Demystify Common Trading Terms

Some Traders' Terms!

Welcome to my blog on "Demystify Common Trading Terms "! If you're new to the world of trading or looking to expand your knowledge of the financial markets, understanding the specific terms and jargon used by traders is essential. 

This blog aims to demystify common trading terms and provide you with a clear and concise explanation of their meanings. Whether you're interested in fundamental analysis, technical indicators, or various trading strategies, this blog will serve as a valuable resource to enhance your trading vocabulary. So, let's dive in and unravel the terminology that traders use on a daily basis to navigate the exciting and dynamic world of financial markets.

 

1. ANALYSIS

Fundamental Analysis:

The study of economic information to forecast prices and to gauge if an asset is overvalued or undervalued. It is an analysis of current economic conditions to calculate the fair value and forecast the future price of an asset.

 

Technical Analysis:

The study of price movements using past prices, volume and open interest to identify trading opportunities. It is an analysis of historical price data to identify price trends. Technical analysis includes a variety of techniques such as chart analysis, pattern recognition, seasonality and cycle analysis, and algorithm technical trading systems.

 

2. CHART ANALYSIS

Chart : A graphical record of prices and volume, taken at regular intervals. 

Close/Closing Price : The last trade price for the period.

High : The highest price traded for the period.

Low : The lowest price traded for the period.

Open/Opening Price: The first traded price for the period.

Open Interest: The number of futures contracts that have been opened and have not been closed. The amount of futures contracts that are still open and in existence.

Volume : The number of contracts/shares traded for the period.

 

3. TECHNICAL INDICATORS

Bands : Lines constructed around a moving average that define relative high and low.

Bband Z-test statistics (BBZ) : A technical trading system that uses as a default one standard deviation around a default 21-day moving average (to give a long signal above the one standard deviation band and a short signal below the one standard deviation band).

Absolute Range Breakout : A technical trading system that indicates a buy signal when the close is above the high of the previous number of days and a sell signal when the close is below the low of the previous number of days.

Moving Average (MA): The measure of the average price over the previous periods that is recomputed each succeeding period using the most recent data.

Moving average convergence and divergence (MACD): An indicator that uses the difference between a 12-day and a 26-day moving average to indicate a buy signal if the difference is more than the average difference of the previous nine days and a sell signal if the difference is less than the average difference of the previous nine days.

Optimised Bband Z-test statistics (OptBBZ): A technical trading system that uses optimised parameters for standard deviation and moving average (to give a long signal above the optimised standard deviation band and a short signal below the optimised standard deviation band).

 

4. TRADING RANGE TERMS

Trading Range : A price range in which trading has been confined for an extended period. Generally sideways in character.

Trading Range System : A trading system that tries to sell at the resistance and to buy at the support on the assumption that the market will pull back at the resistance and support levels.

Resistance : An area on a chart above the current price where identifiable trading has occurred before. It is believed that investors who bought at those higher prices will become sellers when those prices are reached again, thus halting an advance.

Support : An area where declines are halted and reversed. Support is often associated with perceived value.

5. TRADING TREND TERMS 

Algorithm Trading System : A trading system with a set of trading rules that mathematically computes according to an algorithm (suitable to the prevailing market conditions) mechanically generated signals (long, short or out-of-market) indicating when to enter and when to exit, and executes the trades automatically. Algorithmic trading (or automated or algo, or black box or robo trading) is the computer program that executes trades according to an algorithm that is suitable to prevailing market conditions. The algorithm in the program is derived after intensive backtesting and optimisation. Algorithm trading programmes are popularly employed by professional model trading desks of large financial institutions.

Trend Trading System: A trading system with a set of trading rules that defines when to initiate a position early to capture the prevailing trend using a mechanically generated signal on the assumption that the trend will continue. Moving average and standard deviation are technical indicators used in trend trading systems.

Downtrend : A state in which prices are steadily declining.

Uptrend : A state in which prices are steadily increasing.

6. TESTS 

Backtest : The process of testing using historical data.

Optimisation : The process of finding the best performing parameter for a trading system.

Parameter : A value assigned to a trading system to vary/optimise the timing of the signal.

7. THEORIES 

Dow Theory : An observation (initially by Charles Dow) which states that:

The averages must confirm each other.

The averages discount everything.

The market has three movements.

The major trends have three phases.

Volume must confirm trend.

A trend continues until the signal reverses.

 

Elliott Wave Theory : An observation (initiated by R. N. Elliott) which states that all market activities develop into well ordered patterns consisting of five primary impulse waves followed by three correction waves.

Fractal Geometry : An observation (initially by Benoit Mandelbrot) which states that there are repeating patterns in nature including time series.

Random Walk Theory : An observation (initially by Eugene Fama) which states that the history of the series cannot be used to predict the future in any meaningful way and that the future path of the price of a security is no more predictable than the path of a series of cumulated random numbers (Fama, 1965).

 

8. TRADING TERMS

Fill : Getting the order done.

Long : The state of owning a security.

Short : The state of being short a security. The act of selling before buying.

Rollover : The closing of the front month’s position and the opening of the next month’s position.

Slippage Cost : The cost of the difference between the theoretical execution price and the actual price executed due to poor fill.

Volatility : The tendency for prices to vary. Standard deviation and variance are measures of volatility.

Whipsaw : A period of wrong signals that result in losses

 

9. Bibliography

Financial Times Guides : Technical Analysis, by Jacinta Chan