a day whosetrading range is confined within opening and closing prices.micro trader a trader who looks for trading setup patterns within a single day ofteninvolving the study of five-minute and 15-minute price periods.minimum margin the deposit requirement to set up a margin account, which is thelesser of $2,000 or 100 percent of the security’s purchase price.momentum in technical analysis, the rate and speed of changes in price and tradingrange, believed to be a determining factor in how soon a trading pattern is likely to adjust.moving average a statistical method of showing a trend that is representative ofchanges without short-term volatility. The average is computed by adding up the fieldsin the period, and then dividing by the number of trading days.multiple the P/E of a stock, arrived at by dividing price per share by earnings pershare. The multiple is expressed as a single numerical value.naked call
alternative name for an uncovered call.
narrow range day a day in which the high-to-low price of a day is much smaller thanthe typical day, and when it occurs after three or more established trend day patterns.neckline the price area in between the price extremes of the head and shoulders pattern.new high
the highest price a stock has reached during the past 52 weeks.
new low the lowest price a stock has reached during the past 52 weeks.OHLC chart a type of stock chart summarizing the open, high, low, and close for aday using a single vertical line and two horizontal tabs The top of the vertical line is theline and the bottom is the low; the left tab is the day’s opening price and the right tab isthe day’s closing price.operating statement a financial statement summarizing all activity—revenue, costsand expenses, and profits—for a specified period of time, most often a full year or a fiscal quarter.option an intangible contract granting its owner specific rights to either buy or sell100 shares of a specific stock, on or before a specific date, for a specific price per share.or better in a limit order, the terms for completion of a transaction. In a buy order,execution is to occur when a specified price or lower has been reached; and with a sellorder, execution is to occur when a specified price or higher has been reached.out of the money condition of an option when the strike price of a call is higher thanthe current stock price, or when the strike price of a put is lower than the current stockprice.P/E ratio a test comparing technical and fundamental information. The price pershare is divided by earnings per share to arrive at the multiple. The P/E is an effectiveway to compare stocks and to limit stock selection. The result of dividing price per shareby earnings per share is expressed as a single numerical value, known as the multiple.
204
GLOSSARY
paper profits the profits in existing stock positions, which become realized profitsonly if and when those positions are closed.parallel price channels the top and bottom edges of a trading range when price levelsare evolving to the upside or downside, as opposed to a range in which prices remainstable within the range.pattern day trader as defined by the SEC, any trader who buys or sells a single stockfour or more times within five days; a pattern day trader must maintain no less than$25,000 account equity before a high volume of trading is permitted.point-and-figure chart a stock chart reflecting rising prices with columns of Xs extending from high to low price; and columns of stack’s Xs. This chart does not distinguish trading days, only trends.power spike a price spike above or below trading range accompanied by unusuallyhigh volume or other price patterns and signaling a change in the chart pattern.premium the value or cost of an option, which varies according to the distance between strike price and current market value; and the time remaining until expiration.price range the overall range of a stock’s price within a single day, from highest priceattained down to lowest price, and distinct from opening and closing prices.pump and dump a strategy to buy shares and then spread rumors intended to driveup prices, after which shares are sold at a profit.put an option granting its owner the right (but not the requirement) to sell 100shares of a specific stock at a fixed price per share.rally a period when prices are rising, also known as a condition where greed dominates the market.random walk theory a belief that all pricing of stocks is random, and that at anytime there is a 50/50 chance that a stock’s price will either rise or fall. This theory discounts the value of fundamental analysis and assumes that stock pricing is a battle between buyers and sellers for purely technical reasons.reaction swings short-term changes in price trend resulting from the reaction of buyers to sellers and vice versa.real body in a candlestick chart, the rectangular central part. A white real body showsthe stock moved up from opening to closing price. A black real body shows the stockmoved down from opening to closing price.resistance the highest price within a trading range, representing the top price thatbuyers are willing to pay for the stock under current conditions.retail investor an individual, in comparison to an institutional investor. The retail investor traditionally paid higher fees to trade, which explains the name. Today, any individual—even one paying low fees with a discount brokerage—is defined as a retailinvestor.reversal signal any chart pattern or trend implying that the current price direction isabout to stop and begin moving in the opposite direction.
Glossary
205
risk tolerance the level of risk an individual is able and willing to assume. Risk andpotential profit are directly related and cannot be accepted, so those seeking better thanaverage profits also need to expand their risk tolerance.round lot
the usual trading increment for stocks, which is 100 shares.
runaway gap a gap appearing as part of a strong and sustained price trend, reinforcing the price direction, and possibly showing up as a series of gaps one after another.sell to close an order that closes a long investment, which involves selling the securityand number of shares to cancel out the open position.sell to open the first order in a short position, which instructs the broker to sell theindicated security and number of shares or contracts.setup a signal to act in a swing trade pattern; the setup at the top of an uptrend is asell signal, the setup at the bottom of a downtrend is a buy signal.shadow in a candlestick, the area above and below the real body; the trading rangeabove and below the opening and closing prices.shaven bottom a candlestick with no lower shadow and a black real body; this appears on a day when the stock fell and closed at its low of the day.shaven head a candlestick with no upper shadow and a white real body. This appearson a day when the stock rise and closed at its high of the day.short and distort a short position variation of the pump and dump strategy; speculators open short positions and then spread rumors intended to frighten investors intoselling their stock to drive prices down. After the price falls, short positions are coveredat a profit.short interest a market indicator, reporting the number of shares of a specific stockthat are sold short and open, and often used by investors to time market decisions.short position the sale of stock and other securities that is eventually closed with apurchase transaction. In a short position, the sequence of events is sell-hold-buy.speculators individuals willing to take greater than average risks in exchange for theopportunity for higher than average profits.spike an unusual price movement, above or below established trading range, and often followed by a return to that range.spinning top a candlestick with a large upper shadow and a small lower shadow andwith a small real body that is either white or black.spread the point difference between high and low prices within a trading range; thelarger the spread, the greater the price volatility.spread the purchase and sale of options with different strike prices, expiration dates,or both.stop orders types of orders that generate execution once a stop price has been met orpassed (below for buy orders and above for sell orders). Once the stop price has beenmet or passed, the trade is executed.
206
GLOSSARY
straddle the purchase and sale of calls and puts with identical strike prices and expiration dates.strike price the fixed buy or sell price of stock specified in the option contract.supply and demand the forces determining whether prices rise or fall. Increases indemand create upward price pressure, and increases in supply create downward pricepressure; supply and demand are the causes of all stock price changes.support the lowest price within a trading range, representing the lowest price atwhich sellers will release their stock under current conditions.swing trading a strategy that involves two- to five-day market cycles and identifieshigh and low points in short-term cycles; and flags key points for moving in and out ofstock positions based on specific chart pattern signals.technical analysis the study of stock price and volume trends, charts, and tradingpatterns, for the purpose of anticipating short-term price movement to time trades.three black crows a bearish candlestick pattern consisting of three or more black realbody days in a downtrend.three white soldiers a bullish candlestick occurring at the end of a downtrend, consisting of three or more consecutive white real bodies closing higher on each day.time value the portion of an option’s premium excluding any intrinsic value.trading range the normal trading area extending from the highest to the lowest typical price. Stocks tend to trade within a specific range. The broader the range, the greaterthe volatility and thus the greater the market risk.trailing stop a trading order that sets a percentage below current price. If and whenthe stock falls to that price or below, a sale is generated automatically.triangle a price pattern in which the trading range narrows, a sign of uncertaintyabout the stock’s price movement and a precursor of a coming upward or downwardtrend.uncovered calloffset the risk.
an option position involving a short call and no ownership of stock to
underlying stock the stock on which options are written and bought or sold.upper shadow in a candlestick, the trading range between the day’s high price andthe top of the real body (opening or closing price).uptick rule a Securities and Exchange Commission (SEC) rule limiting short sellingactivity to prevent price manipulation; stock can be sold short only when the latesttrade was higher than the trade preceding it.uptrend a movement in a stock’s price to the upside; for swing traders, an uptrend isdefined as three or more consecutive days in which the closing price was higher than theopening price.
Glossary
207
volatility the degree of movement in a stock’s price, and the number of points ofmovement from day to day. The greater the price swing, the higher a stock’s volatility.Most investors define market risk in terms of price volatility.white candlestick a candlestick with a white or clear real body indicating that thestock moved up on the day.zero-plus tick price movement of a stock when price rises at least in its minimum increment in the latest trade.
Index
A
C
Accutrade, 98against the box, 132Alberto-Culver, 77–78Altria Corporation, 74, 108,122–123, 158Amazon.com, 20American Express, 98Anheuser-Busch, 170–171Apple Computer, 158Argus, 186ascending channel, 74asset allocation, 190–191at the money, 140, 141
calls, 138candlestickblack, 47broadening formations, 39concealing baby swallow, 59–60defined, 45deliberation, 61–62doji, 49–51double top and bottom, 35–36dragonfly doji, 49–51engulfing line, 55–58, 66, 69-70, 84gravestone doji, 49–51hammer, 52hangman, 52–53head-and-shoulders patterns, 37–38marubozu, 59origins, 17patterns, 51–58real body, 46revelations, 46–51reverse signal, 52shadow, 46–48shaven head and bottom, 48–49similarities, 59–63sources, 63–64spinning top, 49three black crows, 59–60three white soldiers, 61–62triangles, 39–40white, 47
BBank One OneInvest, 98Bank of America, 158black candlestick, 47Blockbuster, 70–71blocks, 29Bloomberg, 63breakaway gap, 34–35breakouts, 31–34broker call rate, 98–99brokerage rules, 95–99BrownCo, 98buy stop, 85buy to open or close, 125–126buying power, 101
209
210
INDEX
Candlestickchart.com, 58, 64, 187capitalization, 115cash flow, 114channel, 73Charles Schwab Corporation, 20, 63,73–74, 98, 186chartcandlestick, 17, 45–64chartists and use of, 18–19moving average, 16–17OHLC, 16, 17, 63patterns, 35–43, 51–58point-and-figure, 16watching, 15–20chartists, 18–19chart-watching, 15–20Chevron, 158Citigroup, 54, 122, 158Cititrade, 98CNN, 63Coca-Cola, 120, 122combination, 176common gap, 33, 35concealing baby swallow, 59–60confirmation, 15ConocoPhillips, 158consolidation, 20–21contingent liability, 109contingent order, 91–93contrarian investing, 4–5, 22, 179core earnings, 107correction, 20–21cover, 131current yield, 114
Dday order, 89day trade call, 100–101day trader, 7, 8–15debt ratio, 116deliberation, 61–62
descending channel, 74–75Diebold, 167–168dividend yield, 111, 114dividendachievers.com, 113do not reduce (DNR), 90Dogs of the Dow, 113doji, 49–51Dow Theory, 30–31Dow, Charles, 30–31downtrend, 10–13dragonfly doji, 49–51
EEastman Kodak, 108eBay, 20efficient market hypothesis, 2engulfing line, 55–58, 66, 69–70, 84equity investments, 136–137E-Trade, 63, 98exchange-traded fund (ETF),185–186ex-dividend, 90–91exhaustion gap, 34–35expiration of options, 138, 148–149,162extrinsic value, 146Exxon Mobil, 158
FFederal Express, 83–84Federal Reserve Board, 87–88, 96–97Fidelity, 98fill or kill (FOK), 89financial statement, 111Firstrade, 98flat channel, 73Forbes, 63Ford Motor Company, 57fundamental analysiscapitalization, 115contingent liability, 109
Index
core earnings, 107criteria, 117debt ratio, 118defined, 4distinguished, 15financial statement, 111indicators, 110–116long-term liabilities, 116operating statement, 111tests, 105volatility, 107
Ggaps, 32–35General Electric, 158General Motors, 120–123, 158go short, 125Goldman Sachs, 158, 186good ’til canceled (GTC), 90, 92Google, 158gravestone doji, 49–51
Hhammer, 52hangman, 52–53Harrisdirect, 98hedge, 130Hewlett-Packard, 158Hormel Foods, 76house requirement, 98
Iimmediate or cancel, 89–90in the money, 140, 141, 146–147initial margin, 96–97institutional investors, 29Intel, 158internal diversification, 108intraday trader, 195intrinsic value, 140, 143
JJohnson and Johnson, 68–69,149–151, 154, 156JP Morgan Chase, 158
KKraft Foods, 108Krispy Kreme, 19, 20
Lleverage, 95limit order, 88–89long position, 92long-term hold, 6long-term liabilities, 116lower shadow, 48Lucent Technologies, 111–112
Mmaintenance requirement, 97margin call, 98margin, 95market order, 88market risk, 23–24marubozu, 59Merck, 122Mergent Corporation, 113micro trader, 195Microsoft, 56, 71–72, 158minimum margin, 96momentum, 26moving average, 16–17MSN Money, 63multiple, 115
Nnaked call, 173narrow range day, 14, 70NASDAQ, 185
211
212National Association of SecuritiesDealers (NASD)brokerage rules, 87–88day trading rules, 99margin accounts, 96pump and dump rules, 133Rule 2520, 95, 99new high and low prices, 81–82New York Stock Exchange (NYSE),95, 99, 185Newmont Mining, 158Newton’s Third Law, 65–66
OOHLC chart, 16, 17operating statement, 111optionsat the money, 139–140, 141call, 138combination, 176consequences and risks, 160–164,188covered calls, 172–175defined, 135exotic reputation, 162expiration, 138, 148–149, 162extrinsic value, 146in the money, 140, 141,146–147incremental additions, 171intrinsic value, 140, 143multiple contracts, 167–172naked call, 173out of the money, 140, 141premium, 139put, 138short, 175–177spread, 176–177stock selection for, 164–167straddle, 176–177strike price, 138
INDEX
time value, 140, 142, 143–146trading examples, 149–156uncovered call, 173underlying stock and, 138or better, 89out of the money, 140, 141
PP/E ratio, 114–115paper profits, 92–93parallel price channels, 25–26pattern day trader, 7, 99–100Pepsi Cola, 68–69Pfizer, 122–123, 158Phillip Morris, 108point-and-figure chart, 16Polaroid, 108power spike, 75premium of options, 139price range, 11price spikes, 75–78price volatility, 107, 119–123primary emotions of the market,20–22Proctor & Gamble, 149–151,153, 156pump and dump, 133puts, 138
Rrally, 20–21random walk theory, 2–3reaction swingactions, 67–65ascending channel, 74channels, 73defined, 65descending channel, 74–75end of, 82–85flat channel, 73
Index
management of, 78–82price and volume spikes, 75–78trading cycles, 67–68real body, 46Regulation T, 97, 99, 101retail investors, 29–30Reuters, 186reverse signal, 52risk tolerance, 94–95, 103round lot, 137runaway gap, 34–35
SS&P Stock Reports, 186Scott Trade, 63, 99sector leaders, 118Securities and Exchange Commission(SEC)day trading rules of, 7, 99Krispy Kreme and, 19–20margin regulations, 96–97oversight, 87pump and dump rules, 133website, 88sell to open or close, 125–126setup, 14shadow area, 46–47shaven head and bottom, 48–49Sherwin-Williams,149–152, 156short and distort, 133short interest, 131short options, 175–177short position, 92–93speculators, 6spinning top, 49spread, 25, 176–177Sprint, 158stock selectioncapitalization, 115cash flow, 114
213
core earnings, 107debt ratio, 116diversification, 108–109, 176, 189,190–192dividend yield, 111, 114indicators, 110–119price volatility, 119–123rules of thumb, 105–110Stockcharts.com, 63stop orders, 90straddle, 176–177strike price of options, 138supply and demand, 26–27support and resistance,25–29, 33
TT. Rowe Price, 99TD Ameritrade, 63, 99TD Waterhouse, 99technical analysiscriteria, 117defined, 4distinguished, 15indicators, 110–116price volatility, 119tests, 105three black crows, 59–60three white soldiers, 61–62time value, 140, 142, 143–146trading range, 24, 26, 28,31–34trailing stop, 85
Uuncovered call, 173underlying stock, 138upper shadow, 48uptick rule, 128uptrend, 10–13
214VVanguard, 99volatility, 24, 104, 107, 119–123volume spikes, 75–78
INDEX
Wal-Mart, 111, 113, 158white candlestick, 47
YYahoo, 63, 158
WWalgreen, 127–128Wall Street Journal, 98WallStreet Inc, 99
Zzero-plus tick, 128–129
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