used to identify price resistance or support areas for short-term profit
taking and to initiate positions. Channels are formed by drawing a standard
trendline with a parallel line. In the case of an uptrend the parallel line
runs along price highs forming a channel; in the case of a downtrend the
parallel line runs along price lows.
Channel Line
A line parallel to the standard trendline that shows potential areas of price
resistance or support.
Chart-Based Stops
Signal when to exit a trade, often by a break in a trendline, moving average,
or other key measure of support or resistance.
Closed Trades
The listing for the liquidation of open positions by either selling long
positions or buying back to cover short positions.
Commercial Banks
Trade billions of dollars daily on behalf of their customers and for their own
accounts.
Commission
Brokerage fees.
Comparative Relative Strength
This is a method of measuring the relative performance of one price against
another. It is normally used to compare the performance of one price item
against its index or to another item.
Congestion Area or Pattern
A sideways trading range with no follow through buying or selling. It is
generally characterized by short, sharp movements in price that are then
reversed in a choppy, volatile manner. These will often provide support or
resistance once price has broken away from the pattern.
Consolidation
A leveling off of prices, often after a swift price move up or down.
Consolidation is generally comprised of one of a range of price patterns such
as triangles, flags or pennants representing a pause or correction in the
current trend of the market.
Continuation Patterns
Price patterns associated with market pauses or price consolidations.
Continuation patterns are created by sideways price action that often narrows
as the market consolidates. Continuation patterns have names like their
shapes; wedges, triangles or flags. (See Congestion Area of Pattern.)
Contract
A standard trading lot, typically 100,000 units of the base currency.
Coppock
Developed by Edwin Sedgwick Coppock in 1962 as a long-term price momentum
indicator for the Dow Jones Industrial Average or any other index.
Correction
A retracement of the previous major trend. When prices climb or fall too far
too fast, a market often retraces part of the trend move. This situation is
described as a market correction. Often the degree of the retracement is
measured utilizing a Fibonacci Ratio.
Corrective Wave
(Elliott Wave)
Corrective waves are those that form corrective patterns against the main
direction of the trend. For example, wave 2 corrects wave 1 and wave 4
corrects wave 3. Once a 5-wave pattern has been completed there will be a
simple, or complex, correction of the entire move that will develop as a
single or multiple three-wave move. The numbered phase of A-B-C waves are also
corrective.
Correlation Coefficient
This is a measurement of the relationship between two variables that varies
between +1 (highly correlated) and -1 (highly uncorrelated).
Counter Trend
A minor trend move that runs against the direction of the underlying major
trend.
Cover
To close out a foreign currency trading position.
Credit Spread
The difference in value of two options, where the premium of the option sold
exceeds the cost of the option purchased.
Cross Rate
An exchange rate between two non-U.S. Dollar currencies. Popular cross rate
currency pairs include EUR/GBP, EUR/JPY and AUD/CAD.
Cup and Handle
A period of accumulation observed as a price pattern on bar charts that lasts
from seven to 65 weeks. The initial price pattern is the shape of a cup or
shallow 'U'. The handle typically lasts for just one or two weeks. The handle
is a slight retracement of the last rally with low trading volume during the
right-hand side of the formation.
Currency
Foreign Currency (see Currency Pairs). Paper money or banknotes. Also the
section of a trading screen that provides currency reference information, such
as the high and low prices for a trading day.
Currency Nicknames
Many currencies and currency pairs are referred to by shortened versions of
their names, or by nicknames. Examples include: Sterling, Pound & Cable (for
Great Britain Pound), Kiwi (for the New Zealand Dollar), Aussie & Looney (for
the Australian Dollar), Euro (for the European Currency), Goose (for the
Canadian Dollar), Swissie (for the Swiss Franc).
Currency Pairs
FX trading is always conducted using currency pairs, with one currency priced
in terms of another. The first currency in the pair is called the base or
traded currency; the second currency is called the pricing or quote currency.
Currency Prices
In FX, currencies are priced in pairs. The first currency shown in the pair is
referred to as the base or traded currency, and the second is the pricing or
quote currency.
Current Account
The net result of a country’s Trade Balance and its Services Account.
Curve-Fitting
The process during the development and testing of a mechanized system where
rules are created that map every event in the historical data of a security.
However, since these are not applied to a previously untested section of data
history the risk is for losses to occur due to the failure to ensure the
system’s rules are not generic. The rules are accurate in hindsight only.
Cycle
A repetitive wave form that attempts to measure the time measurements of price
highs to price highs, price lows to price lows and price highs to price lows.
Daily Range
The difference between the high price and the low price during one day's
trading.
Dark Cloud and Piercing Line
(Candlestick Reversal Pattern)
The Piercing Line is a bullish reversal in a downtrend. During this trend a
long black day develops following which price opens below the low of the black
day and rallies to form a long white day. The close of the white day will be
below the close of the black day but above the mid point.
The pattern suggests that the underlying bearishness may be overdone and a
further move higher to breach the high of the white day will confirm further
gains.
A Dark Cloud is the opposite of the Piercing Line. During an uptrend a long
white day develops. The following day’s open will be above the high of the
white day and price then declines in a long black day to close above the white
day’s close but below the mid price.
The pattern suggests that the underlying bullishness may be overdone and a
further move lower to breach the low of the black day will confirm further
losses.
Day Trading
Trading positions are squared up by the end of the trading day. No positions
are carried overnight.
Dead Cross
A Dead Cross is created when shorter moving average crosses below a longer
moving average. This is generally considered a bearish signal.
Dealer
An individual or FX brokerage firm that risks its own capital, offering buy
and sell quotes in a currency market. One that consistently makes two-way
prices, providing both bids and offers.
Dealing Rates (Trade Entry)
The section on a trading screen that shows prices at which you can buy and
sell currencies.
Debit Spread
Buying one option and selling another option, creating a spread position where
the value of the long position exceeds the value of the short position.
Delta
The percentage amount by which the price of an option changes for every dollar
move in the underlying instrument.
Derivatives
An over-the-counter (OTC) or exchange-traded financial contract whose value
depends on the value of the underlying instrument. Some examples are futures
contracts, stock options, equity indexes, and mortgage backed securities, and
OTC Forex options.
Descending Triangle
A pattern of corrective trading that develops between two converging lines
where the support line is horizontal and the resistance line is declining.
This pattern is generally described as a continuation pattern but can also be
a reversal pattern.
Detrend
The removal of the underlying trend in price. One method of detrending prices
is to subtract price from its average and represent the result around a zero
line.
Devaluation
When a Central Bank abandons the pegging of its currency to a fixed rate of
exchange, resulting in a significant drop in its currency’s value (example:
Argentine Peso 2002). Also used when a government actively promotes a dramatic
decline in its country’s exchange rate (example: Japanese Yen 2001-2002).
Diagonal Triangle
(Elliott Wave)
This is a five-wave pattern in which the waves are constructed of three waves.
The pattern emerges normally between two rising (or falling) converging lines,
though they can be parallel. It is most commonly found in wave 5 positions,
but can also occur in wave A or wave C. In classic technical analysis it is
called a wedge.
Diffusion Index
A measurement of the percentage of individual cases that are positive when
compared with the aggregate group. For example, the number of stocks within
the S&P 500 that are above their 200 day moving average.
Divergence
Occurs when an oscillator line and prices move in opposite directions
providing early warning of a possible trend reversal.
A Bullish Divergence is identified when price declines make new lows
while the underlying momentum indicator (eg RSI or Stochastics) does not make
new lows.
A Bearish Divergence is identified when price rallies make new highs
while the underlying momentum indicator (eg RSI or Stochastics) does not make
new highs.
The implication of momentum and price making divergences is important. It
implies that the movement in price in one direction is slowing and highlights
the risk for reversal. Divergence commonly occurs after a trend and therefore
highlights potential for the trend to complete or reverse. It is important to
ensure that other analysis confirms the possibility of a reversal.
Doji
(Candlestick)
A Doji occurs when the open and close are the same value (or very close). The
length of the shadow is not important and interpretation will depend on the
position and length of the shadows. They can occur at market reversals since
they indicate a balance of buyers and sellers. (Indecision of buyers in an up
trend, of sellers in a downtrend). By themselves single bars do not
necessarily provide any indications but will contribute to a group that
represent a candlestick pattern.
Doji Stars - Morning and Evening
(Candlestick Reversal Pattern)
The Morning Doji Star is a reversal in a downtrend. During a downtrend
a long black day is formed. The next day is a short day with the open having
gapped lower below the low of the black day but which also closes around the
same level as the open. The next day price gaps open once again, but to above
the high of the Doji Star and forms a white day.
The long black day in the downtrend fuels the underlying bearish
sentiment. However, this is not continued on the day of the Doji Star and the
gap higher again leaves many traders short and causes squaring of those
positions.
The Evening Doji Star is a reversal in an uptrend. During an uptrend a
long white day is formed. The next day is a short day with the open having
gapped higher above the high of the white day but which also closes around the
same level as the open. The next day price gaps open once again, but to below
the low of the Doji Star and forms a black day.
The long white day in the downtrend fuels the underlying bullish
sentiment. However, this is not continued on the day of the Doji Star and the
gap lower again leaves many traders long and causes squaring of those
positions.
Doji Star Up and Down
(Candlestick Reversal Patterns)
The Doji Star may be both bullish and bearish reversals. In a Bullish Doji
Star a long black day develops in a downtrend. This is followed by a Doji Star
that opens below the low of the black day and closes at, or around, the level
of the open. The shadows of the star should not be long.
The fact that a Doji Star occurs in a downtrend signifies that the bearish
sentiment is becoming weaker with traders uncertain of committing to a short
position. A subsequent open above the high of the star would cause further
short covering.
In a Bearish Doji Star a long white day develops in an uptrend. This is
followed by a Doji Star that opens above the high of the white day and closes
at, or around, the level of the open. The shadows of the star should not be
long.
The fact that a Doji Star occurs in an uptrend signifies that the bullish
sentiment is becoming weaker with traders uncertain of committing to a long
position. A subsequent open below the low of the star would cause further long
covering.
Dollar Risk Stop
Also referred to as a money management stop. It exits a trade at a
pre-determined monetary loss.
Double Bottom
The opposite of a double top. When price declines once to a level then
rebounds, and over a period of time once again declines to the same
approximate level then rallies above the peak between the two troughs a double
bottom is confirmed at the two equal price lows. This can be likened to the
shape of a 'W'. A target can be generated by measuring the distance from the
lows to the peak and projecting this value upwards from the intervening peak.
Double-Smoothed
A price series that has been smoothed first by a mathematical algorithm such
as an exponential moving average and then the output of the first smoothing is
then smoothed a second time by a similar method.
Double Top
The opposite of a double bottom. When price rallies once to a level then
rebounds, and over a period of time once again rallies to the same approximate
level then declines below the trough between the two peaks a double top is
confirmed at the two equal price highs. This can be likened to the shape of an
'M'. A target can be generated by measuring the distance from the highs to the
trough and projecting this value downwards from the intervening trough.
Double Zig-zag
(Elliott Wave)
This is an extended correction in which two ABC patterns occur with a Wave X
separating them.
Dow Theory
Originated by Charles Dow, describes the action of price trends. Dow Theory is
used by technical analysts to chart the direction of market prices.
Downtrend
Price movement characterized by a series of lower price highs and lower price
lows.
Downtrend Line
Needs at least two descending price highs with a third for confirmation of the
trendline.
Drawdown
The reduction in the equity of an account as a result of a losing trade or
series of losing trades.
Economic Indicator
Measures the strength or weakness of all or part of a country’s economy.
EMA
See Exponential Moving Average
Engulfing - Bullish and Bearish
(Candlestick Reversal Pattern)
The first bar of the pattern is a long black/white day, which is then followed
by a white/black candlestick that completely engulfs the total range of the
first day. In a downtrend, the market opens at a new low but buying pressure is so
strong that it closes at or above the previous day’s open. This strong
reversal suggests that the bulls are in control and may overwhelm the bears. In an uptrend, the market opens at a new high but selling pressure is
so strong that it closes at or below the previous day’s open. This strong
reversal suggests that the bears are in control and may overwhelm the bulls.
It is very similar to a Key Reversal Day.
Envelope
Trading bands that are plotted as lines above and below a market normally by
plotting a percentage of price around a central moving average.
Euro
Introduced on January 1, 1999, this currency combined its European member
nations’ individual currencies into a new single currency, the Euro.
European Central Bank (ECB)
The regulatory body charged with setting monetary policy and controlling the
money supply of the Euro.
European Monetary Unit
The Euro.
Evening Star and Morning Star
(Candlestick Reversal Pattern)
The first bar to develop in a morning or evening star is a long white/black
day. This is followed by a gap in the direction of the trend and then a Short
Day.
There will be no overlap between the first and second candlesticks. (The short
day may be substituted with a Doji).
Finally there is a second black/white long day, gapping in the opposite
direction, with no overlapping shadows.
The pattern is similar to an “Island Reversal” in classical patterns,
representing a market that has over-extended in one direction, with little
supporting sentiment. It is always preferable to have other supporting
technical evidence of a potential reversal such as a bullish/bearish
divergence or break of trend line.
Exchange Rate
The value, or price of one currency quoted in terms of another.
Expanded Flat
(Elliott Wave)
Occasionally in a correction the end of wave B will penetrate the extreme of
the end of the impulsive wave. Wave C will normally retrace to the extreme of
wave A. Wave A will be comprised of three waves. Wave C will be comprised of
five waves. These normally occur before an extended wave and will signal a
significant trend. This is also called an “irregular correction”.
Expanding Triangle
(Elliott Wave)
This is a five-wave pattern in which the waves are constructed of three waves.
There are two different forms of this:
(1) The pattern emerges normally between two rising (or falling) diverging
lines. It is most commonly found in wave 5 positions and occur before a large
reversal in trend direction.
.
(2) The pattern emerges normally between one rising and one falling diverging
lines. In this situation it is a continuation pattern and is merely an
inverted standard triangle.
Exponential Moving Average (EMA)
A technical indicator that addresses the weighting limitations of the Simple
Moving Average by assigning greater value to the most recent closing price,
and a declining value to older prices, making it easier to see the general
direction of a trend underlying market action.
Extended Wave
(Elliott Wave)
On occasion one of the impulsive waves can extend. An extending wave will be
constructed of more than five internal waves, and the additional waves will be
of the same degree as the others. Normally there will be 7 or 9 waves in an
extended wave. Most often wave 3 will extend, but extensions in wave 5 are
also very common.
A failed fifth wave occurs when the completion of the fifth wave does not
penetrate the extreme of the third wave. It is indicative of either the price
target having been met or a sharper reversal in prices.
Falling and Rising Three
(Candlestick Continuation Pattern)
A Rising Three pattern is a bullish continuation pattern in an uptrend.
The first bar develops as a long white bar. The following three bars are all
short days but which fail to move below the low of the first day’s long white
bar. On the fifth day a further long white bar develops that breaks above the
high of the first long white day.
The failure of the correction that lasts over three days to retrace past the
low of the first long white bar signals that the selling pressure is weak and
that bulls can dominate once again.
A Falling Three pattern is a bearish continuation pattern in a
downtrend. The first bar develops as a long black bar. The following three
bars are all short days but which fail to move above the high of the first
day’s long black bar. On the fifth day a further long black bar develops that
breaks below the low of the first long black day.
The failure of the correction that lasts over three days to retrace past the
high of the first long black bar signals that the buying pressure is weak and
that bears can dominate once again.
Fast Fourier Transform
Decomposes a periodic series of data into its component frequencies.
Failure Swing
The market not trading to a new high and thereby not reaffirming the uptrend,
or not trading to a new low in a downtrend. Also used when an oscillator does
not move to a new high when the market makes a new high, or the oscillator
does not make a new low when the market makes a new low.
Failure
An event in the Elliott Wave Principal, when the fifth wave of a five-wave
pattern fails to move above the top of the completed third. This will normally
be a precursor to a strong reversal.
Federal Reserve (Fed)
The central bank of the United States.
Fibonacci
Leonardo Fibonacci was an Italian 13th century mathematician who developed a
sequence of “magic” numbers that many consider has a natural place in the
financial market place. The sequence was developed by taking zero and adding
one to this, then adding the current number in the sequence to the previous
number to create the next in the sequence:
0 - 1 - 1 - 2 - 3 - 5 - 8 - 13 - 21 - 34 - 55 - 89 - 144 etc.
>From this sequence of numbers certain ratios such as 38.2% and 61.8% can be
derived and used in determining support and resistance.
Filter
A mathematical routine that alters the price series. This may be achieved by
measuring the movement of price around a moving average that smoothes the
price data to remove noise. Alternatively filters may be used in developing
trading rules to eliminate loss making trades.
5-3-5
(Elliott Wave)
This is a method of referring to a simple ABC pattern that is comprised of
five-wave waves A and C divided by a three-wave wave B. The diagram shows this
pattern.
Fixed Exchange Rate
Also referred to as a pegged rate. An exchange rate that has been set by a
country’s central bank against one or more currencies. Example: from 1993 -
2002 the Argentine Peso was fixed against the U.S. Dollar but floated freely
against other currencies.
Flag
A pattern formed during a short consolidation in price movement that is
contained by two parallel lines and thus looks similar to a flag on a
flagpole. Additionally, the price movements before and after the flag are
generally equal in length.
Flat Correction
(Elliott Wave)
Occasionally in a correction the end of wave B will complete at the extreme of
the end of the impulsive wave. Wave C will normally retrace to the extreme of
wave A. Wave A will be comprised of three waves. Wave C will be comprised of
five waves.
Foreign Exchange
(Forex or FX) Terms used to describe the process of trading one currency
against another at a set price or rate. Also names for the global currency
market, itself.
Forex - See Foreign Exchange.
Frequency
The number of cycles within a time period. For instance a 13 week cycle would
have an annual frequency of four.
Front and Back Office
A phrase used in banks to differentiate the area that conducts trades (front
office), and the area that process trades (back office).
Front-Loaded
The fees and commission are subtracted from the initial investment before
trading.
Fundamental Analysis
Examines the affect of economic, social and political events on currency
prices.
Fundamental Factors
Financial, Economic, Political, and Social events affecting the FX market.
FX - see Foreign Exchange
FX-Strategy System
Developed by Doug Schaff in the 1990s, this back-tested technical trading
system is designed to give traders a clear picture of the overall momentum or
trend of a currency market.
Gann's Square of 9
Originated by W. D. Gann, the square is constructed by spiraling numbers
outwards from "one" in an anti-clockwise direction. The first completed spiral
is achieved by the number “9” and subsequent progression of the spiral will
construct a price pattern tool that associates prices to degrees on a circle.
Gap
An empty space on a bar chart where no price overlap between two adjacent bars
exists. In other words the current day’s low is above the previous day’s high
or the current day’s high is below the previous day’s low. Gaps typically
occur due to overnight news developments.
GDP (Gross Domestic Product)
Measures a country’s economic growth.
Golden Cross
A Golden Cross is created when shorter moving average crosses above a longer
moving average. This is generally considered a bullish signal.
Golden Ratio
The ratio of any two consecutive numbers in the Fibonacci Sequence (0, 1, 1,
2, 3, 5, 8, 13, 21, 34, 55...). After development of the sequence the ratio
between one number and it’s preceding number is 1.618 and in the opposite
direction is 0.618. These ratios were used by the Egyptians to build pyramids,
by the Greeks to build the Parthenon and also occur in nature.
Good Till Canceled (GTC)
A trading order that remains in force until the trader cancels it.
Gross Domestic Product (GDP)
Measures a country’s economic growth.
Hammer and Hanging Man
(Candlestick Reversal Pattern)
In a Hammer, during a downtrend, there is an initial sharp sell off to new
lows. However, by the end of the day, the market rallies to close at or near
its high for the day.
The sharp recovery suggests that the bearish sentiment may be beginning to
wane and if a move above the high of the Hammer days occurs during the next
day’s trading there is a stronger risk of complete trend reversal.
In a Hanging man, during an uptrend there is a sharp sell off after the
market. By the end of the day, the market rallies to close at or near the high
for the day.
This pattern definitely requires confirmation. The recovery in price over the
day could mean the bulls are still in control. However, a break to new highs
on the next trading day is required to confirm. Alternately, a decline to test
the low of the Hanging Man day will suggest a trend reversal.
Harami - Bullish and Bearish
(Candlestick Reversal Pattern)
The first bar to develop is a long black/white day.
The second day will usually be comprised of a short day that is completely
engulfed by the real body of the first.
Following a long black day at end of a downtrend, a white candlestick opens
higher than the previous day’s close. Price is then unable to follow through
the previous day selling pressure and the uncertainty causes shorts to be
covered. (Bullish Harami)
Following a long white day at end of an uptrend, a black candlestick opens
lower than the previous day’s close. Price is then unable to follow through
the previous day selling pressure and the uncertainty causes long positions to
be covered.
(Bearish Harami)
The pattern is indicative that a reversal is possible. However, it is always
preferable to have other supporting technical evidence of a potential reversal
such as a bullish/bearish divergence or break of trend line.
Harami Cross - Bullish and Bearish
(Candlestick Reversal Pattern)
The first bar to develop is a long black/white day.
The second day a doji cross that is completely engulfed by the real body of
the first will complete.
Following a long black day at end of a downtrend, a white candlestick opens
higher than the previous day’s close. Price is then unable to follow through
the previous day selling pressure and the uncertainty causes shorts to be
covered. (Bullish Harami Cross)
Following a long white day at end of an uptrend, a black candlestick opens
lower than the previous day’s close. Price is then unable to follow through
the previous day selling pressure and the uncertainty causes long positions to
be covered. (Bearish Harami Cross)
The pattern is indicative that a reversal is possible.
However, it is always preferable to have other supporting technical evidence
of a potential reversal such as a bullish/bearish divergence or break of trend
line.
Head and Shoulders
A price pattern associated with market peaks, composed of three prominent
price highs. In an uptrend there is one prominent high in the middle with two
slightly lower highs on either side. The pattern is said to resemble a head
and shoulders. When a line is drawn through the two lows on either side of the
“head”, and prices break through that “neckline”, then a downtrend may be
beginning. When the same pattern occurs in reverse as price declines it is
called an “Inverse Head and Shoulders”.
Hedge Funds and Portfolio Managers
Investors of customer funds in the FX markets.
Higher/Lesser Degree
All waves are constructed internally of impulsive and corrective waves and
ultimately all waves will be part of a larger wave pattern. Therefore, within
a five-wave move higher that is labeled wave 1, waves 1, 3 and 5 (the impulse
waves) will be constructed of five internal waves. These internal waves will
be of “one lesser degree” to the larger wave 1. Also, the larger wave 1 may
continue to develop as a five-wave move higher itself. These larger waves are
of “one higher degree”.
In the example shown, the waves labeled in blue are of “one lesser degree” to
the waves labeled in red. The waves labeled in red are of “one lesser degree”
to the waves labeled in green and of “one higher degree” to the waves labeled
in blue. The waves labeled in green are of “one higher degree” to the waves
labeled in red.
Histogram
Indicators may often be plotted as vertical lines around a zero line.
Historic Volatility
There are many forms of measuring volatility, the most common is Historic
Volatility that considers the standard deviation of the log value of the daily
difference in closes over the length detailed in the parameter. The result is
then normalized on an annual basis and plotted.
Volatility is utilised by many option traders as a tool to determine how
volatile price has been and compare this with market traded volatility.
Importers/Exporters
Produce a regular flow of trading volume in the FX market.
Impulse Wave
(Elliott Wave)
Impulse waves are those that define the main direction of the
trending move. They are labeled as waves: 1, 3 and 5. They are comprised of
five waves of lesser degree.
Independent Traders
They speculate in the FX markets to make money. With the growth of the
Internet and lower trading costs, their numbers are increasing.
Indicators
Indicators are calculated by using mathematical algorithms and are used to
represent different characteristics such as overbought/oversold, trending or
underlying price direction.
Inflation
Rate at which the prices of goods and services are increasing.
Initial Margin
The amount of money required by a brokerage firm for a trader to execute
online currency trades.
Inside Bars and Outside Bars
Inside bars and outside bars are single bar patterns that are often identified
as having important qualities and break of the bar’s extremes imply a
continuation of the underlying direction. An “Inside Bar” occurs when the current bars high and low are within
the range of the previous bar. This is often interpreted as market price
pausing and being uncertain of the underlying direction of the market. An “Outside Bar” occurs when the current bars high and low exceed the
extremes of the previous bar. This is often interpreted as the market having
two conflicting views, the market has both buyers and sellers entering the
market and thus break of the extremes (high or low) may provoke a further move
in one direction.
Often, market players will look at the underlying volume to provide additional
evidence of a potential move.
Interbank Market
The market for foreign exchange trading conducted by banks throughout the
world, by phone or electronic network.
Interbank Rates
Forex prices quoted by the Interbank Market. Online FX trading now makes
Interbank currency prices available to the independent trader.
Interest Differential
Each currency carries an interest rate. Depending on the difference between
what interest rates are in one country compared to another (the so-called
interest differential), traders can either earn interest on their trading
positions over time or they will have to pay out interest.
Interest Rate
The amount of money paid on a bank deposit, expressed as an annual percentage.
Intermarket Analysis
This form of analysis was popularized in separate works by Martin Pring and
John Murphy. Comparing the price action or trend of one market to the trend or
price movement of another market to anticipate the impact one market may have
on another. For example, following the trend of interest rates relative to the
trend of the stock market.
Intermediate-term Trend
Represents corrections in a long-term trend.
Intrinsic Value
The difference between the price of the underlying instrument and the strike
price of an option.
Inverted Hammer and Shooting Star
(Candlestick Reversal Pattern)
The Inverted Hammer develops in a downtrend and after a long black day
a new low is formed with the body at the lower end of the range. The upper
shadow is normally twice the size of the body, or slightly less, and there is
only a small lower shadow.
After the long black day, the price opens below the close of the previous day.
Price then rallies but remains below the previous day’s close. This obviously
displays the desire to sell rallies, to maintain the downtrend. On the next
trading day, if the price opens above the body of the Inverted Hammer, it
implies short covering and further gains.
The Shooting Star develops in an uptrend and after a long white day
price opens above the close, rallies to a new high but declines to leave a
short body to the low of the day’s range. Normally the upper shadow is two or
three times the size of the body and there is almost no upper shadow. An open
on the following day below the short body would imply further losses.
Irregular Flat
(Elliott Wave)
Occasionally in a correction the end of wave B will penetrate the extreme of
the end of the impulsive wave. Wave C will normally retrace to the extreme of
wave A. Wave A will be comprised of three waves. Wave C will be comprised of
five waves. These normally occur before an extended wave and will signal a
significant trend. This is also called an expanded flat.
ISO Codes
Three-letter abbreviations assigned by the International Standards
Organization to designate currencies traded in the FX markets. The first two
letters generally are an abbreviation of the country name. The last letter in
the code is usually the first letter of the country’s currency.
Essentially a Key Reversal Bar is an Outside Bar that has particular
properties and most commonly occurs at the end of a trend. Before following
this type of event it is important to analyse market conditions further to
decide whether the Key Reversal Bar is valid.
Thus a Downward Key Reversal Bar will occur at the end of an uptrend and the
close of the bar will be below the low of the previous bar. This is said to
represent an initial follow through of the upward trend to new highs but then
failure as the market declines to close below the previous day’s low.
Thus an Upward Key Reversal Bar will occur at the end of a downtrend and the
close of the bar will be above the high of the previous bar. This is said to
represent an initial follow through of the downward trend to new lows but then
failure as the market rallies to close above the previous day’s high.
Kicking - Bullish and Bearish
(Candlestick Reversal Pattern)
The first day of this pattern is a Black/White Marubozu day. This is followed
by a White/Black Marubozu day that gaps against the direction of the first
day.
The dramatic reversal in price direction is a strong sign that the market is
headed in the direction of the second day’s gap.
The significantly strong selling pressure of the first day implied by the
Black Marubozu, (in a Bullish Kicking), is reversed the next day by the gap
opening. This is most likely caused by an unexpected fundamental event.
The significantly strong buying pressure of the first day implied by the White
Marubozu, (in a Bearish Kicking), is reversed the next day by the gap opening.
This is most likely caused by an unexpected fundamental event.
Lag
The number of bars that an indicator trails the current price. For example, a
moving average will peak by a number of periods after the market price peaks.
This period is generally half the length of the moving average.
Lead
The number of bars that an indictor designed to change prior to the price
changing is ahead of the current price. For example, a rate-of-change
oscillator may peak before the price peaks.
Leading Indicators
Economic indicators thought to forecast the future level or direction of
economic activity.
Least Squares Method
A statistical method to derive the formula for a line that fits the data
points by minimizing the sum of the squares of the deviations of the given
points from the line. This method is used in calculating linear regression.
Lesser/Higher Degree
All waves are constructed internally of impulsive and corrective waves and
ultimately all waves will be part of a larger wave pattern. Therefore, within
a five-wave move higher that is labeled wave 1, waves 1, 3 and 5 (the impulse
waves) will be constructed of five internal waves. These internal waves will
be of “one lesser degree” to the larger wave 1. Also, the larger wave 1 may
continue to develop as a five-wave move higher itself. These larger waves are
of “one higher degree”.
In the example shown, the waves labeled in blue are of “one lesser degree” to
the waves labeled in red. The waves labeled in red are of “one lesser degree”
to the waves labeled in green and of “one higher degree” to the waves labeled
in blue. The waves labeled in green are of “one higher degree” to the waves
labeled in red.
Lettered Phase
(Elliott Wave)
Some analysts refer to the “lettered phase”. This refers to the section of the
wave structure that forms the major corrective waves that are labeled A-B-C
and occasionally also D and E.
Leverage
The ability to use a small amount of money to control a large trading
position.
Limit Order
Used to enter the market at a specific price, or to exit a market at a
specific profit target.
Line Chart
Plots the movement of currency prices over a successive period of time.
Closing prices are most commonly used to construct line charts.
Liquidate
To close or get out of an existing position.
Liquidity
Over 85% of all FX transactions involve seven major currencies (AUD, CAD, CHF,
Euro, GBP, JPY and USD). In a 1.5 trillion dollar daily market, traders are
usually able to get in or out of currency positions in the major currencies.
Locked Limit
A market that has reached the maximum allowable price move permitted by an
exchange, such as on a stock exchange. There is no such limit in the Foreign
Exchange market.
Long
Trader has bought a currency with the expectation of selling it at a higher
price.
Long Bars
(Candlestick)
A long bar is one in which the body is longer than average and where the body
(between the open and close) is considerably longer than head and tail. A long
bar represents a large shift in market perception of value from open to close.
By themselves single bars do not necessarily provide any indications but will
contribute to a group that represent a candlestick pattern.
Long-term Trend
The overall direction in market prices are moving.
Lookback Interval
The number of periods of data used for the calculation of an indicator.
Lot
Refers to a standard trading contract, typically 100,000 units of the base
currency.
MACD
(Moving Average Convergence Divergence) Developed by Gerald Appel in the
1960s, this oscillator uses three exponential moving averages to show changes
in currency trends. The MACD fluctuates above and below a zeroline.
Major Currencies
Eighty-five percent of all FX transactions involve seven major currencies: the
U.S. Dollar (USD), Japanese Yen (JPY), Euro (EUR), British Pound (GBP), Swiss
Franc (CHF), Australian Dollar (AUD), and Canadian Dollar (CAD).
Margin
The amount of money a Forex brokerage firm requires a trader to keep in
his/her account to support a currency position.
Marked to Market
The calculation of the value of a market traded position based on the
settlement prices for the day.
Market Maker
A Forex dealer or FX brokerage firm that risks its own capital offering buy
and sell quotes in a currency market. One that consistently makes two-way
prices, providing both a bid and an offer.
Market Order
An order to execute a trade “at the market” or best available price.
Market Regulation
Unlike the U.S. Stock Market, which is subject to regulation by the Securities
and Exchange Commission (SEC), the FX markets are still largely unregulated.
There are no licensing requirements for FX brokers, no capital requirements
and no federal or industry protection for your account.
Market Sentiment
A measurement of views expressed by market participants and generally measured
through surveys, a gauge of bullish or bearish attitudes among investors and
traders.
Market Timing
Using technical tools to devise timely entry and exit strategies.
Market Trend
The overall direction in which currency prices are moving.
MarketView
As used by FX-Strategy, a market forecast based on the overall direction and
momentum of a market trend.
Marubozu
(Candlestick)
A Marubozu is a bar where the open and close are at the extremes of the bar.
The body is long and has no shadows. A Marubozu represents a large shift in
market perception of value from open to close that are at the extremes.
By themselves single bars do not necessarily provide any indications but will
contribute to a group that represent a candlestick pattern.
Mat Hold - Bullish and Bearish
(Candlestick Continuation Pattern)
A Bearish Mat Hold occurs during a downtrend. The first day is a long
black day. On the second day, price opens below the close of the first black
day, makes a new minor low, but the bar develops with a short body. The third
and fourth days also see small bodies rising from the low of the second day,
but in which the bars remain below the high of the first long black day. On
the fifth day a further long black day occurs that declines below the low of
the first day.
The pattern represents a holding pattern in a downtrend and when three short
bars cannot rally back above the high of the first long black day, sellers
once again dominate trading.
A Bullish Mat Hold occurs during an uptrend. The first day is a long
white day. On the second day, price opens above the close of the first white
day, makes a new minor high, but the bar develops with a short body. The third
and fourth days also see small bodies declining from the high of the second
day, but in which the bars remain above the low of the first long white day.
On the fifth day a further long white day occurs that rallies below the high
of the first day.
The pattern represents a holding pattern in an uptrend and when three short
bars cannot fall back below the low of the first long white day, buyers once
again dominate trading.
Maximum Adverse Excursion
Developed by John Sweeney. Measuring negative price performance of a series of
trades. This information is used to determine a reasonable stop-loss level
based on the historical analysis.
Maximum Entropy Method
A technique for spectrum analysis and a method of adaptive filtering and trend
forecasting.
Mean
Another method of describing the average price.
Mean Deviation
The average value on an absolute basis of the difference between the mean
(average) price and the individual prices in the lookback period.
Minor Currency
Lesser-traded currencies, in terms of daily volume of trades and liquidity.
The Singapore Dollar and Mexican Peso are examples of minor currencies.
Momentum Oscillator
Measures the momentum or rate of change of currency prices within a specific
time interval. The momentum oscillator fluctuates around a central zeroline.
Money Markets
Markets for instruments, such as CD’s and other bank deposits that carry
short-term interest rates.
Morning Star and Evening Star
(Candlestick Reversal Pattern)
The first bar to develop in a morning or evening star is a long white/black
day. This is followed by a gap in the direction of the trend and then a Short
Day.
There will be no overlap between the first and second candlesticks. (The short
day may be substituted with a Doji).
Finally there is a second black/white long day, gapping in the opposite
direction, with no overlapping shadows.
The pattern is similar to an “Island Reversal” in classical patterns,
representing a market that has over-extended in one direction, with little
supporting sentiment. It is always preferable to have other supporting
technical evidence of a potential reversal such as a bullish/bearish
divergence or break of trend line.
Moving Average
A series of averaged price data plotted on a currency chart. This technical
indicator makes it easier to see the general direction of a trend underlying
market action.
Moving Average Convergence Divergence - see
MACD
Moving Average Crossovers
It is common for traders to employ two or more moving averages to identify
turn points in the trend of the market. A shorter-term moving average rising
above the longer-term moving average is called a “Golden Cross” and is a buy
signal, while a sell signal would be the shorter-term moving average closing
below the longer-term moving average, otherwise known as a “Dead Cross”.
Moving Average Stops
A moving average whose price is used in a stop order. The lagged nature of a
moving average makes it easily applicable as a trailing stop.
Multiple Time Frames
The use of more than one time frame to determine trades. For example, look to
the weekly chart for the trend, support and resistance levels, then trade on
signals generated by the daily chart only if they are supported by the weekly
chart.
Narrow Range Bar
A trading bar with a smaller price range relative to the previous bar's price
range or a smaller price range as compared to an average of a period of
previous bars.
Neckline
During the development of a reversal or consolidation pattern, a trend line
may be drawn along the support or resistance that are implied by the troughs
or peaks around the head and from where the shoulders have developed. Eventual
break of the neckline confirms completion of the pattern.
Normalized
The adjustment of an indicator to have readings between 0 and 100 or -100 and
+100.
Numbered Phase
(Elliott Wave)
Some analysts refer to the “numbered phase”. This refers to the section of the
wave structure that forms the main direction of the trend. This is the
five-wave moves including the two corrective waves, 2 and 4.
O.C.O. (One Order Cancels The Other)
An order that, if executed, automatically cancels another order.
Offer (Ask)
The price at which a Forex brokerage firm or trader is willing to sell a
currency; also the price at which a trader can buy a currency.
Open Orders (Trader’s Orders)
The section of a trading screen that shows unfilled trades left by a trader.
Open Trades (Open Positions)
Any current position that has not been liquidated and thus on which the trader
is still at risk. Also that section of a trading screen that shows a trader’s
currency positions and their values.
Opening Range
The range of prices occurring during the first trading of the day. The actual
time period is determined by the rules of the exchange.
Optimization
A process of improving the performance of a trading system by testing for
optimal input values.
Oscillator
An oscillator is a technical indicator for which the value ranges between zero
to 100, -100 to 100, or vacillates around a central zero line. They are most
often used to identify overbought and oversold price regions, but can assist
in identifying the direction and strength of trends.
OTC (Over-the-Counter)
Trades made between counter-parties via the telephone or through an electronic
network, rather than on an exchange floor. FX is an Over-The-Counter market.
Out-of-Sample Data
Price series used for testing the parameters of an indicator that has not been
used for determining the parameters (in-sample data). This is most often used
in Walk Forward testing of a mechanized system to ensure that the results
generated from in-sample data also provide adequate results over other areas
of the price history.
Outside Bars and Inside Bars
Inside bars and outside bars are single bar patterns that are often identified
as having important qualities and break of the bar’s extremes imply a
continuation of the underlying direction.
An “Inside Bar” occurs when the current bars high and low are within
the range of the previous bar. This is often interpreted as market price
pausing and being uncertain of the underlying direction of the market.
An “Outside Bar” occurs when the current bars high and low exceed the
extremes of the previous bar. This is often interpreted as the market having
two conflicting views, the market has both buyers and sellers entering the
market and thus break of the extremes (high or low) may provoke a further move
in one direction.
Often, market players will look at the underlying volume to provide additional
evidence of a potential move.
Outside Reversal Bar
When the bar trading range, high to low, exceeds the previous bar’s high to
low range and closes opposite the previous period’s close. When employed
during a trend, they often occur at trend reversal.
Overbought
When market prices have reached a point an exhaustion of buyers exists.
Momentum indicators are employed to identify overbought conditions but are
generally only accurate in consolidating markets. Note: Overbought conditions
within a downtrend can alert traders to selling opportunities.
Overbought/Oversold Indicator
An momentum indicator that defines when prices may have reached a potential
point for a reversal due to a lack of buyers or sellers. The use of momentum
indicators as overbought/oversold signals is generally only accurate in
consolidating markets.
Overfitting
Using the highest profit point for the selection of parameters of a trading
system over a specific time period without determining the likelihood that the
parameters will retain their profitability over other periods of price data.
Also known as “Curve Fitting”.
Oversold
Market prices that have declined to a point that there is a lack of any new
sellers. Momentum indicators are employed to identify oversold conditions but
are generally only accurate in consolidating markets. Note: Oversold
conditions within an uptrend can alert traders to buying opportunities.
Over-the-Counter (OTC)
Trades made between counter-parties via the telephone or through an electronic
network, rather than on an exchange floor. FX is an over-the-counter market.
Par
The principal amount of an investment instrument (e.g. 100) or where price
equals the original value.
Parabolic Stop
Wells Wilder introduced the Parabolic Indicator, whose shape resembles the
curve of a parabolic arc. The Parabolic is useful as a trailing stop because
it has an acceleration factor that, over time, moves it closer to prices.
Parameterep
A variable setting for an indicator, such as the lookback period for a moving
average, or a rule for a system.
Peak
A price high on a currency bar chart.
Penetration of a Trendline
When a currency trades below an uptrend line or above a downtrend line.
Pennant
A pattern formed during a short consolidation in price movement that is
contained by two parallel lines and thus looks similar to a triangular flag on
a flagpole. Additionally, the price movements before and after the pennant are
generally equal in length.
Percentage Retracements
Price corrections often retrace a prior move by a specific percentage, and
then resume moving in the original direction of the trend. Charles Dow
noticed, as have traders since, that prices often retrace half of a prior
move, before continuing in the same direction. In addition to 50% retracement
percentage, Dow used one-third and two-thirds retracement levels. Percentage
retracements are calculated by taking the distance between a significant price
high and low, and multiplying by the selected percentages. Subtract those
amounts from the price high to project retracements within an uptrend. Add
those amounts to a price low to identify potential retracements within a
downtrend.
Piercing Line and Dark Cloud
(Candlestick Reversal Pattern)
The Piercing Line is a bullish reversal in a downtrend. During this trend a
long black day develops following which price opens below the low of the black
day and rallies to form a long white day. The close of the white day will be
below the close of the black day but above the mid point.
The pattern suggests that the underlying bearishness may be overdone and a
further move higher to breach the high of the white day will confirm further
gains.
A Dark Cloud is the opposite of the Piercing Line. During an uptrend a
long white day develops. The following day’s open will be above the high of
the white day and price then declines in a long black day to close above the
white day’s close but below the mid price.
The pattern suggests that the underlying bullishness may be overdone and a
further move lower to breach the low of the black day will confirm further
losses.
Pip (Point)
The smallest incremental value by which an exchange rate move is measured in
Forex markets. For most currencies a Pip is one 10,000th of an exchange rate,
0.0001. Noted exceptions: Dollar-Yen and Euro-Yen, where a Pip is valued at
one 100th or 0.01 of an exchange rate.
Pivot Levels
Pivot levels are created when price fails in the same area on several
occasions. Once this level is breached it is common for price to come back and
test the same price area, which then reverses its role. i.e. Support becomes
resistance and resistance becomes support.
Point (Pip)
The smallest incremental value by which an exchange rate move is measured in
Forex markets. For most currencies a Point is one 10,000th of an exchange
rate, 0.0001. Noted exceptions of lower valued currencies: Dollar-Yen and
Euro-Yen, where a Point is valued at one 100th or 0.01 of an exchange rate.
Point & Figure Charts
The Point and Figure (PF) charting method is a technique that has been used
for many years in analyzing the variations in prices of stocks and
commodities. The principal advantage of a PF chart is that it is much easier
to read and interpret than other types of charts. Two basic symbols are used:
X Denotes the continuance of an increase in price and is always "stacked" in
the vertical direction.
O Denotes the continuance of a decrease in price and is always "stacked" in
the vertical direction.
While prices are rising, X's are used. When falling, O's are used. They are
always plotted on rectangular grid graph paper such that columns of X's and
O's alternate. A Point and Figure chart is characterized by the specification
of two parameters: box size and reversal number. The box size dictates the
price range associated with a particular box (cubical area within the grid),
while the reversal number specifies the conditions which terminate a column of
X's and begin a column of O's and vice-versa.
Position
The outstanding contracts that a trader is holding in his/her account.
Position Limits
Determining position size, maximum dollar loss per trade, number of contracts
being traded and number of points per stop loss.
Positive Carry
A market position held overnight where the currency owned pays a higher
interest rate than the one that it is priced against.
Pound
A market term for the Great Britain Pound.
Price Breakout
Price action that breaks or moves beyond a trendline or consolidation pattern,
indicating an increase in momentum or a possible change in direction of
prices.
Price Chart
Composed of historical and current prices. Used for the purpose of forecasting
the direction of currency prices.
Pricing Currency (Quote Currency)
The second currency in a currency pair. Used to price the first or base
currency.
Price Filters
Used to identify valid trendline penetrations and to eliminate false signals,
known as “whipsaws”. Price filters require that prices break through a
trendline by some predetermined price increment in order to signal a valid
trend reversal.
Price Retracement
A price move that runs counter to the direction of a trend.
Profit Exit
An exit order that reduces or closes a position once an initial profit target
is met.
Pyramid
To increase the size of a position as the market moves in a profitable
direction.
R squared
The coefficient of determination. The percentage of variation in the dependent
variable that is explained by the regression equation.
Random Walk
An academic theory stating there is no correlation between prices from one day
to the next and that prices will act unpredictably.
Range
The distance between the high and the low of a price bar.
Realized Profit and Loss
The profit or loss resulting from closed trades.
Reaction High
Price high of a retracement or correction within a downtrend.
Reaction Low
Low price of a retracement or correction within an uptrend.
Relative Strength Index (RSI)
Developed by Welles Wilder to improve upon the classic momentum oscillator.
Used as an overbought/oversold indicator and to identify divergence.
Resistance
A price level where selling pressure has overcome buying pressure and prices
turn downward. Commonly thought of as indicating oversold or overbought
conditions.
Resistance Level
Usually identified on a chart by a price high or series of high points, above
the market, where prices previously “met resistance” or “ran into resistance”
and stopped rising.
Retracement
A price movement in the opposite direction of the primary trend. When prices
climb or fall too far too fast they often retrace part of a trend move, or
pause by trading sideways.
Retracement Zones
A combination of Dow and Fibonacci percentages to create zones where the
market is likely to find support or meet resistance.
Reward-Risk Ratio
An estimate of the potential gain of a trade versus the potential loss.
Reversal Stop
Also known as stop and reverse. A stop order placed after a trade that
reverses the current trading position, e.g., from long to short.
Reverse Trade Entry Signals
Once a position has been taken, a technical trading system may continue to
generate new trade entry signals as market conditions change. A system may
generate reverse trade entry signals before a stop loss order is executed.
Such an order, if executed, closes the existing position and opens a new
position in the opposite direction.
Rising and Falling Three
(Candlestick Continuation Pattern)
A Rising Three pattern is a bullish continuation pattern in an uptrend. The
first bar develops as a long white bar. The following three bars are all short
days but which fail to move below the low of the first day’s long white bar.
On the fifth day a further long white bar develops that breaks above the high
of the first long white day.
The failure of the correction that lasts over three days to retrace past the
low of the first long white bar signals that the selling pressure is weak and
that bulls can dominate once again.
A Falling Three pattern is a bearish continuation pattern in a downtrend. The
first bar develops as a long black bar. The following three bars are all short
days but which fail to move above the high of the first day’s long black bar.
On the fifth day a further long black bar develops that breaks below the low
of the first long black day.
The failure of the correction that lasts over three days to retrace past the
high of the first long black bar signals that the buying pressure is weak and
that bears can dominate once again.
Risk Capital
The amount of money a trader has in his/her trading account.
Risk Management
The process of implementing techniques to monitor and control risk. This
includes risk limits on position size and capital, as well as knowing the
types of orders, such as stop orders, that are used to limit losses.
Rollover
To establish a new position in a foreign currency by simultaneously
liquidating the current position and establishing the same position at a value
date in the future. Depending on the difference between the interest rates in
one country compared to another (the so-called “interest differential”)
traders can either earn interest on their trading positions over time or they
will have to pay out interest. Day traders do not hold positions overnight, so
they are not affected by rollover.
Rounded Bottom
A chart formation that shows a gradual decline then a gradual rise in prices
with the resultant effect of price taking a saucer-shaped pattern. (Is also
known as a Saucer Pattern)
RSI (Relative Strength Index)
Developed by Welles Wilder to improve upon the classic momentum oscillator.
Used as an overbought/oversold indicator and to identify divergence.
Running Market
Market conditions where the prices are moving rapidly in one direction.
Saucer Pattern
A chart formation that shows a gradual decline then a gradual rise in prices
with the resultant effect of price taking a saucer-shaped pattern. (Is also
known as a rounded bottom)
Schaff Indicators
First developed by Doug Schaff in the 1990s, based on the FX-Strategy System,
and used to create proprietary, back-tested trading signals.
Schaff TC Trigger ™
Provides a setup and trigger approach to create automated trade entry and exit
signals, based on the Schaff TC™ Indicator.
Schaff TC/TC1 Trigger™
Provides a setup and trigger approach to create automated trade entry and exit
signals, based on a combination of both the Schaff TC™ and Schaff TC1™
indicators.
Schaff TC1 ™ Indicator
An oscillator used to identify trend momentum.
Schaff Trend Cycle™ Indicator
An oscillator used to identify trend momentum.
Schaff Trend RSI™
This oscillator measures the strength of a trend against its own past
performance.
Seasonality
A tendency for a change in market activity during a particular time of the
year. Forex rates may be affected in this way by fiscal year end flows.
Segregated Accounts
A designated trading account, set up and monitored by a Forex brokerage firm
in the name of the account holder.
Sell
Selling a base currency in terms of the pricing currency.
Sell Order
An order to sell a base currency in terms of a pricing currency.
Sell Limit Order
Placed above the current market price, a sell limit order attempts to sell a
currency at a higher price.
“Selling the Rallies”
Describes the process of selling retracement rallies or pullbacks in a
downtrend.
Sensitivity
The degree to which an indicator responds to the changes in the market. For
example, the rate-of-change of the moving average in response to the movement
of the market.
Separating - Bullish and Bearish
(Candlestick Continuation Pattern)
The first day is a black/white long day followed by a white/black long day
whose opening price is around the previous day’s open.
A black day occurs in an uptrend, suggesting potential for a corrective
decline. However, the next day, when the market gaps higher and opens at
around the open of the first day (towards the high), the subsequent rally to
close even higher suggests that the uptrend is still firmly in place.
A white day occurs in an downtrend, suggesting potential for a
corrective rally. However, the next day, when the market gaps lower and opens
at around the open of the first day (towards the low), the subsequent decline
to close even lower suggests that the downtrend is still firmly in place.
Services Account Balance
Income on services, such as investment fees, consulting, tourism, earnings on
foreign investments, overseas insurance and banking fees.
Settlement
In the Interbank Market, the process of receiving one currency and paying out
another.
Setup Bar
Occurs when one or both of FX-Strategy’s key indicators are rising from below
the buyline, or falling from above the sell line.
Sharpe Ratio Method
A return/risk measure used to compare the performance of a trading system or a
money manager, where:
E = Expected return
I = Risk-free interest rate
SD = Standard deviation of returns
Shooting Star and Inverted Hammer
(Candlestick Reversal Pattern)
The Inverted Hammer develops in a downtrend and after a long black day
a new low is formed with the body at the lower end of the range. The upper
shadow is normally twice the size of the body, or slightly less, and there is
only a small lower shadow.
After the long black day price opens below the close of the previous day.
Price then rallies but remains below the previous day’s close. This obviously
displays the desire to sell rallies, to maintain the downtrend. On the next
trading day, if price opens above the body of the Inverted Hammer, it implies
short covering and further gains.
The Shooting Star develops in an uptrend and after a long white day
price opens above the close, rallies to a new high but declines to leave a
short body to the low of the day’s range. Normally the upper shadow is two or
three times the size of the body and there is almost no upper shadow. An open
on the following day below the short body would imply further losses.
Short
Trader has sold a currency with the expectation of buying it back cheaper.
Short Bars
(Candlestick)
A Short bar is one in which the body is shorter than average and where both
body and shadows are short. A short bar represents little shift in the
market’s perception of value. By themselves single bars do not necessarily
provide any indications but will contribute to a group that represent a
candlestick pattern.
Short Position
A position resulting from the sale of a base currency.
Short-term Trend
Represents fluctuations in an intermediate trend.
Side by Side - Bullish and Bearish
(Candlestick Continuation Pattern)
In a Bullish Side by Side pattern the first two days develop as a long white
days where the second day creates a gap opening above the high of the first
white day. The subsequent day is also a white day that has an opening price
at, or around, the open of the second day and in spite of the lower open,
continues to rally to close around the area of the close of the second day.
This rally after a potentially bearish open after the second day is a sign
that there are still plenty of buyers to push price higher. A break above the
high of the third day would confirm the move.
In a Bearish Side by Side pattern the first two days develop as a long black
days where the second day creates a gap opening below the low of the first
black day. The subsequent day is also a black day that has an opening price
at, or around, the open of the second day and in spite of the higher open,
continues to decline to close around the area of the close of the second day.
This decline after a potentially bullish open after the second day is a sign
that there are still plenty of sellers to push price lower. A break below the
low of the third day would confirm the move.
Sideways Market
A market characterized by prices staying in a narrow range.
Simple Moving Average
A series of averaged price data plotted on a currency chart. A simple moving
average can be constructed by taking the closing prices for the number of
sequential price bars that you want to analyse, adding those prices together
and dividing that sum by the number of price bars. This technical indicator
makes it easier to see the general direction of a trend underlying market
action.
Skew
Data is either disproportionately to the right or to the left of the center
point of the data.
Smoothing
A mathematical technique that removes excess noise from the data. This is
commonly performed by moving averages.
Spike
A sharp rise or fall in price over a relatively short period of time.
