A-Z Trading Glossary
An A to Z of the world of futures and options, designed to equip you with all the industry terms you need to trade with confidence. Sourced from Common Sense Commodities LLC.
A B C D E F G H I K L M N O P R S T U V W
A
Account Executive
The agent of a commission house who serves customers/traders by entering their commodity futures and options orders, reporting trade executions, advising on trading strategies, etc.
ADP
Alternative Delivery Procedure. A provision of a futures contract that allows buyers and sellers to make and take delivery under terms or conditions that differ from those prescribed in the contract. An ADP may occur at any time during the delivery period, once long and short futures positions have been matched for the purpose of delivery.
Alpha-Beta Trend Channel
The Alpha-Beta Trend Channel study uses the standard deviation of price variation to establish two trend lines, one above, and one below the moving average of a price field. This creates a Channel (band) where the great majority of price field values will occur.
Arbitrage
The simultaneous purchase of one commodity against the sale of another in order to profit from fluctuations in the usual price relationships. Variations include the simultaneous purchase and sale of different delivery months of the same commodity; of the same delivery month, but different grades of the same commodity; and of different commodities.
At The Market
An order to buy or sell a futures contract at whatever price is obtainable when the order reaches the trading floor. Also called a market order.
At The Money
An option whose exercise, or strike, price is closest to the futures price.
B
Backwardation
Market situation in which futures prices are lower in each succeeding delivery month. Also known as an inverted market. The opposite of "contango".
Banker's Acceptance
A draft or bill of exchange accepted by a bank; payment is guaranteed by the accepting institution.
Basis
The differential that exists at any time between the cash, or spot price, of a given commodity and the price of the nearest futures contract for the same or a related commodity. Basis may reflect different time periods, product forms, qualities or locations. Cash minus futures equals basis.
Basis Risk
The uncertainty as to whether the cash futures spread will widen or narrow between the time's a hedge position is implemented and liquidated.
Bear
One who anticipates a decline in price or volatility. Opposite of a "bull".
Bear Market
Market in which prices are in a declining trend.
Bear Spread
1) The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a decline in prices, but at the same time limiting the potential loss if this expectation is wrong. This can usually be accomplished by selling a nearby delivery and buying a deferred delivery (further out contract). 2) A delta negative option position comprised of long and short options of the same type, either calls or puts, designed to be profitable in a declining market. An option with a lower strike price is bought and one with a higher strike price is sold.
Bid
A motion to buy a futures or option contract at a specified price. Opposite of "offer".
Book Transfer
Transfer of title without actually delivering the product.
Bollinger Bands
Bollinger Bands plot trading bands above and below a simple moving average. The standard deviation of closing prices for a period equal to the moving average employed is used to determine the band width. This causes the bands to tighten in quiet markets, and to loosen in volatile markets. The bands can be used to determine overbought and oversold levels, locate reversal areas, project targets for market moves, and determine appropriate stop levels. The bands are used in conjunction with indicators such as RSI, MACD histogram, CCI, and Rate of Change. Divergences between Bollinger bands and other indicators show potential action points. As a general guideline, look for buying opportunities when prices are in the lower band, and selling opportunities when the price activity is in the upper band.
Box Spread
An options market arbitrage in which both a bull spread and a bear spread are established for a risk less profit. One spread includes put options, and the other includes calls.
Brand
Insignia identifying the producer of a specific commodity.
Break-Even Point
The underlying futures price at which a given options strategy is neither profitable nor unprofitable. For call options, it is the strike price plus the premium. For put options, it is the strike price minus the premium.
Broker
1) An individual who is paid a fee or commission for acting as an agent in making contracts, sales, or purchases. 2) A floor broker is a person who actually executes trading orders on the floor of an exchange. 3) An account executive, registered commodity representative, or customers' man, who deals with customers and their orders in commission house offices.
Bulge
A rapid advance in futures prices.
Bull
One who anticipates an increase in price or volatility. Opposite of a "bear".
Bull Market
Market in which prices are in an upward trend.
Bull Spread
1) The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a rise in prices, but, at the same time, limiting the potential loss if this expectation is wrong. This can be accomplished by buying the nearby delivery and selling the deferred. 2) A delta positive options position composed of both long and short options of the same type, either calls or puts, designed to be profitable in a rising market. An option with a lower strike price is sold, and one with a higher strike price is bought.
Buyer's Market
A condition of the market in which there is an abundance of goods available, and, hence, buyers can afford to be selective and may be able to buy at less than the price that had previously prevailed. See "seller's market".
Buying Hedge
Also called a long hedge. Buying futures contracts to protect against possible increased costs of commodities that will be needed in the future.
C
Calendar Spread
An options position comprised of the purchase and sale of two options contracts of the same type that have the same strike prices, but different expiration dates. Also known as a horizontal, or time, spread.
Call Option
An option that gives the buyer (holder) the right, but not the obligation, to buy a futures contract (enter into a long futures position) for a specified price within a specified period of time, in exchange for a onetime premium payment. It obligates the seller (writer) of an option to sell the underlying futures contract (enter into a short futures position) at the designated price, should the option be exercised at that price.
Candlestick Charts
Method of drawing stock (or commodity) charts which originated in Japan. Requires the presence of Open, High, Low, and Close price data to be drawn. There are two basic types of candles, the white body, and the black body. As with regular bar charts, a vertical line is used to indicate the period's (normally daily) high to low. When prices close higher than they opened, a white rectangle is drawn on top of the high-low line. This rectangle originates at the opening price level and extends up towards the closing price. A down day is drawn in black. The combination of several candles results in patterns (with names like "two crows" or "bullish engulfing pattern") which give insight into future price activity. For other Japanese charting approaches also see Renko and Kagi charts.
Cap
A supply contract between a buyer and a seller, whereby the buyer is assured that he will not have to pay more than a given maximum price. This type of contract is analogous to a call option.
Carrying Charge
The total cost of storing a physical commodity over a period of time. Includes storage charges, insurance, interest, and opportunity costs.
Cash Commodity
The actual physical commodity. Sometimes called a spot commodity, or actuals.
Cash Market
The market for a cash commodity where the actual physical product is traded.
CFTC
See Commodity Futures Trading Commission.
Chaikin Oscillator
The Chaikin Oscillator is created by subtracting a 10 period exponential moving average of the Accumulation/Distribution line from a 3 period moving average of the Accumulation/Distribution Line.
Charting
The use of graphs and charts in the analysis of market behavior, so as to plot trends of price movements, average movements of price, volume, and open interest, in the hope that such graphs and charts will help one to anticipate and profit from price trends. Contrasts with "fundamental analysis".
CIF
Cost, Insurance, Freight. Term refers to a sale in which the buyer agrees to pay a unit price that includes the Free On Board (FOB) Value at the port of origin plus all costs of insurance and transportation. This type of transaction differs from a "delivered" agreement in that it is generally ex duty, and the buyer accepts the quantity and quality at the loading port, rather than pay on quality and quantity as determined at the unloading port. Risk and title are transferred from the seller to the buyer at the loading port, although the seller is obliged to provide insurance in a transferable policy at the time of loading.
Class Of Options
All call options, or all put options, exercisable for the same underlying futures contract and which expire on the same expiration date.
Clearing Member
Clearing Members of the New York Mercantile Exchange accept responsibility for all trades cleared through them, and share secondary responsibility for the liquidity of the Exchange's clearing operation. They earn commissions for clearing their customers' trades and enjoy special margin privileges. Original margin requirements for Clearing Members are lower than for customers, and Clearing Members may use letters of credit posted with the clearinghouse as original margin for customer accounts, as well as for their own trades. Clearing Members must meet a minimum capital requirement.
Clearinghouse
An Exchange associated body charged with the function of insuring the financial integrity of each trade. Orders are "cleared" by means of the clearinghouse acting as the buyer to all sellers, and the seller, to all buyers.
Closing Range
A range of prices at which transactions took place at the closing of the market; buying and selling orders during the closing period might have been filled at any point within such a range.
Commission
The fee charged by a futures broker for the execution of an order.
Commission House
An organization that trades commodities and/or futures and options contracts for customer accounts in return for a fee.
Commission Merchant
One who makes a trade, either for another member of an exchange or for a nonmember client, but who makes the trade in his own name and becomes liable as principal to the other.
Commitment or Open Interest
The number of open or outstanding contracts for which an individual or entity is obligated to the Exchange, because that individual or entity has not yet made an offsetting sale or purchase, an actual contract delivery, or, in the case of options, exercised the option.
Commodity
As defined by the CFTC, specifically enumerated agricultural commodities, all other goods and articles, except onions and all services, rights and interests in which contracts for future delivery are presently, or in the future may be, dealt.
Commodity Futures Trading Commission
A federal regulatory agency authorized under the Commodity Futures Trading Commission Act of 1974 to regulate futures trading in all commodities. The commission is comprised of five commissioners, one of whom is designated as chairman, all appointed by the President, subject to Senate confirmation. The CFTC is independent of the Cabinet departments.
Commodity Channel Index (CCI)
The CCI is a timing system that is best applied to commodity contracts which have cyclical or seasonal tendencies. CCI does not determine the length of cycles - it is designed to detect when such cycles begin and end, through the use of a statistical analysis which incorporates a moving average and a divisor, reflecting both the possible and actual Trading Ranges. Although developed primarily for commodities, the CCI could conceivably be used to analyze stocks as well.
Commodity Selection Index
The Commodity Selection Index is related to the Directional Movement Index. Whereas the ADXR plot of the DMI is used to rate contracts from the longer term, trend-following point of view, the CSI is used to rate items in the more volatile short term. The Commodity Selection Index takes into account the ADXR from the Directional Movement Index, the Average True Range, the value of a one cent move, as well as margin and commission requirements. The higher the CSI rating, the more attractive an item is for trading.
Commodity Pool
A venture, usually a limited partnership, in which funds contributed by a number of investors are combined for the purpose of trading futures. Also called a commodity fund or a futures fund.
Commodity Pool Operator (CPO)
Acts as a general partner of commodity pools. CPOs hire independent Commodity Trade Advisors to handle daily trading decisions. Responsible for the pool's administration, and structure, and selecting and monitoring the traders who conduct transactions using the fund's money.
Commodity Trading Advisor (CTA)
Directs trading in the managed accounts of a commodity pool. Professional money managers who manage client assets on a discretionary basis, using global futures markets as an investment medium.
Contango Market
A market situation in which prices are higher in the succeeding delivery months than in the nearest delivery month. Opposite of "backwardation".
Contingency Order
An order which becomes effective only upon the fulfillment of some condition in the marketplace.
Contract
1) A term of reference describing a unit of trading for a commodity future or option. 2) An agreement to buy or sell a specified commodity, detailing the amount and grade of the product, and the date on which the contract will mature and become deliverable.
Contract Grade
That grade of product established in the rules of a commodity futures exchange as being suitable for delivery against a futures contract.
Contract Months
See "delivery month".
Conversion
A delta neutral arbitrage transaction involving a long futures contract, a long put option, and a short call option. The put and call options have the same strike price, and the same expiration date.
Cover
To close out a short futures or options position.
Covered Writing
The sale of an option against an existing position in the underlying futures contract. For example, short call and long futures.
Current Delivery Month
The futures contract which matures and becomes deliverable during the present month or the month closest to delivery. Also called the spot month.
Cutler's RSI
Cutler's RSI is a slight variation of Welles Wilder's original Relative Strength Index. The RSI is a momentum oscillator used to identify overbought and oversold conditions by keying on specific levels, generally 30 and 70, on a chart scaled from 0 to 100. The study can also be used to detect the following: Movement which might not be as readily apparent on the bar chart; failure swings above 70, or below 30, which indicate reversals Support and resistance Divergences between RSI and price. Cutler's RSI is calculated as follows: RSI = 100 - (100 / ( 1 + RS ) ) RS = UPAV:x / DNAV:x and . . . UPAV:x = (E, period's Closes UP) / period DNAV:x = (z: period's Closes DOWN) / period A Close UP (or DOWN) = CLOSE - CLOSE previous. If the difference is positive, it is a Close UP. If the difference is negative, the sign is changed and it is a Close DOWN.
D
Day Trade
The purchase and sale of a futures or an options contract on the same day that is sold or bought back generally on the same day (often within minutes).
Delivery Notice
A notice presented through an exchange's clearing house, by a Clearing Member, announcing the intention to deliver the actual commodity in satisfaction of a contract obligation.
Delivery Point(s)
Location(s) designated by an exchange, at which delivery may be made in fulfillment of contract terms.
Delta
The sensitivity of an option's value to a change in the price of the underlying futures contract. Also referred to as an option's "futures equivalent position". Deltas are positive for bullish options positions, or calls, and negative for bearish options positions, or puts. Deltas of "deep in the money" options are approximately equal to one; deltas of "at the money options" are 0.5; and deltas of "deep out of the money" options approach zero.
Delta Neutral Spread
A spread where the total delta position on the long side and the total delta on the short side add up to approximately zero.
Demand Aggregate
The Demand Aggregate is used similarly as the Demand Index, but adds Open Interest as a consideration in the formula. In its simplest terms, the system confirms price trends, by analyzing concurrent Volume and Open Interest trends. For example, a rise in price, coupled with rising Volume and Open Interest figures, is considered a bullish indicator. Interpretations are made with respect to the relationship between the movement of Volume, Open Interest, and Price.
Demand Index
The Demand Index is a leading indicator which combines volume and price data in such a way as to indicate a change in price trend. It is designed so that, at the very least, it is a coincidental indicator, never a lagging one. The calculation of this index is relatively complex. This analysis is based on the general observation that volume tends to peak before prices peak, both in the commodity and stock markets.
Depository or Warehouse Receipt
A document issued by a bank or warehouse indicating ownership of a commodity stored in a bank depository or warehouse. In the case of many commodities deliverable against futures contracts, transfer of ownership of an appropriate depository receipt may affect contract delivery.
Derivative
Financial instrument derived from a cash market commodity, futures contract, or other financial instrument. Derivatives can be traded on regulated exchange markets or over the counter. For example, futures contracts are derivatives of physical commodities, options on futures are derivatives of futures contracts.
Detrend
Detrend is simply another interpretation of a moving average. It provides a means of identifying underlying cycles not apparent when the moving average is viewed in its original form, by effectively hiding the major cycles from view. The moving average line is drawn as a straight, horizontal basis line on the Detrend chart. Price bars are then re-positioned along this line depending on their relation to the moving average line.
Differentials
Price differences between classes, grades, and locations of different stocks of the same commodity.
Directional Movement Index
Directional Movement uses a rather complicated set of calculations designed to rate the directional movement of commodities or stocks on a scale from 0 to 100. For those traders who employ trend-following methods, commodities or stocks rating in the upper end of the scale would be attractive. For those using non-trending methods, commodities or stocks rating at the lower end of the scale should be considered for trading. At its most basic, the Directional Movement would affect trading in the following manner: Long positions would be taken when the "+DI" line crosses over the "-DI" line. Short positions would be taken when the "-DI" line crosses over the "+DI" line. Further components of this index are the ADX and ADXR lines.
Discount
1) A downward adjustment in price allowed for delivery of stocks of a commodity of lesser than contract grade against a futures contract. 2) Sometimes used to refer to the price differences between futures of different delivery months.
Discretionary Account
An arrangement by which the holder of an account gives written power of attorney to someone else, often a broker, to buy and sell without prior approval of the account holder. Often referred to as a "managed account."
E
Electronic Trader
A person who is authorized to enter orders for his own account and/or for customers' accounts on any exchange that offers electronic trading.
Elliott Wave
Elliott wave theory goes beyond traditional charting techniques by providing an overall view of market movement that helps explain why and where certain chart patterns develop. The three major aspects of wave analysis are: pattern, time, and ratio. The basic Elliott pattern consists of a 5 wave uptrend followed by a three wave correction. Each "leg" of a wave, in turn, consists of smaller waves. Elliott waves can be used to successfully define where the market currently is in relation to "the big picture", but is usually too unreliable for short term trading.
Exchange Certified Stocks
Stocks of commodities, held in depositories or warehouses, certified by an Exchange approved inspection authority as constituting good delivery against a futures contract position. Current total certified stocks are reported in the press for many important commodities such as platinum.
Exchange Of Futures For Cash
A transaction in which the buyer of a cash commodity transfers to the seller a corresponding amount of long futures contracts, or receives from the seller a corresponding amount of short futures, at a price difference mutually agreed upon. In this way, the opposite hedges in futures of both parties are closed out simultaneously.
Exchange Of Futures For Physicals
A futures contract provision involving an agreement for delivery of physical product (that does not necessarily conform to contract specifications in all terms) from one market participant to another, and a concomitant assumption of equal and opposite futures positions by the same participants at the time of the agreement.
Exercise
The process of converting an options contract into a futures position.
Exercise Price
The price at which the underlying futures contract will be bought or sold in the event an option is exercised. Also called the "strike price".
Expiration Date
The date and time after which trading in an options contract terminates and after which all contract rights or obligations become null and void.
Extrinsic Value
The amount by which the premium exceeds its intrinsic value. Also known as "time value".
F
Fair Value
Theoretical value.
Fast Market
Transactions in the pit or ring that take place in such volume, and with such rapidity, that price reporters are behind with price quotations, so they insert "Fast" and show a range of prices.
Fence
A long (short) underlying position together with a long (short) out of the money put and a short (long) out of the money call. All options must expire at the same time.
FIA
Futures Industry Association. A national not-for-profit futures industry trade association, that represents the brokerage community on industry, regulatory, political, and educational issues.
Fibonacci Ratios and Retracements ( I use these on EVERY trade)
They can be applied both to price and time, although it is more common to use them on prices. The most common levels used in retracement analysis are 61.8%, 38%, and 50%. When a move starts to reverse, the 3 price levels are calculated (and drawn using horizontal lines) using a movements low to high. These retracement levels are then interpreted as likely levels where counter moves will stop. It is interesting to note that the Fibonacci ratios were also known to Greek and Egyptian mathematicians. The ratio was known as the Golden Mean, and was applied in music and architecture. A Fibonacci spiral is a logarithmic spiral that tracks natural growth patterns.
Fill
The price at which an order is executed.
Fill Or Kill
An order which must be filled immediately and in its entirety. Failing this, the order will be canceled.
Floor
1) The main trading area of an exchange. 2) A supply contract between a buyer and seller of a commodity, whereby the seller is assured that he will receive at least some minimum price. This type of contract is analogous to a put option.
Floor Broker
An exchange member who executes orders to buy or sell futures and options in the trading ring on the floor of a commodities exchange.
Floor Trader or Local
An exchange member who executes orders to buy or sell futures and options for his own account.
Force Majeure
A standard clause which indemnifies either or both parties to a transaction whenever events which the Exchange declares to be reasonably beyond the control of either party occur to prevent fulfillment of the terms of the contract.
Forward Contract
A supply contract between a buyer and seller, whereby the buyer is obligated to take delivery, and the seller is obligated to provide delivery, of a fixed amount of a commodity at a predetermined price on a specified future date. Payment in full is due at the time of, or following, delivery. This differs from a futures contract, where settlement is made daily, resulting in partial payments over the life of the contract.
Free On Board (FOB)
A transaction in which the seller provides a commodity at an agreed unit price, at a specified loading point, within a specified period; it is the responsibility of the buyer to arrange for transportation and insurance.
Fundamental Analysis
The study of pertinent supply and demand factors which influence the specific price behavior of commodities. See also "technical analysis".
Futures Contract
A supply contract between a buyer and a seller, whereby the buyer is obligated to take delivery, and the seller is obligated to provide delivery, of a fixed amount of a commodity at a predetermined price at a specified location. Futures contracts are traded exclusively on regulated exchanges, and are settled daily, based on their current value in the marketplace.
Futures Commission Merchant
An FCM is the only industry participant who receives, handles, and manages customers' funds, margin payments, and commission charges. He is also responsible for confirmation of trade slips, customer statements, and guarantees.
Futures Equivalent
A term frequently used with reference to speculative position limits for options on futures contracts. The futures equivalent of an option's position is the number of options multiplied by the previous day's risk factor, or delta, for the option series. For example, 10 "deep out of the money" options with a risk factor of 0.20 would be considered two futures equivalent contracts. The delta, or risk factor" used for this purpose is the same as that used in delta based margining and risk analysis systems.
G
Gamma
The sensitivity of an option's delta to changes in the price of the underlying futures contract.
Gann Square
The Gann Square is a mathematical system for finding support and resistance based upon a commodity or stock's extreme low or high price for a given period. Attainment of a particular price level in a square tells you the next probable price peak or valley of future movement. The probable price levels tend to be more reliable if they are extrapolated from Gann Square values along one of the major axes of the Gann Square. The Gann Square is generated from a central value, normally an all-time, or cyclical, high or low. If a low is used, the numbers are incremented by a constant amount to generate the Gann Square. If a high is used, the numbers are decremented during the square generation.
H
Hedge
The initiation of a position in a futures, or options, market that is intended as a temporary substitute for the sale or purchase of the actual commodity. The sale of futures contracts in anticipation of future sales of cash commodities as a protection against possible price declines, or the purchase of futures contracts, in anticipation of future purchases of cash commodities, as a protection against the possible price increases.
Haurlan Index
This indicator is calculated daily from the plurality of NYSE advances over declines. There are three components of the Haurlan index: Short Term, Long Term, and Intermediate Term.
1) Short Term. A 3 day, exponential, moving average is taken of the net NYSE advances over declines, measuring the short term condition of the market. When this index moves above +100, a market short term buy signal is generated. The signal is in effect until the market drops below -150 at which time a sell signal is generated. The sell signal remains in effect until the index again moves above +100.
2) Intermediate Term. Same as above, but with a 20 day, exponential, moving average. This index is considered the most important of the three. Market buys and sells are determined in this index by the crossing of trend lines or support/resistance levels, depending on the particular market in question. For example, when the market is basing out in preparation for an uptrend, a resistance level may be set up. Once its value is determined, buy and sell signals could be generated for that market.
3) Long Term. Same as above, except with a 200 day, exponential, moving average. Useful for determining trends, but not for signals.
Hedger
A trader who enters the market with the specific intent of protecting an existing, or anticipated, physical market exposure from unexpected or adverse price fluctuations.
Hedge Ratio
1) Ratio of the value of futures contracts purchased or sold to the value of the cash commodity being hedged, a computation necessary to minimize basis risk. 2) The ratio, determined by an option's delta, of futures to options required to establish a riskless position. For example, if a $1/barrel change in the underlying futures price leads to a $O.25/barrel change in the options premium, the hedge ratio is four (four options for each futures contract).
Herrick Payoff Index
This is a commodity trading tool, useful for the early spotting of changes in price trend direction. The Payoff Index is best used to distinguish trends that are destined to continue from those that will most likely be short-lived. The Payoff Index is a commodity trading tool that is useful in the early identification of changes in the direction of price trends. The Payoff Index frequently helps distinguish between a rally in a trend that is destined to continue, and a significant trend change that will provide a worthwhile trading opportunity. The Payoff Index tends to give coincident signals within a day or two before a significant change in price trend. This advance action is accomplished through use of trading volume and contract open interest to modify the price action. Analysts have observed that volume trends often change before a price-trend change. There are also generally accepted relationships between the price trend and the trend of open interest.
Historical Volatility
The annualized standard deviation of percent changes in futures prices over a specific period. It is an indication of past volatility in the marketplace.
Horizontal Spread
Calendar, or time, spread.
I
Immediate or Cancel
An order which must be filled immediately or be canceled. IOC orders need not be filled in their entirety.
Implied Volatility
A measurement of the market's expected price range of the underlying commodity futures, based on the market traded option premiums.
In The Money
An option that can be exercised and immediately closed out against the underlying market for a cash credit. The option is in the money if the underlying futures price is above a call option's strike price, or below a put option's strike price.
Independent
Term generally applies to a non integrated oil or natural gas company, usually active in only one or two sectors of the industry. An independent marketer buys petroleum products from major, or independent, refiners and resells them under his own brand name or buys natural gas from producers, and resells it. There are also independents which are active exclusively either in oil or gas production or refining.
Intrinsic Value
The amount by which an option is "in the money". An option which is not in the money has no intrinsic value. For calls, intrinsic value equals the difference between the underlying futures price and the option's strike price. For puts, intrinsic value equals the option's strike price minus the underlying futures price Intrinsic value is never less than zero.
Introducing Broker
A firm engaged in soliciting, or in accepting orders for the purchase or sale of any commodity for future delivery.
Inverted Market
A futures market is said to be inverted when distant contract months are selling at a discount compared to nearby contract months; also known as "backwardation".
Invisible Supply
Uncounted stocks of a commodity, in the hands of wholesalers, manufacturers and producers, which cannot be identified accurately; stocks outside commercial channels, but theoretically available to the market.
K
Kagi Chart
Like Candlestick and Renko charts, Kagi charts come from Japan, and were made popular in the USA by Steve Nison. Kagi charts display a series of connecting vertical lines where the thickness and direction of the lines are dependent on the price action. If closing prices continue to move in the direction of the prior vertical Kagi line, then that line is extended. However, if the closing price reverses by a pre-determined "reversal" amount, a new Kagi line is drawn in the next column in the opposite direction. An interesting aspect of the Kagi chart is that when closing prices penetrate the prior column's high or low, the thickness of the Kagi line changes.
L
Last Notice Day
The final day on which notices of intent to deliver on futures contracts may be issued.
Last Trading Day (LTD)
The final trading day for a particular delivery month futures contract or option contract. Any futures contracts left open following this session must be settled by delivery.
Limit
The maximum daily allowable amount a futures price may advance, or decline, in any one day's trading session. Limits are also placed on the number of positions a participant may hold in the market.
Limit Order
A contingent order for an options or futures trade specifying a certain maximum (or minimum) price, beyond which the order (buy or sell) is not to be executed.
Liquidation
The closing out of futures and options positions.
Liquidity
A market is said to be "liquid" when it has a high level of trading activity and open interest.
Liquid Market
A market characterized by the ability to buy and sell with relative ease.
Local
An exchange member who executes orders to buy or sell futures and options for his own account.
Locked Market
A market where prices have reached their daily trading limit and trading can only be conducted at that price or prices which are closer to the previous settlement price.
Long
1) The market position of a futures contract buyer whose purchase obligates him to accept delivery, unless he liquidates his contract with an offsetting sale. 2) One who has bought a futures contract to establish a market position. 3) In the options market, position of the buyer of a call option contract. Opposite of short.
Long Hedge
Purchase of futures against the future "market price" purchase or "fixed price" forward sale of a cash commodity, to protect against price increases.
Long The Basis
A person or firm that has bought the spot commodity and hedged with a sale of futures is said to be long the basis.
Lot
Any definite quantity of a futures commodity of uniform grade; the standard unit of trading.
M
MACD (Moving Average Convergence/Divergence)
The MACD is used to determine overbought or oversold conditions in the market. Created for stocks and stock indices, MACD can be used for commodities as well. The MACD line is the difference between the long and short exponential moving averages of the chosen item. The signal line is an exponential moving average of the MACD line. Signals are generated by the relationship of the two lines. As with RSI and Stochastics, divergences between the MACD and prices may indicate an upcoming trend reversal.
McClellan Oscillator
This index is based on New York Stock Exchange net advances over declines. It provides a measure of such conditions as overbought/oversold and market direction on a short-to- intermediate term basis. The McClellan Oscillator measures a bear market selling climax when it registers a very negative reading, in the vicinity of -150. A sharp buying pulse in the market would be indicated by a very positive reading, well above 100.
Margin
The amount of money or collateral deposited by a customer with his broker, or deposited by a broker with a Clearing Member, or by a Clearing Member with the Clearinghouse, for the purpose of insuring the broker or Clearinghouse against adverse price movement on open futures contracts. The margin is not partial payment on a purchase. 1) Initial margin is the minimum deposit per contract required by the broker when a futures position is opened. 2) Maintenance margin is a sum which must be maintained on deposit at all times. If the equity in a customers' account drops to, or under, that level because of an adverse price movement, the broker must issue a "margin call: to restore the customers' equity. Margins are set by the Exchange based on its analysis of price risk volatility in the market at that time. See "variation margin".
Margin Call
A demand for additional margin funds when futures prices move adverse to a trader's position, or if margin requirements are increased. Buyers of options are not subject to margin calls.
Marked To Market
Daily cash flow system used by U.S. futures exchanges to maintain a minimum level of margin equity for a given futures or options contract position by calculating the gain or loss in each contract position resulting from changes in the price of the futures or options contracts at the end of each trading day.
Market Correction
In technical analysis, a small reversal in prices following a significant trending period.
Market If Touched Order
An order that becomes a market order when a particular price is reached. A sell MIT is placed above the market; a buy MIT is placed below the market.
Market Maker
An independent trader or trading firm which is prepared to buy and sell futures or options contracts in a designated market. Market makers provide a two sided (bid and ask) market and greater liquidity.
Market On Close
An order to buy or sell at the end of the trading session at a price within the closing range of prices.
Market Order
An order to be filled immediately, at the current market price.
Maximum Price Fluctuation
A commodity exchange's established maximum limits for fluctuations in futures prices during any one trading session.
Minimum Price Fluctuation
Minimum unit by which a futures price or an option premium can fluctuate per trade, also known as "tick size".
Momentum
Momentum provides an analysis of changes in prices (as opposed to changes in price levels). Changes in the rate of ascent or descent are plotted. The Momentum line is graphed positive or negative to a straight line representing time. The position of the time line is determined by the price at the beginning of the Momentum period. Traders use this analysis to determine overbought and oversold conditions. When a maximum positive point is reached, the market is said to be overbought, and a downward reaction is imminent. When a maximum negative point is reached, the market is said to be oversold, and an upward reaction is indicated.
Moving Averages
The moving average is probably the best known, and most versatile, indicator in the analysts tool chest. It can be used with the price of your choice (highs, closes, or whatever) and can also be applied to other indicators, helping to smooth out volatility.
As the name implies, the Moving Average is the average of a given amount of data. For example, a 14 day average of closing prices is calculated by adding the last 14 closes and dividing by 14. The result is noted on a chart. The next day the same calculations are performed with the new result being connected (using a solid or dotted line) to yesterday's and so forth. Variations of the basic Moving Average, are the Weighted, and Exponential moving averages.
N
Naked
A long or short market position taken without having an offsetting short or long position. A trader who executes one side of a spread is said to be naked until he executes the other side.
National Futures Association
Futures industry trade association which promulgates rules of conduct, and mediates disputes between customers and brokers.
Net Position
The difference between an individual or firm's open long contracts and open short contracts in any one commodity.
Neutral Spread
Another name for a "delta neutral" spread. Spreads may also be lot neutral, where the total number of long contracts and the total number of short contracts of the same type are approximately equal.
Nominal Price
The declared price for a futures month, sometimes used in place of a closing price when no recent trading has taken place in that particular delivery month; usually an average of the bid and asked prices.
Norton High/Low Indicator
The Norton High/Low Indicator uses results from the Demand Index and the Stochastic study, and is designed to pick tops and bottoms on long term price charts. Two lines are generated: the NLP line and the NHP line. The system also uses level lines at -2 and -3. The NLP line crossing -3 to the downside is the signal that a new bottom will occur in 4-6 periods, using daily, weekly, or monthly data. Similarly, the NHP line crossing -3 to the downside indicates a new top in the same time frame.
The indicator tends to be more reliable using longer term data (weekly or monthly). When either indicator drops below the - 3 level, a reversal may be imminent. The reversal (or hook) is the signal to enter the market. For greater reliability, use the Norton High/Low Indicator together with other studies for confirmation.
Notis %V
A way to measure volatility is to measure the daily ranges between the high and the low. Volatility is high when the daily range is large, and low when the daily range is small. The Notis %V study contains two separate indicators. It divides market volatility into upward and downward components (UVLT and DVLT). Both are plotted separately in the same window, and can be plotted as an oscillator.
The upward component is also compared to the total volatility (UVLT + DVLT), and is expressed as a percentage; thus the name, %V. Volatility can be a key to options trading. A good sense of market volatility can help you avoid those frustrating times when the market moves your way but your option still loses value.
O
Offer
A motion to sell a futures or option contract at a specified price. Opposite of "bid".
Offset
A transaction which liquidates or closes out an open contract position. In spread positions, one side offsets the other without liquidating the entire position. Risk is reduced when one side offsets the other.
Omnibus Account
An account, carried by one futures commission merchant with another in which the transactions of two or more persons are combined rather than designated separately, and the identity of the individual accounts is not disclosed.
On Balance Volume (OBV)
OBV is one of the most popular volume indicators, and was developed by Joseph Granville. Constructing an OBV line is very simple: The total volume for each day is assigned a positive or negative value, depending on whether prices closed higher or lower that day. A higher close results in the volume for that day to get a positive value, while a lower close results in a negative value. A running total is kept by adding or subtracting each day's volume based on the direction of the close. The direction of the OBV line is the thing to watch, not the actual volume numbers. Formula: OBV=SUM(C-CP)/(ABS(C-CP)xV); C=Today's Close ;CP=Yesterday's Close; V=Today's Volume.
One Cancels The Other
Two orders submitted simultaneously, either of which may be filled. If one order is filled, the other is considered to be canceled.
Open Interest or Commitment
The number of open or outstanding contracts for which an individual or entity is obligated to the Exchange because that individual or entity has not yet made an offsetting sale or purchase, an actual contract delivery, or, in the case of options, exercised the option.
Open Order
A resting order that is good until canceled.
Open Outcry
A method of public auction for making verbal bids and offers for contracts in the trading pits or rings of commodity exchanges.
Opening Price
The price for a given futures commodity that is generated by trading through open outcry during the opening range of trading on a commodity exchange.
Option
A contract which gives the holder the right, but not the obligation, to purchase or to sell the underlying futures contract at a specified price within a specified period of time in exchange for a one time premium payment. The contract also obligates the writer, who receives the premium, to meet these obligations.
Original Margin
The initial deposit of funds, as good faith moneys, at the outset of trading a futures contract, in order to guarantee fulfillment of its obligations. Also known as "initial margin".
Out Of The Money
An option which has no intrinsic value. For calls, an option whose exercise price is above the market price of the underlying future. For puts, an option whose exercise price is below the futures price.
Overbought
A technical opinion that the market price has risen too steeply and too fast in relation to underlying fundamental factors.
Oversold
A technical opinion that the market price has fallen too quickly and too fast in relation to underlying fundamental factors.
P
Parabolic (SAR)
The Parabolic is a Time/Price system for the automatic setting of stops. The stop is both a function of price and of time. The system allows a few days for market reaction after a trade is initiated after which stops begin to move in more rapid incremental daily amounts in the direction the trade was initiated. For example, when a long position is taken the stop will move up regardless of price direction. However, the distance that the stop moves up is determined by the favorable distance the price has moved. If the price fails to move favorably within a certain period of time, the stop reverses the position, and begins a new time period.
Price Patterns
Price Patterns are formations which appear on commodity and stock charts which have shown to have a certain degree of predictive value. Some of the most common patterns include: Head & Shoulders (bearish), Inverse Head & Shoulders (bullish), Double Top (bearish), Double Bottom (bullish), and Triangles, Flags, and Pennants (can be bullish or bearish depending on the prevailing trend).
R
Random Walk Index
This indicator, is defined as the ratio of an actual price move, to the expected "random walk". If the move is greater than a "random walk" and thus a trend is present, its index will be larger that 1.0
Rate of Change
Rate of Change is used to monitor momentum by making direct comparisons between current and past prices on a continual basis. The results can be used to determine the strength of price trends. Note: This study is the same as the Momentum, except that Momentum uses subtraction in its calculations, while Rate of Change uses division. The resulting lines of these two studies, operated over the same data, will look exactly the same - only the scale values will differ.
RSI - Relative Strength Index
This indicator was developed by Welles Wilder Jr. Relative Strength is often used to identify price tops and bottoms by keying on specific levels (usually "30" and "70") on the RSI chart which is scaled from 0-100. The study is also useful for detecting the following:
1. Movement which might not be as readily apparent on the bar chart
2. Failure swings above 70 or below 30, which can warn of coming reversals.
3. Support and resistance levels.
4. Divergence between the RSI, and price which is often a useful reversal indicator.
The Relative Strength Index requires a certain amount of lead-up time in order to operate successfully. The formula for calculating the RSI is: rsi=100-(100/1-rs); rs= average of x day's up closes divided by average of x day's down closes.
Renko Chart
The Renko charting method probably got its name from "renga", which is the Japanese word for bricks. Introduced by Steve Nison, a well-known authority on the Candlestick charting method, Renko charts are similar to Three Line Break charts, except that, in a Renko chart, a line is drawn in the direction of the prior move only if a fixed amount (i.e., the box size) has been exceeded. The bricks are always equal in size.
Example: With a five unit Renko chart, a 20 point rally is displayed as four equally sized, five unit high, Renko bricks.
S
Short
1) The market position of a futures contract seller whose sale obligates him to deliver the commodity unless he liquidates his contract by an offsetting purchase.
2) A trader whose net position in the futures market shows an excess of open sales over open purchases.
3) The holder of a short position.
4) In the options market, the position of the seller of a call option. The short in the options market is obliged to take a futures position if he is assigned for exercise. Opposite of "long".
Short Selling
Selling a contract with the idea of delivering or of buying to offset it at a later date.
Short The Basis
The purchase of futures as a hedge against a commitment to sell in the cash or spot markets. See "hedging".
Speculative Position Limit
The maximum position, either net long or net short, in one commodity futures or option, or in all futures or options of one commodity combined, which may be held or controlled by an entity without a hedge exemption as prescribed by an exchange or the CFTC.
Speculator
A trader who hopes to profit from the specific directional price move of a futures or options contract, or commodity.
Spot
Term which describes a one time open market case transaction, where a commodity is purchased "on the spot" at current market rates. Spot transactions are in contrast to term sales, which specify a steady supply of product over a period of time.
Spot Month
The futures contract closest to maturity. The nearby delivery month.
Spread (Futures)
The simultaneous purchase of futures contracts and sale of futures contracts for a different months, different commodities, or different grades of the same commodity.
Spread (Options)
The purchase and sale of options which vary in terms of type (call or put), strike prices, expiration dates, or both. May also refer to an options contract purchase (sale) and the simultaneous sale (purchase) of a futures contract for the same underlying commodity.
Stoller STARC Bands
STARC bands create a channel surrounding a simple moving average. The width of the created channel varies with a period of the average range; thus the name ('ST' for Stoller, plus 'ARC' for Average Range Channel). STARC Bands, in a fashion similar to Bollinger Bands, will tighten in steady markets and loosen in volatile markets. However, rather than being based on closes, the STARC Bands are based on the average true range, thus giving a more in-depth picture of the market volatility. While the penetration of a Bollinger Band may indicate a continuation of a price move, the STARC Bands define upper and lower limits for normal price action.
Swing Index
The Swing Index (primarily for use with commodity trading) attempts to determine real market direction and changes in direction, by making use of the most significant comparisons between the results (Open-High-Low-Close) of the current and previous day's trading.
Stop Limit Order
An order that goes into force as soon as there is a trade at the specified stop price. The order, however, can only be filled at the limit price or better. The stop price and the limit price can be the same or different. The stop price is the price level specified in the order.
Stop Loss
A resting order designed to close out a losing position when the price reaches a level specified in the order. It becomes an "at the market" order when the "stop" price is reached. Individuals also use stops to enter the market when the prices reach a specified level.
Straddle (Futures)
Also known as a "spread". The purchase of one futures month against the sale of another futures month of the same commodity. A straddle trade is based on a price relationship between the two months.
Straddle (Options)
The purchase or sale of both a put and a call having the same strike price and expiration date. The buyer of a straddle benefits from increased volatility and the seller benefits from decreased volatility.
Strangle
An options position consisting of the purchase or sale of put and call options having the same expiration date but different strike prices.
Strike Price
The price at which the underlying futures contract is bought or sold in the event an option is exercised. Also called an exercise price.
Support
In technical analysis, a price area where new buying is likely to come in and stem any decline.
Synthetic Futures
A position created by combining call and put options. A synthetic long futures position is created by combining a long call option, and a short put option for the same expiration date, and the same strike price. A synthetic short futures position is created by combining a long put and a short call, with the same expiration date, and the same strike price.
T
Technical Analysis
An approach to forecasting commodity prices which examines patterns of price change, rates of change and changes in trading volume and open interest, without regard to underlying fundamental market conditions.
Theoretical Value
An option's value generated by a mathematical model given certain prior assumptions about the term of the option, the characteristics of the underlying futures contract, and prevailing interest rates.
Theta
The sensitivity of an option's value to a change in the amount of time to expiration.
Tick
A minimum change in price, up or down.
Time Cycles
Some analysts believe that "price analysis" alone offers only half the information needed for successful trading. The other part is time, more exactly time cycles, which give actual insight into understanding the movements of markets. Common cycles are the seasonal cycles apparent in many commodity markets, but cycles can be detected on intra-day charts as well.
Time Spread
The selling of a nearby option and buying of a more deferred option with the same strike price.
Time Value
Part of the option premium which reflects the excess over the intrinsic value, or the entire premium if there is no intrinsic value. At given price levels, the option's time value will decline until expiration. It is this decrease in time value that makes options a "wasting asset".
Trade House
A firm which deals in the physical commodity.
Trading
Buying and selling.
Trading Index
This index (also known as the "Arms" index, or "TRIN") measures the relative strength of volume associated with advancing stocks against the strength of volume associated with declining stocks. When used as a short term indicator, readings below 1.0 are considered bullish, while readings above 1.0 are considered bearish. An extreme bearish reading would be 1.5 or higher; an extreme bullish reading would be .5 or lower. Readings of 2.0 or .3 would be considered "climactic".
For the intermediate term, a bearish sign is an index over 1.0, bullish is under 1.0. For the long term, the Trading Index can be viewed as an overbought / oversold indicator.
Trading Volume
The number of contracts that change hands during a specified period of time.
Trend
The general direction of price movement.
Trix
Single linear exponential smoothing was developed in the early 1950s as a means of prediction along a straight line whose slope was based on previous data. The Triple Exponential Smoothing Oscillator (Trix) has now been developed to act on trends of a higher order than linear. Trix uses a one-day momentum of a triple exponential smoothed price series to produce an indicator which is cycle dependent.
Changes in the Trix direction are less prone to whipsaws than standard cycle-momentum indicators. The period is chosen to filter out any insignificant cycles shorter than the period. Fourier Analysis, or visual observation, may be used to find the proper cycle length of a given market. Raising the number of days will remove more small cycles, and smooth out the oscillator, but at the loss of sensitivity. The more smoothing that is applied to the data, the more of a lag in the oscillator, but not nearly the lag of a normal moving average.
Type Of Option
Either puts or calls.
U
Underlying
The stock, commodity, futures contract, or cash index against which the futures or options contract is valued.
V
Variation Margin
Payment made on a daily or intraday basis by a Clearing Member to the Clearinghouse, to cover losses created by adverse price movement in positions carried by the Clearing Member, calculated separately for customer and proprietary positions.
Vega
The sensitivity of an option's value to a change in volatility.
Volatility
The market's price range and movement within that range. The direction of the price move, whether up or down, is not relevant. "Historic volatility" indicates how much prices have changed in the past, and is derived by using daily settlement prices for futures. "Implied volatility" measures how much the market thinks prices will change in the future, and is obtained from daily settlement prices for options.
Volume Accumulation
This volume indicator addresses some of On Balance Volume's shortcomings, and was developed by Marc Chaikin. Where OBV assigns all of a day's volume a positive or negative value, Volume Accumulation counts only a percentage of the volume as positive or negative, depending on where the close is in relation to the average price of the day. The only time the entire day's volume is assigned a positive value is when the close is the same as the day's high. The opposite applies for a close at the day's low.
Volatility
This analysis is based on the idea that stocks bottom from "panic" selling, after which a rebound is imminent. One way of measuring this phenomenon is to observe a widening range between high and low prices each day. In general, a progressively wider range, observed over a relatively short period of time, can indicate that a bottom is near. Price tops are generally reached at a more leisurely pace, and can be characterized by a narrowing of the price range.
This measure of the Trading Range takes place over a specified period in order to determine whether or not an issue is being "dumped" and is approaching a bottom. A pre-requisite to a valid bottom is an increase in the volatility line above the reference line. In a similar manner, an indication of an imminent top would be a decrease in the volatility line below the reference line. As long as volatility is rising, in all probability, a stock will not approach a top. It should be noted that this study should be used in conjunction with trend following analyses and momentum oscillators for confirmation and accuracy.
W
Writer
The seller of an option. Also known as the grantor of the option.
