Advance/Decline Lines: An indicator line on a chart showing the absolute number of shares increasing in value versus those falling.
Ask: See bid.
At-market or At-the-market: An order to buy or sell an option or a share at the prevailing market price.
At the money: When the exercise price of the option is close to, or equal to the current market price.
Average True Range: is the average of the true ranges over the past x periods (where x is specified by the user). See True Range.
Average down: Buying more of a security that is not co-operating with your initial view. For example, buying more of a downtrending share. You are trading against the trend. Only ever buy more of uptrending shares.
Average up: To buy more of a share that is co-operating with your initial view.
Bar Chart: This is the standard form of chart utilised in Western technical analysis. A single bar consists of an open price, a high, a low and a close price for a particular session.
Back-Test: A method of testing an indicator’s performance by applying it to historical data.
Bear/Bearish: A trader with a negative expectation of the market or share. Some texts use this phrase is used to signify a sideways trending market as well as a downtrending market.
Bid: The price at which the buyers have registered their interest in a share. A real-time screen will show the buyers that are queuing to buy the share as bids, and the sellers queuing to sell their shares as asks.
Black Candle: A bearish session showing the close lower than the opening price.
Black Box System: A trading system where all buy and sell signals are generated, yet the calculation or rationale for these signals is not disclosed.
Breakaway Gap: See gaps.
Breakout Trade: An entry into a long position in an instrument in an existing uptrend after a significant level of resistance has been bullishly transcended.
Bull/Bullish: A trader with a positive expectation that prices will rise in the market or for a particular share.
Candlesticks: A 17th century Japanese technique that uses the same information as contained in a Western bar chart, but provides a different graphical representation. Candlestick patterns of 1, 2, 3 or more candles (bars) provide an excellent timing/confirmation tool when used in conjunction with other indicators.
Candle Body Size: The size of the real body can provide a clue as to the level of conviction of either the bulls or the bears. The presence of a long candle in relation to the most recent candles of previous sessions holds special significance.
Candle Range: The range from the high to the low, or the peak of the upper shadow to the base of the lower shadow is a general indicator of the level of volatility for that period.
Call Option: A call option gives the buyer the right, but not the obligation, to buy a given security at a particular price up to and including the day of expiry.
Capital: The amount of equity or money that you have set aside to begin trading with.
Capitalisation: See Market Capitalisation
Confirmation: The activity of the share price action after the appearance of a trigger pattern. Some patterns require greater levels of confirmation than others.
Continuation Gap: See gaps.
Continuation Pattern: After the appearance of this pattern, a share is likely to continue in the direction of the predominant, established trend. These patterns imply a pause or consolidation within the prevailing trend.
Contracts: options are sold by the contract. One option contract provides exposure to 1000 shares. For example, five BHP options contracts would provide exposure to 5000 BHP shares.
Consolidation: See sideways trend.
Correction: A movement in prices against the general trend which typically occurs with little or no warning. For instance, the market periodically loses value as many of the underlying securities drop in price by several percent. This typically occurs with little or no warning.
Defensive Actions: These act a last resort when the share goes against the view you had when initially writing the option. Defensive actions are a way of removing yourself from risk and minimising your potential loss if the trade goes against you.
Delta: The sensitivity of option price to changes in share price.
Derivatives: A derivative is a financial instrument that has another asset as its underlying base, eg options, warrants etc.
Dividend: This periodic payment is a part of a company’s net profit that is paid to shareholders as a cash reward for investing in the company’s shares.
Double Top: This pattern is where price action on a chart displays that the price has rallied twice in quick succession and stopped at or near the same high. This pattern forms two prominent peaks in the share price action and often signifies that a downtrend is imminent.
Downtick: Any downward movement in price action. This downward movement can even be by the smallest available price increment available on the price scale eg one-cent.
Downtrend: Prices are making consistently lower highs and lower lows.
Downtrend Line: A straight line is drawn in at downward right slanting angle connecting the peaks of the share price action. Once the prices show evidence of rising above this line in a sustainable manner, it is likely that the downtrend has been broken. Ideally, this should be accompanied by a simultaneous increase in volume.
Equities: Another word for shares
Exchange Traded Options: The options traded over shares in Australia are called ‘exchange-traded options’ or ‘American options’. This type of option allows the option holder to exercise the option at any time during the life of the contract.
Ex-Dividend: The day after the shareholders have taken the dividend. This typically results in a share price drop.
Exercise: To exercise your rights as an option buyer means that the option has reached or is close to its strike price and you may exercise your right to buy or sell the shares covered by the option. You can do this at or before expiration. It is likely however, that you will exercise your rights only after the share price has transcended the strike price of the option, or if there is a vested interest to exercise due to the effect of an ex-dividend scenario.
Exhaustion Gap: See gaps.
Expectancy: This is a mathematical calculation that will provide a measure to show that for every dollar that you have invested in the market, how many dollars you will extract. Expectancy = (probability of winning x average win) – (probability of losing x average loss)
Expiration Date: The final date of the option contract. The duration of each option contract will often be 12 months or more in advance. As a writer, you can choose to write contracts on options with 6 months to expiry, or 1 month to expiry. The choice is up to you.
Exponential Moving Average: The exponential moving average places more emphasis (on an exponential basis) on the most recent sessions and forms a moving average line. A moving average takes the closes of several periods and plots a point. When several of these points are connected, a moving average line is formed. Moving averages are most effective as trend-following tools. They smooth out the price action but incorporate a time lag. A moving average in a sideways moving market is less effective.
Exposure: As a writer, this is the total possible amount of money that you would be liable for, if the options were to be exercised.
Formation: See pattern.
Fundamentals: Fundamental analysis assists in detecting ‘which’ shares have a probability of increasing or decreasing in value based on the company balance sheet and profit/loss details. Economic supply and demand information is analysed rather than the market activity of price and volume action on a share chart.
Futures: An agreement which is legally binding to buy and sell specific quantities of specified commodities or financial instruments at a particular date in the future.
Gaps: Gaps show that the price activity of the preceding period is completely above or below the next candlestick or bar apparent on the chart. Spaces or holes are left on the share chart when viewing candlestick charts or bar charts and these are called gaps. In Western analysis there are three main types of real gaps; continuation, breakaway and exhaustion. A continuation gap suggests that the prevailing trend direction is likely to continue. An exhaustion gap is a gap that occurs after a trend which signals that the trend direction is likely to end. These can often be observed prior to a reversal trigger candlestick pattern. A breakaway gap usually signals the beginning of a new trend. These gaps can often confirm the new trend direction after a reversal trigger candle pattern. There are also false gaps - gaps that occur on low volume. Suckers gaps are gaps that occur because of an ex-dividend situation.
Illiquid: Instruments with low levels of trading are considered illiquid and are best avoided. By trading in illiquid options/shares, if the trade goes against you, exiting from your open positions will be considerably more difficult.
In the Money: A call option that has the current share price above the strike price, or a put option that has the current share price below the strike price.
Line Chart: This type of chart connects the closing prices for each period to provide a continuous line that depicts share price action.
Liquid: Shares or options with a significant number of buyers and sellers already participating in actively trading this instrument.
Long Candle: A candle showing a larger real body range than previous sessions on the chart.
Long or Going Long: This implies a bullish view of the market and describes when a trader purchases an instrument to initiate a transaction. When buying shares, traders have a long view of the market.
Market Capitalisation: the number of shares that have been issued in total, multiplied by the share price.
Managed Fund: A pool of money where investors relinquish power regarding buy and sell decisions to a fund manager, or a so-called professional trader.
Margin: The amount of money retained in trust by the Options Clearing House or your broker, while you have an open written options position, a futures contract, or a short sold position. This insures your broker or the clearing house against a loss on your open positions.
Margin Loan: A sum of money that is available for you to loan in order to purchase a select group of stocks eg Top 100. Although specific firms allocations will vary, you may be able to borrow up to 70% of the value of the shares that you would like to purchase.
Margin Called: When the share price trends against your initial expectation, your broker will require an increased amount of money to be deposited often within 24 hours, in order to maintain the original leveraged position margin ratio.
Momentum: The velocity of a price trend. These indicators show whether prices are declining at a faster or slower pace.
Moving Average: See Exponential Moving Average.
Naked Calls: Writing calls where you do not own the underlying security.
Open Interest: The number of outstanding option contracts at a particular strike price. This is a comparable concept to volume.
Open Market Risk: When you combine all of your active positions, calculate the exposure from the current share price, to the stop price that you have stipulated, you will calculate your open market risk.
Overbought: This term and the following term are usually used in relation to momentum indicators. An overbought line may be constructed manually by looking at the historic high points on a momentum indicator, or it may be an integral part of the indicator and shown as an indexed number from 0 to 100. When a momentum indicator has risen to a historic or indexed high, it implies an overbought condition where the instrument may be vulnerable to a sell-off.
Oversold: An oversold line may be constructed manually by looking at the historic low points on a momentum indicator, or it may be an integral part of the indicator and shown as an indexed number from 0 to 100. When a momentum indicator has dropped to a historic or indexed low, it implies an oversold condition where the instrument may be likely to rally.
Out of the Money: When the share price is below the strike price of the call option, or when the share price is above the strike price of a put option. Writing out of the money call and put options is the most conservative and safest method of writing options.
Pattern: A single or a number of separate trading periods that form the data for a defined candlestick formation, or other pattern based on technical analysis.
Period: The time increment on a share chart. For example, a daily chart would show each candlestick to be comprised of the open, high, low and close price for a day. The terms session and period are interchangeable.
Position Size: This shows you how many of a particular instrument to buy or sell. There are several methods to assist in this goal – the equal portions model, the capital allocation model, and the volatility based model, for example.
Pyramid: To add more to your position as an instrument trends in the expected direction, eg to buy more of an uptrending share. To do this effectively, you should buy the largest parcel of shares first, and then add increasingly smaller positions to your initial position
Pullback: See retracement.
Put/Call Ratio: The put call ratio displays the number of put options traded divided by the number of call options traded. Traders often view the put call ratio as an indicator of sentiment. When the put call ratio is high, more put options have been traded than call options. Traders infer from this that bearish sentiment prevails. When the put call ratio is low, traders infer that bullish sentiment prevails.
Put Option Definition: A put option gives the buyer the right to sell a given security at a certain price within a given time.
Rally: An upward movement of prices.
Rate of Change: A momentum indicator with manually derived overbought and oversold conditions.
Real Body: The thick part of the candle representing the range between the opening price and the closing price. This is considered to be of more importance than high and low prices for that period.
Relative Strength Comparison (RSC): The relative strength comparison takes the progression in price of one instrument and compares it to another. It is often displayed as an indicator in many of the more popular charting packages.
Retracement: A less significant version of a correction.
Retracement Trade: This is where an entry into a position is made, preferably on a candlestick bottom reversal, after the share prices have made a counter-trend reversal.
Resistance: A price level where sellers are expected to enter. It appears above the current price action and suggests that the price becomes resistant to making a higher high.
Selling Options: See writing options.
Session: See period.
Sideways Trend: A period of lateral price movement within a relatively narrow price range.
Shadow: Shadows are the thin lines above and below the candlestick representing the extreme high and low for that session. The shadow provides an indication of buyer or seller strength. Tails and shadows are interchangeable terms.
Shadow location: If there are long upper shadows at the top of an uptrend, this implies that the buyers have weakened and the sellers have begun to move in. If there are long lower shadows at the bottom of a downtrend, the price has dropped to a low enough level to encourage buyers to purchase the share.
Short, or Going Short: This implies a bearish view where traders short sell the market, or sell to initiate a transaction. Selling shares and then purchasing them at a later date and a lower price can make substantial profits. Approximately 200 Australian shares can be short sold.
Sideways Trend: A period of lateral price movement within a relatively narrow price band between a level of support and a level of resistance.