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Fibonacci Numbers – A sequence of mathematical ratios used in technical analysis to assess the likelihood that a stock will retrace a large portion of an initial price move, find support or resistance at a specific level and then continue its move in the original direction. The key support and/or resistance levels in any move are determined by drawing a trendline between two extreme points and then dividing the vertical distance by the key Fibonacci ratios of 23.6percent, 38.2percent, 50percent, 61.8percent and 100percent. In addition to retracement ratios, other widely used Fibonacci studies – named after Leonardo Fibonacci of Pisa, who first undertook them in the early 13th century – relate to patterns known as arcs, fans, and time zones.
Fibonacci Ratios – A mathematical sequence of numbers in which each number is equal to the sum of the two previous numbers: 1,2,3,5,8,13,21, 34, 55. This sequencing is used by technicians to help determine retracements.
Fibonacci Retracements – Fibonacci retracements measure the strength of an initial price move by establishing the beginning and end of the price move using the swing highs and lows. Once these points are established, prices are projected that represent different percentages (based on Fibonacci sequence numbers) of the original move.
Fibonacci Series – A series of numbers where each number is the sum of the previous two, except for the first two numbers (example: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34). Widely used in technical analysis to estimate the probable extent of price moves and likely points where reversals may occur.
Fill – Fill refers to the action of satisfying a trade order for an instrument. Placing a trade order does not guarantee that it will be filled, or if it will be filled at the intended upon price. Fill price is the price for which the transaction is completed.
Fixed – Percentage Betting Fixed-percentage betting refers to risking a consistent percentage of capital (2percent for instance) on any given trade. As an account size changes, so will the trade size.
Flag – A technical pattern that is a hallmark of a strongly trending market (along with a pennant pattern). The flag represents short, counter-trend price action bound by a pair of short, parallel trend lines.
Flat Action/Market - Tight and light, limp, infertile, suck, same as consolidations. Describes price action that chops and wiggles a lot but can’t maintain gains or losses long enough for the 5- and 15-period moving averages to form a trend. The 5- and 15-period moving averages indicate this on the chart by moving sideways with no trading channel.
Flow State of Mind – From the field of psychology, a functional mental state in which a person tunes out all distractions, fears and anxieties and becomes fully immersed in what he or she is doing in order to perform to his or her highest potential. With respect to stock trading, it’s where you focus your energies to fully translate what you’ve studied and practiced into real-time trading success.
Follow-through - Describes a price action that forms a direct move with minimal wiggles. Follow-through has trend, volume, liquidity, and price movement. This is what makes a market fertile to a trader. (For example, RIMM breaking out from 87 to 87.60 on a 5-minute mini pup without even testing the 5-period moving average on a single 1-minute stochastics oscillation from the 30 to the 90 band).
Forecast Volatility – One of the four basic interpretations of volatility. A prediction, or “best guess,” regarding the degree of price movement, or volatility, that can be expected for a given security in the future. With respect to derivative securities, such as options, forecast volatility usually relates to the predicted price movements of the underlying asset rather than of the option itself.
Forex Market (FX) – The global financial market in which exchange rates are established and world currencies are traded among individuals, financial institutions and government agencies. The foreign exchange market, which operates 24 hours a day, six days a week, is the largest financial arena in the world, with a daily trading volume now approaching US$3 trillion.
Forward Performance Testing – Forward performance testing, sometimes referred to as paper trading, is the stage in trading plan development where trades are placed via an order entry simulator or on paper. No actual trading takes place during this stage.
Front-End Software – Front-end software allows its users a certain level of strategy automation. The advantage to using front-end software is its ability to automate complex exit strategies that may include multiple profit targets, multi-level stop orders, or pyramiding (adding shares or contracts to a winning position). This tool can significantly speed up the order placement process.
Full Service Brokers – Full service brokers are broker whose services include research and advice such as trading recommendations, retirement planning, or tax tips. In exchange for their services, full service brokers typically charge substantial commissions.
Fundamental Criteria – The financial values of a stock that are used to determine the strength or weakness of the company. Some fundamental criteria include earnings, earnings growth, cash flow and sales.
Future Expiration Value – The expected value of the equity or combination equity and option transaction at the expiration date, assuming the equity remains at the current value through expiration. This value is shown on the PowerOptions Profit/Loss Portfolio and Position Analysis tool for management calculations.
Future Volatility – This is the volatility of an option’s underlying contract over a specific future time period-typically the period leading up to the expiration of the option being evaluated. While future volatility is always an estimate, such estimates are important in determining the level of time value appropriate in an option premium.
Futures Commission Merchant (FCM) – An individual or firm that solicits or accepts orders to buy or sell futures contracts of commodity options and accepts money or other assets from customers to cover these costs.
Futures Contract – A contract between buyer and seller whereby the buyer is obligated to take delivery and the seller is obligated to make delivery of a fixed amount of a commodity at a predetermined price at a specified future date.
Gamma – The rate at which an options delta changes as the price of the underlying changes. Gamma is usually expressed in deltas gained or lost per a one point change in the underlying equity. As an example, if gamma is .05 the options delta would change .05 if the underlying equity moved one point.
Gartley Pattern – Based on Fibonacci ratios and popularized by Larry Pesavento, this is a complex pricing pattern used to determine optimum buy and sell points by measuring the retracements of up and down movements in a stock’s price.
Golden Cross - A golden cross occurs when a shorter moving average crosses above a longer moving average. This signifies an increase in momentum to the upside and is said to be “golden.” [see also dead cross]
Grind- A slow and steady trending price movement. The shorter time frame charts tend to look choppy, as the price gains are minimal, but the wider time frames—the 8-, 13-, and 60-minute—give a better view of the overall trend. Grinds are very tough for oscillation scalpers as there is little room for exhaustion and the trend moves are short-lived as well when trying to scalp. Stocks that grind are best ranged or swung with the wider time frame charts.
Group 1 Naked Put Investors – A group of investors that have researched the underlying security and have a neutral to bullish sentiment on the stock over an extended time period. These investors use naked puts to purchase shares of stock at a discount.
Group 2 Naked Put Investors – A group of investors that are more interested in the premium and percent naked yield return on a stock that they are bullish on over a short period of time. Group 2 investors are typically not interested in purchasing shares of the underlying security.
Hammer - A hammer is a small white or black body close to the high price. It has a long shadow below with a minimum size of twice the height of the body. There is a very small shadow or no shadow at the top. A dragonfly doji is a specific version of the hammer pattern. Confirmation is required. A white body is more positive.
Hanging Man - A hanging man is a small white or black body close to the high price. It has a long shadow below, with a minimum size of twice the height of the body. There is a very small shadow or no shadow at the top. A dragonfly doji is a specific version of the hanging man pattern.
Harami Cross – A two-period candlestick chart formation in which a candle with a large body is followed by a candle with a smaller body that falls entirely between the top and bottom of the original candle. Generally considered to be a signal that the trend in force is about to change, or reverse, a Harami cross can be either bullish or bearish, depending on the direction of the previous trend.
Head and Shoulders – A technical trading pattern that resembles a head and two shoulders. The price reaches one plateau, the goes higher still, and then drops back to the plateau again. A top head and shoulders signifies the reversal of an upward trend. A bottom head and shoulder pattern signifies the reversal of a downward trend.
High-Band Mini Pup or Low-Band Mini Inverse Pup - These are mini pups that trigger through the 80 band for the high-band mini pups, or through the 20 band for the low-band mini inverse pups. These are most significant on the 1-minute chart stochastics, as they are indicative of a final capitulation move before exhaustion and traders absolutely need to be locking profits into the move, before the stochastics exhaust and cross back through the 80 and 20 bands.
Historical Volatility – This is generally considered to be the most accurate assessment of volatility since it merely reflects what the price distribution of an option’s underlying security has been in the past. By looking at past patterns, the hope is that one can make a more intelligent guess about future price movement. Option traders spend a lot of time studying historical volatility, as represented by graphic illustrations known as volatility charts.
Holding Company Depositary Receipts (HOLDR’s) – An acronym for Holding Company Depositary Receipts and are service marks of Merrill Lynch & Co., Inc. They are securities that represent an investor’s ownership in the common stock or American Depositary Receipts of specified companies in a particular industry, sector, or group.
Holographic Resonance Repatterning – A self-improvement methodology that assumes all individuals are vibrating at a certain resonance, or wave pattern, similar to those found in radio frequencies. Practitioners suggest that, through the use of certain therapeutic modalities such as light and sound, an individual’s negative resonance patterns can be disrupted and then replaced with vibrations that are compatible with the achievement of a person’s current goals in life.
Implied Volatility – The fourth and, for option traders, most important form of volatility. Also sometimes referred to as “implicit volatility,” implied volatility is derived from the actual prices of options in the marketplace. In other words, implied volatility is the marketplace’s own forecast of future volatility-the consensus among all current option traders regarding what they think the future volatility is going to be, based on the prices they’re currently bidding and asking for the options being traded. The true value of the Black-Scholes option pricing model, rather than being the determination of the price of an option, lies in its ability to assess implied volatility.
Implied Volatility Ratio – A comparison of the option’s implied volatility to the underlying security’s historical volatility. This ratio is calculated by dividing the implied volatility by the historical volatility. Implied volatility ratios greater than 1 are used to help determine overvalued options, where implied volatility ratios less than 1 point to undervalued options.
Impulse Waves – One of the two basic patterns Elliott Wave theorists look for in analyzing stock price trends. Impulse waves reflect the strong moves in a stock’s price coinciding with the main direction of the underlying trend, either upward or downward. Impulse waves are not limited to any specific time period and can thus last anywhere from several hours to several years – or even decades. However, regardless of length, they always follow the direction of the primary trend.
In the Money (ITM) – An option that could be exercised and immediately closed out against the contract for a cash credit. A call is in the money if its exercise price is lower than the current market price of the underlying instrument. A put is in the money if the exercise price is higher than the current market price of the underlying instrument.
Income Generating Strategy – Stock option investment strategy where a premium or credit is received on a regular basis. These include the naked put strategy, covered calls, credit spreads, and others.
Income-Producing Account – Refers to an account that looks to take money out of the market everyday by executing day trades and guerrilla trades. These trades are designed to be exited the same day or one day and one night.
Index – An index (or indices) is a group of stocks that make up a portfolio in which performance can be monitored based upon one mathematical calculation. A list of the larger, key stocks that are thought to be representative of the market itself. Some indices are the S&P 500, the NASDAQ 100, and the Dow Industrials .
Index Options – Option contracts that are available on an index such as the S&P 500 index, the Nasdaq 100 index or the Russell 2000. Indexes represent a collection of various stocks and typically have a lower historical volatility as they do not fluctuate in price as frequently as individual stocks.
Input Values – Input values are user-defined variables (such as look back period or type of price data) that modify the behavior of an indicator. Changing input values can give an indicator much different values and point out different market conditions.
Institutional Holdings - The number of shares owned by organizations that primarily invest their own assets or on behalf of others. Some examples of institutional investors are employee pension funds, insurance companies, banks and university endowments.
Intrinsic Value – The real value of an option. This is determined by calculating the difference between the price of the underlying asset and the in-the-money option’s strike price. Every option premium is comprised of some intrinsic value and some time value. The intrinsic value is based on how deep in the money the stock is priced. For a put it is how far below the strike price the stock price is located.
Introducing Broker (IB) – An individual or firm that solicits or accepts orders to buy or sell futures contracts or commodity options but does not accept money or other assets from customers to cover the orders.
KST (Know Sure Thing) - An oscillator developed by Martin Pring, calculated from the weighted summed rate of change of four smoothed rate-of-change indicators. KSTs can be calculated for any timeframe, including intraday. The most common are short, intermediate, and long-term (Primary trend). KSTs can also be very effectively applied to comparative relative strength.
LEAPS – An acronym that stands for Long-term Equity Anticipation Securities. About 40 percent of the optionable stocks available, they are traded under different root symbols than the normal option series and only expire in January of the next two years. LEAPS is a registered trademark of the CBOE.
Leverage – Leverage refers to the increased buying power available in margin accounts. Leverage allows traders to enter larger positions than could be afforded with the money in a trading account alone. Leverage magnifies both profits and losses.
Limit Order – A type of order that is placed with the broker where the investor can set what price they would like to receive for selling or buying an equity or option. It is recommended to use a limit order when selling naked puts so the investor can hopefully receive a slightly higher premium than the offered bid price.
Liquidity – A term used to describe how often a equity or option is traded. For options, liquidity can be measured using the volume of the option or the open interest. Liquidity is characterized by a high level of trading activity allowing traders to enter and exit positions easily without affecting the instrument’s price. The amount of volume in a futures or options contract.
Live-Market Performance Testing – Live-market performance testing is the stage in trading plan development where traders must put real money on the line to test the system. Live-market performance testing should only be conducted with a minimum position size. The focus of this phase is to establish a correlation between the live-market trading results and the previous development steps.
Locked in Profit – The profit value that is guaranteed on a profitable stock position once a put option is purchased. At times the locked in profit might be lower than the unrealized gain, but once the put is in place, the return is guaranteed.
Lognormal Distribution – A lognormal distribution is very similar to a normal distribution except that the pattern of potential prices has a slight upside bias. This is because, under the assumptions of a lognormal distribution, the price of the subject security cannot go below zero. Thus, the long-term pattern must allow for the possibility of slightly more upside movement and slightly less downside movement. However, over shorter periods of time, there is very little difference between the normal distribution and lognormal distribution.
Long Position – When an investor is a holder of an equity or option position over time when a change in the option or equity would be favorable. If an investor is long on a stock, they hope that the price goes up. If an investor is long a put contract, they hope that the stock declines in value.
Long-term Capital Gains – Any investment gains on positions left open for 12 months or longer (some option positions are exceptions to this rule, and are treated as short-term regardless of the holding period).
Lucas Series – A series of numbers very similar to the Fibonacci series, except the numbers start with 2 and 1, rather than 1 and 1 (example: 2, 1, 3, 4, 7, 11, 18, 29). Also used in determining the probability that a stock or index will follow a strong upward or downward move with a retracement to support or resistance levels.
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