Stock Market and Technical Analysis Glossary
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| Accumulation/Distribution: |
Developed by Marc Chaikin, this line combines price and volume to show how money may be flowing into or out of a stock. One of the indicators that is based on the premise of "volume preceeds price movement".
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| Average Directional Index (ADX): |
Developed by J. Welles Wilder, the Average Directional Index (ADX) measures the degree of directional movement and reflects strength of a trend. The ADX line measures the directional movement as an oscillator on a scale of 0 to 100.
Readings below 20 reflect a weak trend and readings above 40 reflect a strong trend. Readings above 60 are rare. ADX levels can be used to signal the move from a sideways to trending market (movement above 20) and a trending market to a sideways market (movement down below 40).
Developed by Gerald Appel and is discussed in his book, The Moving Average Convergence Divergence Trading Method.
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| Candlestick: |
Developed in the 1700's a Japanese man named Munehisa Homma, a trader in the Osaka rice futures market, the candlestick chart is a price chart that displays the high, low, open, and close over a specified period of time. It adds dimension and color to a bar chart by depicting the area of the bar between the open and close as a two dimensional real body. This area is shaded white or green for an up time period and black or red for a down time period. Extensions beyond the range of opening and closing prices are shown as lines that reach to the high and low reached within the given time period. |
| Chaikin Money Flow (CMF): |
The Chaikin Money Flow indicator is based on the Accumulation/Distribution line. It is created by summing the values of the Accumulation/Distribution Line for 21 periods and then dividing by a 21 period sum of the volume. The interpretation of the Chaikin Money Flow indicator is based on the assumption that market strength is usually accompanied by prices closing in the upper half of their daily range with increasing volume. Likewise, market weakness is usually accompanied by prices closing in the lower half of their daily range with increasing volume.
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| Chaikin Oscillator (ChiOsc): |
The Chaikin oscillator is another moving average oscillator based on the Accumulation/Distribution volume indicator combined with the MACD. Technicians look for a divergence between volume and price to find a possible forewarning of a sudden market reversal. The Chaikin Oscillator differs from other volume oscillators because it substitutes the average price of the day for the opening price. If a stock closes above the day's midpoint ( i.e. (high + low) / 2), then there was more accumulation than distribution. The closer a stock closes to the high, the more accumulation there was, and vice versa.
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| Commodity Channel Index (CCI): |
Developed in 1980 by Donald Lambert (originally for commodity trading), the commodity channel index indicator shows the variation of a security's price from its statistical mean. The underlying assumption of the CCI is that securities behave in a cyclical pattern. High CCI values indicate that the security's price is high in relation to its statistical mean and vice versa for a low CCI value. The CCI is flexible when it comes to giving buy and sell signals. The CCI typically oscillates between -100 and +100, but can reach levels well beyond both extremes. Lambert suggested a constant of 0.015 so that 70%-80% of the CCI values are distributed between -100 and +100. When a stock’s price crosses above the +100 benchmark for 2 days in a row, it indicates that the security is in an upward trend and a BUY signal is initiated. When a stock’s price crosses below the -100 benchmark, it indicates that the security is in a downward trend and a SELL signal is initiated. Also, when a price is coming up from below -100 a buy signal can be triggered and the same with a sell signal being initiated as the CCI breaks below +100.
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| Keltner Channel: |
The Keltner channel is an indicator that uses the "envelope theory" operating high and low ranges. The theory operates on the premise that prices tend to stay within the channel (envelope). The price can move outside the channel, but the basic concept is to expect a move the other direction once the price approaches the channel and certainly if it is outside it, but it should be known the the pps can stay outside the channel for an extended period of time, even though it is not the norm.
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| Money Flow Index (MFI): |
The MFI is a volume-weighted momentum indicator that compares positive money flow to negative money flow. When compared with price it can gauge the strength of a trend. It is very similiar to the RSI except the RSI does not bring volume into its calculation.
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| Moving Average Convergence Divergence (MACD): |
The MACD shows the relationship between two moving averages of prices. The MACD is the difference between a 26-day and 12-day exponential moving average. A 9-day exponential moving average called the "signal line" is plotted on top of the MACD to show bullish and bearish signal points. A bullish signal is generated when the MACD rises above the signal line, or above zero. A bearish signal occurs when the MACD falls below the signal line or below zero. It is a trend following momentum oscillator.
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| Percentage Price Oscillator (PPO): |
An indicator based on the difference between two moving averages expressed as a percentage. The PPO is found by subtracting the longer moving average from the shorter moving average and then dividing the difference by the longer moving average.
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| Rate of Change Indicator (ROC): |
The Rate of Change Indicator (ROC) is a very simple and effective momentum indicator that shows how rapidly the price of a security is moving. It compares the difference between the current price and the price from a set prior time period.
ROC rises with price increases and falls with price declines. ROC is often used as a short term overbought/oversold indicator.
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| Relative Strength Index (RSI): |
Developed by J. Welles Wilder to help investors gauge the current strength of a stock's price relative to its past performance by comparing recent gains to recent losses. It is a popular and useful momentum indicator. The usefulness of this indicator is based on the premise that the RSI will usually top out or bottom out before the actual market top or bottom, giving a signal that a reversal or at least a significant reaction in stock price is imminent.
RSI readings above 70 indicate the shares are overbought and are likely to start falling in the future. Readings below 30 indicate the shares are oversold and a rally can generally be expected. It should be noted that the RSI can stay above 70 or below 30 for extended periods of time, but is not completely common. The time period specified determines the volatility of the RSI. For example, a 9-day time period will be more volatile than a 21-day time span.
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| Resistance: |
The price level at which technical analysts note persistent selling of a share or commodity.
Generally speaking, when plotted on a chart, this is the area that the price tends not to want to move above. When the pps touches these levels, it tends to "bounce" back downward as sellers take profits from the stock or commodity. |
| Stochastic Oscillator (STO): |
Developed by George C. Lane in the late 1950s, the stochastic oscillator is a momentum indicator that compares a stock’s price to its price range over a defined period of time. The oscillator ranges on a scale from 0 – 100, thus a reading of close to zero means that the stock is traded near it’s lowest price within a time period, and when it is close to 100 it is traded near it’s highest price within the time period. The calculation of the Stochastic Oscillator is done by finding the distance between the highest and lowest closing prices within a time period, and then viewing today’s price relative to this range. Closing levels that are consistently near the top of the range indicate accumulation (buying pressure) and those near the bottom of the range indicate distribution (selling pressure).
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| Support: |
The price level at which technical analysts note persistent buying of a share or commodity.
Generally speaking, when plotted on a chart, this is the area that the price tends not to want to fall below. When the pps touches these levels, it tends to "bounce" back upward as supported by buying of the stock or commodity. |
| Trend Lines: |
Technical analysis is centered around the idea of stocks "trending". Trend lines are simple and extremely helpful tools in confirming the direction of market trends. An upward straight line is drawn by connecting at least two successive lows, but preferably more. Each successive point must necessarily be higher then the previous one. The continuation of the line helps determine the path along which the market will move. An upward trend is a concrete method to identify support lines/levels. Conversely, downward lines are also charted by connecting two points or more. The validity of a trend line is partially related to the number of connection points. The significance of trend lines has helped in the development as such saying as "The trend is your friend" and "Don't fight the trend". They play a huge roll in the concepts of support and resistance.
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More definitions and examples to be added regularly. |
