Glossary of Trading Terms
Glossary (Alphabetical)
50 MA High: A high formed by the 50 MA as it turns from up to down.
50 MA Low: A low formed by the 50 MA as it turns from down to up.
50 MA: A moving average of 50 periods, such as 50 weeks, 50 days, or 50 hours. For the 50/50 Strategy, the 50 MA is an exponential moving average, or EMA.
50/50 High Riser: A type of 50/50 Strategy trade setup where the stock price is above a strong, continuously rising 50-period moving average.
50/50 High Riser: (See High Riser)
50/50 Low Riser: (See Low Riser)
50/50 Low Riser: A type of 50/50 Strategy trade setup where the stock price is below a falling or sideways 50-period moving average, where the last 50 MA high is the highest on the chart.
50/50 Strategy: A trading strategy created by Dr. Charles B. Schaap and first introduced in the March, 2004 edition of Stocks & Commodities magazine. The basic concept is to buy stocks strongly trending stocks following retracement to the 50-week EMA. The buy signal occurs on a price cross above the 50-week EMA, along with RSI 20 crossing above the 50 level.
50/50 Strategy: A trading strategy created by Dr. Charles B. Schaap that consists of buying stocks when price is above a 50-period exponential moving average and RSI 20 is above the 50 level. The 50/50 Strategy can occur on any timeframe, but is usually traded on the weekly timeframe for longer-term investing.
50-week EMA: The 50-week exponential moving average is the average price of a stock over the prior 50 weeks. Moving averages form lines that "move" and adjust to changes in weekly prices. The 50-week EMA is considered the long-term price trend. A rising 50-week EMA is one of two major criteria for the 50/50 Strategy.
50-Week MA: The 50-week moving average used in the 50/50 Strategy which is the average price over the preceding 50 weekly price bars. The 50 weekly MA represents institutional buying and the long-term trend of price.
Accumulation: A period during which a stock is actively bought by traders or investors. An accumulation pattern, or base, is the first stage of the stock cycle. An accumulation day is one where price closes up on higher than average volume.
Ask: The lowest price that sellers are willing to accept for a stock. Also, called the "offer."
Asset Allocation: Dividing investment capital into major asset classes. The most common asset classes are stocks, bonds, and cash equivalents (money markets, CDs, and Treasury bills). Other asset classes include foreign securities, commodities (gold, silver), and real estate.
Asset Class: A group of securities which share common characteristics, such as stocks. Securities in an asset class generally have similar risk/return profiles and behave alike in the marketplace under different economic conditions.
Asset: An item of economic value which can be converted to cash.
Base: A base is a chart pattern where price is either in a period of range or retracement lasting several weeks to months. Bases form recognizable chart patterns such as the cup with handle.
Bear Market: A long-term downtrend in the general stock market associated with a period of economic contraction. As a general rule, bear markets last about 1.5 years and experience a market decline of at least 20% .
Bear: A trader or investor with a negative market outlook. Bears generally trade from the short side for as long as they remain "bearish."
Behemoths: Big (large-cap), well-known companies that account for about 75% of the total value of the U.S. stock market.
Bid: The highest price that buyers are willing to pay for a stock.
BIGs: (Big Institutional Guns) A term which refers to institutional investors (mutual funds, hedge funds, investment banks, endowment funds) who invest large sums of money and generally dominate the market. The activity of the BIGs is represented by above average daily volume in a stock. Stocks with a rising weekly 50 EMA are being bought up by the BIGs.
BOB: An acronym for “Breakeven Or Better.” BOB is a trade management reminder to reduce risk by waiting until a stock's stop loss order is able to be placed at breakeven (entry price) or better before adding another stock position with risk. When a stock can be called BOB, there is no longer a risk of losing money in that position unless a gap down occurs and price gaps open at a price point below the breakeven stop loss order.
Breakeven: The price point where entry into the stock position occurred. Breakeven risk means the stock has risen enough that a stop loss order can be placed at the entry price. In a losing stock position, breakeven can refer to the necessary percent gain in a stock needed to get back to breakeven and eliminate the unrealized loss.
Bull Market: A long-term uptrend in the general stock market associated with a period of economic expansion. As a general rule, bull markets last 3.5 years.
Bull: A trader or investor with a positive market outlook. Bulls generally trade from the long side for as long as they remain "bullish."
Business Cycle: The multi-year cycle of economic expansion (increasing business activity) and contraction (decreasing business activity) in the U.S. economy.
Cash Flow: Money a company has left over after meeting financial obligations.
Company Risk: The risk of how a company event (accounting fraud, etc.) will affect the economic performance (and stock price) of a company. The collapse of Enron is an extreme example of company risk.
Covering: A short trade is closed out, or covered, by buying back the stock shares and returning them to the broker.
Demand Line: The support line of a trend channel which is drawn between pivot lows.
Demand: The amount of stock shares which are being sought for purchase. Demand represents the strength of the buyers. When demand is stronger than supply, the stock price will rise.
Distribution Day: A distribution day is one where price closes down on higher than average volume.
Distribution Stage: The third stage of the stock cycle which begins when the markup stage ends. Stock shares are actively sold by traders or investors, creating a distribution pattern, or top.
Diversification: A portfolio strategy desiring to reduce exposure to risk by combining a variety of investment assets.
Downtrend: A series of lower swig highs and lower swing lows, also represented by a descending 50-period moving average.
Drawdown: Reduction in account equity as compared to a starting amount of capital.
Earnings Growth: An increase in earnings from one period (quarter or year) to the next.
ESP: Acronym for the three concerns when you enter a stock position. E is for Entry price, S is for Stop-loss price, and P is for Position size.
Exchange Traded Funds (ETFs): A collection, or index, of stocks which trades like a stock.
Expansion Phase: An period of economic growth when the market is in a long-term uptrend.
Exponential Moving Average: An average of closing prices that weighs recent values more heavily than older values. See also Simple Moving Average.
Fundamental Analysis: A method of security valuation which involves examining the company's financials and operations, especially sales, earnings, growth potential, assets, debt, management, products, and competition.
Gap Down: A situation where price opens below the range of the previous price bar, such that there is no area of overlap in the price bars. The high of a gap down bar remains lower than the low of the previous bar. This leaves a trading "gap" between the two bars, an price area where no trading took place during the regular session.
Gap Up: A situation where price opens above the range of the previous price bar, such that there is no area of overlap in the price bars. The low of a gap up bar remains higher than the high of the previous bar. This leaves a trading "gap" between the two bars, an price area where no trading took place during the regular session.
Growth Investing: An investment style that looks for stocks with strong earnings and/or revenue growth. Growth stocks generally outperform the majority of stocks in the market, but they are also considered higher risk, especially during market corrections.
Growth Stock: The stock of a company which is growing earnings and/or revenue faster than its industry or the overall market. Such companies usually pay little or no dividends, preferring to use the income instead to finance further company expansion.
Index: Indexes are a representative sample of stocks which reflect the activity of the general U.S. stock market The three main market indices are the Standard & Poor's 500 (S&P 500),
Dow Jones Industrial Average, and the NASDAQ Composite.
Industry: A minor grouping of stocks based on similar business activities. They represent divisions with a major stock sector. For instance, technology is be a sector that contains several industries such a semiconductors, software, computers, etc.
Initial Public Offering (IPO): The first sale of stock to the public. It is often a company without a long history of earnings, and it lacks strong institutional support.
Initial Risk: The amount of capital placed at risk when a trade is entered, or the amount that can be lost per share, which is the number of shares times the dollar amount difference between the entry price and the stop loss price.
Initial Stop: The first stop-loss placed when a stock is entered.
Institutional Investor: Refers to large banks, insurance companies, pension funds, mutual funds, endowment funds, and investment companies.
Institutional Ownership: This term refers to the shares of stock owned by institutional investors.
Large-cap: A company with over $5 billion in market capitalization. These are the big companies that everyone has heard of, such as Wal-Mart (WMT), Microsoft (MSFT) and General Motors (GM).
Limit Order: An order to buy or sell at a specific price or better.
Lot: An equally divided portion of total investment capital. If $100,000 of capital is divided into 10 lots, then each lot is $10,000. The lot amount determines
Markdown Stage (Distribution): The fourth of the stock cycle where price is in a downtrend and the stock is being sold off. You will know the markdown stage has begun when price drops below the 50-week MA and cannot rise back above it again.
Market Capitalization: The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure in determining a company's size; it is frequently referred to as “market cap.”
Market Correction: Market corrections are profit-taking periods in the stock market which can be spurred by economic and geopolitical events. Market corrections generally represent a decline of 10-20% in the general market indices.
Market Order: A buy or sell order executed at the best price currently available.
Market Price: A security's last reported bid (sell) or ask (buy) prices.
Market Risk: The risk that the value of investments may decline due to an overall decline in the market.
Market Timing: Market timing is a technical trading/investing approach which seeks to be long during general market uptrends (economic expansion) and in cash, or short, during general market downtrends (economic contraction).
Markup Stage: The second stage of the stock cycle when a stock trends up in price.
Mid-cap: Stocks with $1-5 billion in market capitalization.
Moving Average High: A moving average high formed when an ascending moving average line turns down and begins to descend.
Moving Average Low: A moving average low formed when a descending moving average line turns up and begins to ascend.
Moving Average: The average price of a security over a specified time period. The 50-week moving average is based on the average of 50 weeks of closing prices. This line gives a visual representation of price direction, or trend.
Overhead Supply: A quantitative measure of the supply that exists above the current price of a stock; it represents shares of stock which were bought earlier, at a higher price than its current price, and which are likely to be sold if price returns to the higher level.
Position: The number of shares you own at a given price is called your stock position.
Pullback: A profit-taking/selling period in an uptrend where price declines, moving counter to the trend.
Relative Strength Index (RSI): An indicator which measures the current price strength of stock relative to past price data. It can also be considered as a measure of relative buying and selling activity. The default period is 14, and the values can range from 0 to 100. Values below 30 are termed "oversold," and values above 70 are considered "overbought."
Resistance: A price level at which selling activity overcomes buying activity. When price rises to meet resistance, it is stopped from going higher.
Retracement Risk: A concept related to trade risk which considers the distance from the current price to a supportive moving average, below which is the likely point of a stop loss order. As price moves higher off the moving average, the retracement risk increases.
Return: The profit you make is your return or reward for having taken the risk.
Revenue Growth: Growth in the gross income (before expenses) from one period (quarter or year) to the next.
Revenue: Proceeds the company receives from the sale of goods or services; it does not include expenses.
Risk Free: No risk of loss. A bank account is considered risk free since you will never get back less than you put in.
Risk Management: A strategy or method to limit risk. A stop-loss order is the basic risk management tool.
RSI 20: The Relative Strength Index (RSI) with a period value of 20 (instead of the default 14) used in Dr. Schaap's 50/50 Strategy. The 50 level is used as a "midline" to reflect relative periods of price strength and weakness. An RSI 20 above the 50 level is strong enough to trend up; an RSI 20 below 50 is weak enough to trend down. Long entries are not entered unless the RSI 20 is above 50 on the timeframe being traded.
Scaling: Buying or selling stock shares in divided amounts instead of all at once. Scaling is a risk management tool that allows the trader/investor to enter a stock position in divided units of risk based on a stock's price performance.
SCORE: Dr. Schaap's acronym for shares outstanding, cash flow, ownership by institutions, revenue growth, and earnings growth. It is a method of rapid fundamental analysis that gives you five key numbers with which to gauge fundamental strength of a company.
Screen: A method of stock selection based on a preset list of criteria.
Sector Rotation: The concept whereby different sectors of the economy are more active at certain times of the economic cycle. Capital investment tends to follow the cyclic rotation of sectors, so money is moved out of less active sectors into more active sectors.
Sector: A major grouping of stocks which reflect an area of economic activity, such as healthcare, consumer goods, technology, etc. Each of the 9-10 sectors can be further divided into industries.
Select Sector SPDRs (S&P Depository Receipts): ETFs that divide the S&P 500 into nine sector funds which represent 9 major sectors of the economy.
Sentiment: The collective attitude of the majority of investors toward market conditions.
Shares Outstanding: The overall supply of stock available to be bought and sold in the market.
Short: A position that is opened by selling a stock not owned (they are borrowed from the broker) and closed by buying back the stock.
Sideways Trend: When the price of the stock is trending neither up nor down.
Simple Moving Average: A moving average calculated as a mean value over a rolling previous period of fixed length.
Small-cap (capitalization): Companies with less than $1 billion in market capitalization. Growth companies are often small-caps.
SPY (SPDR S&P 500 ETF): An ETF which owns the stocks from Standard & Poor's 500 index. It represents the general stock market.
Stage: One of the four periods (stages) in the stock cycle (Accumulation, Markup, Distribution and Mark Down).
Stock Cycle: The cyclic progression of a stock's price from low to high, and then from high to low. The stock cycle has 4 stages, Accumulation (1), Markup (2), Distribution (3), and Markdown (4). Stock cycles are more apparent in newer companies undergoing a period of growth in their business activities.
Stock Symbol: The letters representing a company's stock. For example, the stock symbol for Apple Inc. is AAPL. The stock symbol is also referred to as the ticker symbol.
Stop Limit Order: A stop limit order combines the features of a stop order with a limit order. After price reaches and triggers the stop order price, the limit order will be executed at the limit order price (or better). Stop limit orders are commonly used to enter a breakout.
Stop loss Dollar Amount: The total amount of money (for all shares) that will be lost if a stock position is stopped out. The stop loss dollar amount is determined by multiplying the number of shares times the dollar risk per share (stop loss distance from entry).
Stop loss Order: A standing order to sell (or buy) a stock at a predetermined price in order to limit risk to capital. For long positions, the stop loss order is placed at a predetermined distance below the entry price; for short positions, the stop loss order is placed at a predetermined distance above the entry price.
Stopped Out: When an open stock position is closed due to execution of the stop loss order. If the position has an unrealized loss, the trade will be stopped out with a realized loss. If the position has an unrealized gain, the position will be stopped out with a realized gain
Supply Line: The resistance line of a trend channel which is drawn between pivot highs.
Supply: The amount of stock shares which are available for sale. Supply represents the strength of the sellers. When supply is stronger than demand, the stock price will decline.
Support: A price level at which buying activity overcomes selling activity. When price falls to meet support, it is stopped form going lower.
Top Down: An investing strategy which begins with a look at the overall economic picture (stock market) and then narrows it down to sectors, industries and companies that are expected to perform well. Analysis of the fundamentals of a given security is the final step.
TOP SCORE: An acronym for two parts of rapid stock analysis using the 50-50 Strategy. It checks technicals (TOP) and fundamentals (SCORE). The acronyms stand for Trend, Overhead supply, Price, Shares outstanding, Cash flow, Ownership by institutions, Revenue growth, and Earnings growth.
TOP: Dr. Schaap's method of rapid technical analysis. TOP stands for Trend, Overhead supply, and Price.
Trade Management: The primary method of controlling risk to capital and capturing profits by determining an entry price, stop loss price, and a price where profits are taken. It may include order adjustments, such as trailing a stop.
Trade: To buy or sell an item (a stock). Every investment begins and ends with a trade.
Trailing Stop: A stop-loss order that is progressively raised to protect unrealized gains.
Trend: The prevailing direction of price. An uptrend is composed of a series of higher swing highs and higher swing lows. A downtrend is composed of a series of lower swing highs and lower swing lows.
Uptrend: A series of higher swing highs and higher swing lows, also represented by an ascending 50-period moving average.
Weekly Chart: A stock chart composed of price bars where each bar represents the entire week's price movement.
Yield: The annual rate of return on an investment, expressed as a percentage.