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MACD (Moving Average Convergence Divergence) – Created by Gerald Appel in the 1960s, it is a combination of moving-average lines and a momentum indicator designed to compare the price fluctuations of stocks, futures and other securities. The MACD plots 12- and 26-day moving averages, then contrasts the two in an attempt to forecast market momentum along what’s known as a “signal” line. Crossovers, divergences and dramatic moves along the signal line help identify bullish or bearish tendencies and set up potential buy and sell points.
Make-or-Breaks - A chart setup that has the potential for a breakout pup or breakdown mini inverse pup. These are usually choppy with light volume. It is best to wait out the confirmed direction of the make-or-break and then step in for the trade.
Marubozu - Big white or big black candles without shadows. A white marubozu means that the bulls were in charge during the whole of the trading period. A black marubozu means the bears were in action from the beginning until the end of the session.
Margin Call – A margin call is a demand from a broker that money be added to a trading account in order to meet the minimum margin requirement. If this demand is not met, the broker will close out any positions (without consulting the account holder) in order to ensure that the account is brought up to the minimum maintenance amount.
Margin – Margin is essentially a loan that a broker provides traders
Margin Requirement – The amount of money an uncovered (naked) option seller is required to deposit or have available in their account to maintain and cover an option position. Margin requirements are set by each brokerage house separately.
Market Analysis Platform – Market analysis platforms create price charts and display price quotes that allow traders to see market action graphically. Market analysis platforms require a data feed into the market that allows access to current information (typically, in less than a second).
Market Capitalization – The stock price multiplied by the number of shares outstanding. A commonly used measure of the size of a company since larger companies tend to have higher stock prices and a resultant higher number of stock splits.
Market Maker – An independent trader or trading firm that is prepared to buy and sell shares or contracts in a designated market. Market makers on stock or stock option exchanges perform functions similar to locals on the exchanges. The difference with market makers is that they must make a two-sided market (bid and ask).
Market Order – A type of transaction order where the investor agrees to receive or pay the listed market price for an equity or option. A market order is the most basic type of trade order and instructs the broker to buy or sell at the best price currently available. The advantage to using market orders is that a trader is guaranteed to get the order filled.
Mark-to-Market (MTM) – At the end of each trading day (and all following days a position remains open), the contract value is credited or debited based on that specific trading day’s session. In this way, losses are never allowed to accumulate. It is a designation that active traders may choose to elect for tax purposes. This is the only designation for traders that allows deductions for trading related expenses, such as platform fees or education.
initial net credit/share * 100 shares/contract * # contracts
Maximum Profit – The highest profit amount that can be made on the option position. For a naked put trade, the maximum profit is equal to the premium received when the put is sold. For a married put trade the potential profits are unlimited. For a protective collar spread, the profits are limited by the sale of the short call option.
Mean – A measure of where the peak of a security’s distribution curve occurs. For most purposes, it is assumed that the mean is the current price of the security-or, in the case of options, the current price of the underlying contract.
Mini Pup - A stochastics pattern where the lead stochastics stalls as the stock price stalls and tests the 5-period moving average. If the 5-period moving average successfully holds support and reverses back in the direction of the trend, then the lead stochastics will slope in the direction of the move, triggering an explosive price move towards the Bollinger bands (upper bands on uptrends and lower bands on downtrends). The 5-period moving averages are the trail stop supports.
Morning Star – A morning star is a bigger black body, followed by one or more small black or white bodies below the closing price of the first black body. The white candle that follows ideally has 50% or more of its body within the first black body and has a rising window with the previous candle body.Moving Average – A widely used technical indicator used to show the average price of a stock or a market index over a given period of time, usually ranging from 10 days (short term) to 200 days (long term). Calculated by deleting the oldest closing price for the period being averaged, adding the most recent closing price and then dividing the total of all prices included by the number of intervals, moving averages are used to both measure momentum and define areas of possible support and resistance. Moving averages, which can also be calculated on an exponential or logarithmic basis, can also help emphasize the trend in force and smooth out price and volume fluctuations (or “noise”) that can confuse chart analysis.
Naked Call – A bearish strategy where the investor realizes a profit by making cash from selling (writing) a call without having the cash investment of owning the stock as in a covered call strategy. While the stock goes down, the investor keeps the premium on the sold call.
Naked Put – A bullish strategy where the investor realizes a profit by making cash from selling (writing) a put without having the cash investment of shorting the stock as in a covered put strategy. While the stock goes up, the investor keeps the premium on the sold put.
Narrow Trading Range – A reduction from the established norm in the point spread in which a stock is trading. Swing traders see the narrow trading range (also called the narrow range day) as a signal that the price direction is about to change.
Nasdaq Stock Market – Originally a computerized system for quoting securities traded “over the counter,” NASDAQ (an acronym for National Association of Securities Dealers Automated Quotation system) has grown to become the world’s largest electronic stock market, executing hundreds of millions of transactions daily. Started in 1968 and reorganized in 1971, the NASDAQ had a history of listing emerging companies that might not otherwise have had access to capital markets. However, in 1997, listing requirements were significantly upgraded and NASDAQ split into the Nasdaq National Market (NasdaqNM) for large corporations, including some of America’s technology leaders, and the Nasdaq Small-Cap (NasdaqSC) for smaller companies. By 2002, in response to SEC concerns over conflicts of interest, the NASD divested itself of all ownership in Nasdaq, which became a publicly traded, for-profit company in its own right, with stock trading on the NasdaqNM. In 2006, NasdaqNM became an officially recognized global stock exchange operating under the name The Nasdaq Stock Market.
National Futures Association (NFA) – A self-regulatory futures industry association. Its regulatory powers are delegated by the CFTC. Its responsibility is to regulate members on how they conduct their business with the public.
Net Credit - The total cash received for entering a position. For a Bull-Put Credit Spread it is the price of the purchased put option subtracted from the price of the sold put option. For a Bear-Call Credit Spread it is the price of the purchased call option subtracted from the price of the sold call option. For an Iron Condor, it is the sum price of the purchased put option subtracted from the price of the sold put option plus the price of the purchased call option subtracted from the price of the sold call option.
Net Debit – The total cost to the investor when entering a long position. For married puts, the net debit is the cost of the stock plus the cost of the put option. For a collar spread, the net debit is the cost of the stock plus the cost of the put option minus the call premium received.
Neuro-Linguistic Programming (NLP) – A self-improvement methodology in which individuals are trained to detect, evolve, and focus their conscious and unconscious mental and behavioral processes in order to convert negative thought patterns into more positive and productive ones. Originally developed by studying the patterns of thought and communication employed by highly successful individuals, NLP’s goal is to provide specific “how-to” skills to create change in one’s self and assist others in becoming more resourceful and effective. The same goals apply in helping investors develop improved market trading capabilities.
New Economy – Refers, in a broad sense, to the tech stocks. These companies provide products and services that did not even exist fifty years ago and that are not always necessities. Demand tends to change cyclically for these stocks.
Omnibus Account – An account carried by a clearinghouse member Futures Commission Merchant for another non-clearing house member FCM in which the transactions are combined rather than designated separately and the identity of the individual accounts is not disclosed.
Online Brokers – Online brokers offer access to the markets via the Internet and charge significantly smaller commissions than do full service brokers. Online brokers typically offer only stock/ETF trading and do not offer advisory services, but may include online or software research tools for their clients.
Open Interest – Open interest represents the number of open option contracts on the market over the life of the contract. The open interest is a measure of how liquid the options’ contracts can be. When there is little or no open interest for an option, it can still be liquid because the Options Clearing Corporation (OCC) will make a market for it.
Optimal Risk – Optimal risk, sometimes called optimal f, refers to the method of estimating the optimal percentage of risk for a trading system, so that the system achieves the highest net profit possible.
Optimizing – Optimizing refers to the process of modifying values in a trading plan with the goal of achieving better performance. Once traders develop the tools to assess a trading plan, it is possible to change part of the plan, such as the length of a moving average or ADX value, to create better historical results.
Option Series – The available option expiration months that an investor can use to sell or buy options on a given equity. There are three option series: JAJO (January, April, July, October), MJSD (March, June, September, December), and FMAN (February, May, August, November). Every optionable stock will have the near and next month expiration available.
Option Symbol – An option symbol is comprised of three parts. The first one to three letters are the root symbol for the option. The second to last letter stands for the expiration month of the contract. The last letter in the symbol represents the strike price for the contract.
Option Volume – Option volume is the number of contracts traded on the current trading session or on the last trading day in the case of a holiday when the market is closed. Both buy orders and sell orders will cause this characteristic to increase.
Options – An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. Options fall into a class of securities known as derivatives, which are financial instruments that derive their value from the value of some other financial instrument or variable. For example, a stock option is a derivative because it derives its value from the value of a specific stock. There are only two basic types (or classes) of options:
Order Duration – A specification placed with your broker to cancel the trade or leave it open based on the time frame you selected. Some examples include day order, good ‘till canceled and immediate or cancel.
Out of the Money (OTM) – An option is out of the money if the strike price is not profitable in relation to the market price of the underlying asset. The strike price of an out of the money call would be above the market price, and the strike price of an out of the money put would be below the market price.
Overlap Rule – A key element of Elliott Wave methodology, this rule states that, for a valid five-wave sequence to occur, Wave 1 cannot overlap Wave 4; otherwise, it will become a three-wave pattern. Technicians consider strict application of the “overlap” rule essential to accurate wave analysis and forecasting since nearly any scenario desired can be concocted if an overlap is ignored, thereby rendering Wave Theory virtually useless.
Overlap Supports/Resistances - Price level where two or more indicators converge to show support or resistance depending on where the stock is trading (above means support and stock trading below means it is a resistance). The more overlaps within a 0.20 increment, the stronger that area is.
Over-Optimizing – Over-optimizing refers to excessive curve fitting that produces a trading plan that is unreliable in actual trading. An over-optimized plan will often show outstanding performance statistics, but will only work well on the historic data on which it was tested.
Overshoot - This is a price action where a stock will temporarily dip below a support level before bouncing back up and vice versa on downtrends where a stock will temporarily pop through a resistance before resuming back down.
Paper Trade – A useful educational method an investor can use before placing any actual trades. Paper trading with tools such as the PowerOptions Portfolio will help investors gain confidence and understanding of the market before placing real trades.
Pare In, Pare Out, Add/Pare, Clip/Pare - Paring means to incrementally build or decrease your trade position by piecing it in smaller sizes and different price levels. Paring allows one to proportionately maximize gains while minimizing risk on exits. Paring also improves the average price per share when accumulating a position. Paring is best done when adding shares based on the wider time frames while utilizing the shorter time frames (the 1- and 3-minute charts) to accumulate at a discount. It is absolutely important that you are paring with the trend, not against it. You are adding on the short-term divergence to profit from the eventual convergence with the longer time frame. This is the same thing
Pattern Day Trader – Pattern day traders are those traders who make four or more day trades within a consecutive five-day period, where the number of day trades accounts for more than 6percent of the total trades taken during the time period.
Pattern Recognition – Pattern recognition is a strategy type that relies on regularly occurring price patterns for trade entry or exit rules. Individual markets often display a tendency to move in a particular direction following the formation of reoccurring price patterns. Pattern recognition can be done visually or with the help of a computer.
Pennant – A technical pattern that is a hallmark of a strongly trending market (along with a flag pattern). The pennant represents short, counter-trend price action bound by a pair of short converging trend lines.
Percent Naked Yield – The percentage return if the option is sold and the stock is not owned or shorted. The percent naked yield is calculated by dividing the time value of the option by the strike price.
Percent Naked Yield (Annualized) – The naked yield return calculated on a yearly basis. The return is multiplied by 365 and then divided by the number of days remaining to expiration. This is an important value to use when comparing naked put trades that have different expiration months.
Percent Profitable – Percent profitable is also known as the probability of winning. This statistic is calculated by dividing the number of winning trades by the total number of trades for a given trading period.
Percent Return if Assigned - The percentage return that is achieved in the collar spread strategy when the stock is trading above the strike price of the sold call and the stock is assigned. This return takes into account the premium that is received and anyprofit/loss between the stock price and the sold call strike price, as well as the theoretical value remaining on the long put.
Percent to Break Even – The percentage a stock can change in value before the break even price is hit in any option strategy or combination stock and option strategy. For the naked put strategy, the percent to break even is calculated by subtracting the break-even price from the stock price and then dividing that value by the current stock price.
Perfect Storms - This is the most powerful trade setup that forms when three or more different time frame charts produce a pup or mini pup formation. The price action results in an explosive trend move triggered by the shorter time frames converging with the direction of the perfect storm, usually the 1-minute stochastics cross in the direction.
Performance Metrics – Performance metrics are statistics that can be used to evaluate a trading plan. Traders often develop a preference for those metrics that are most valuable based on their particular trading style or business goals.
Piercing Line - In a downtrend, a bigger black body is followed by a white body with a lower opening price than the low of the black body; however, the white candle closes above the midpoint of the black body.
Pip – The smallest unit of a given currency – e.g., in the case of U.S. dollars, one cent – or, on the Forex markets, the minimum price change that can be quoted in the exchange rate between a given currency pair.
Pivot Points – Pivot points are a type of technical indicator calculated by averaging a previous day’s high, low, and closing prices. Originally calculated by floor traders and market makers at the exchanges, pivots points project support and resistance levels.
Position Size – Position size refers to how many units a trader is buying or selling, or the dollar amount that a trader is going to trade. Short-term traders often refer to position size in terms of lots.
Position Trading – Position trading refers to a relaxed style of trading in which trades are taken over a period of months to years. This style of trading attempts to identify technical trends in stocks or commodities where large price movements are likely to occur.
Premium – The cost of an option, expressed on a per-share basis even though the option controls 100 shares. As a result, premium value has to be converted to dollar values. For example, premium of 3.50 is equal to $350.
Pricing Model – A mathematical formula designed to factor in a range of variables-such as time, implied volatility, etc.-that affect the price of a given security or portfolio of securities and thereby calculate what the value of that security or portfolio should be. With respect to options, the best known and most widely used pricing model is the Black-Scholes model (see Black-Scholes, above).
Probabilities – Mathematical percentages assigned to a given situation to estimate thelikelihood that the price of a specific stock or option will wind up at a given level at a specified point in the future (e.g., in the case of options, this is typically the expiration date). For example, if a stock is trading at $100 a share, you might assign a 30 percentprobability that the stock would wind up at a price of $90 a month in the future and a 30 percent probability that it would end up at $110. Prices at a greater distance from the current price-say $80 or $120-would be assigned a lower probability. The total of all probabilities, when plotted on a graph, create what is known as a distribution curve.
Probability Above/Below- This is the theoretical chance that an option has of being assigned. Specifically, it is the chance that the stock price will be above or below the strike of the option. This is commonly expressed as a percentage.
Probability – Probability can be expressed either as a decimal from 0.00 to 1.00, or as a percentage from 0 percent to 100 percent. A probability of 1.00 or 100 percent means an event will always occur, while a probability of 0.00 means the event will never happen.
Profit Factor – The profit factor can be thought of as the R advantage for the complete trading plan. While the R advantage is only used to measure the risk ratio of individual trades, the profit factor is defined as the gross profit divided by the gross loss(includingcommission) for the entire trading period.
Protective Put – A protective investment strategy where an investor will purchase put options to protect their shares of stock from large declines. The put acts as insurance for the underlying equity.
Pullback – A decline in the price of a stock or market index from its most recent peak. Such a price movement might be seen as a minor reversal within a prevailing upward trend, signaling a modest weakening in upward momentum. Also sometimes referred to as a retracement when certain mathematical considerations are met.
Pup - A moving average pattern where the 5-period moving average goes flat as stock price exhausts, while the 15-period moving average continues to trend. The channel gets tighter and causes steam to build. Eventually the stochastics will cross back up, causing shorts to squeeze and buyers to come in off the fence for an explosive breakout and trend resumption on uptrends, and vice versa on downtrends (stochastics
Put Option – A contract that gives the owner the right, but not the obligation, to sell a stock at the strike price before the expiration date. One option contract gives the right to control 100 shares of stock until expiration, unless the contract otherwise specifies.
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