Profit From Prices

A book on stock market trading
By Jayesh Patel, CFA

Chapter 12

Glossary

Accumulation.  A time period during which market participants with a strong positive opinion/outlook for a given stock are buying /accumulating it. In other words, informed circles are taking long positions with a view to hold the stock for relatively larger gains.  

Arbitrage. Simultaneous positions in two strongly related assets to capture mis-pricing between them. An arbitrage is usually a pair of trades that has guaranteed profit at no risk.

Ascending Asymmetrical Triangle (AAT).  A triangle like pattern on the stock price chart that has successive Bottoms at higher price levels

Asymmetrical Triangle.  This is a hybrid of a Channel and a Symmetrical Triangle.  Like a Channel, it has either a constant Top or a constant Bottom.   As an example let us say the triangle has a constant Top.  Now like a Symmetrical Triangle, the successive Bottoms are getting higher.  This is called an Ascending Asymmetrical Triangle (AAT).

Bear Day.  A Bear Day is a day when the closing price is LOWER than the opening price for the day.

Bottom.  A Bottom is the lowest price that stock makes over a period of few days. In other words, the turning point between a downtrend and the subsequent up-trend is a Bottom.

Breakout.  Breaking out from the current trend or a current price pattern. As a rule, there is one important thing to remember and that is that the longer a stock spends in Side-ways (Channel or Triangles) or in a trend, the more powerful is going to be the successive trend after the stock breaks out.

Bull Day.  A day in which a stock has its closing price higher than its opening price; TDC > TDO;

Candle.  A candle is a day’s (or a period’s) prices shown in a Japanese Candlestick charting. A candle has two parts:  It has a body and two lines –upper and lower – attached to it.  The high point of the UPPER LINE is the High price for the day (or week or month).  Similarly the low point of the LOWER LINE is the Low price.  The upper and lower points of the BODY reflect the OPEN and CLOSE prices depending on the type/color of the candle. The body is either filled (dark) or empty (white). When the body is filled (dark), the upper edge of the BODY (and not the line) is the OPEN price and the lower edge is the CLOSE price. Similarly when the body is empty (white), the upper edge reflects the Closing price and the lower edge reflects the Opening price.  Empty-bodied  (white) candles mean a BULL day and a dark/black candle represents a BEAR day.

Channel. A Channel is a movement of prices within two price levels. For example a stock is moving between 20 and 25 dollars. Every time it touches 20 dollars, it jumps back to 25 dollars. Then after touching 25 dollars, it falls back to 20 dollars. This is comparable to a channel.

Close Price.  The daily Close price is the last trade price for the day.  The last closing price of the last trading day of the week, Friday or Thursday, if Friday was a Market holiday, is the Weekly Close. Similarly, the closing price on the last trading day of the month is called a monthly closing price.

Correction.  A Correction is a short (temporary) up-trend that takes place within a major downtrend. This is a sort of a pause in falling prices.

Descending Asymmetrical Triangle (DAT).  Like a Channel it is has a constant Bottom, and like a Symmetrical Triangle, the successive Tops go lower.

Distribution. A phase in stock price movement during which informed/powerful players are selling/shorting the stock. Strong/informed players are passing on stocks to weaker/less informed players.

Downtrend.  Stock is going down and is making new low prices as time passes.

Flag.  This forms in a sudden up-trend.  After a sudden upward price break out, the stock trades in a narrow range and creates a flag like pattern on the stock chart.

Full-stop (BUY) A powerful trend reversal signal that takes place in a down trend when today’s prices stay higher than Previous Day’s prices, and the day is a Bull Day. 

Gap.  Most of the time, a stock trades in a continuous manner but sometimes it jumps to a higher or a lower level abruptly.  When Today’s High price is LOWER than Previous Day’s Low price, the GAP (SELL) is in a downtrend. TDH<PDL. When Today’s Low price is higher than Previous Days High the GAP (BUY) is in an up-trend. TDL>PDL In both cases there is a range or vacuum prices during which stock does not trade at all.

Inverted Flag (IF) See Flag. This forms in a sudden downtrend, acting like a mid-point of a fall in stock prices.

Inverted Pennant (IP) See Pennant.  This forms in a sudden downtrend, acting like a mid-point of a fall in stock prices.

High Price: This is the highest price the stock traded during the day.  Looking at weekly prices, this is the highest price the stock was traded during the entire week.  In other words, the highest HIGH of all days in the week is that Week’s High price.

Key Price.  A high/low price used as a reference.

Low Price.  This is the day’s lowest price at which the stock traded.  Similarly the Weekly Low is the lowest price the stock was traded during the week.  In other words, this is the lowest LOW of all days in the week.

Minor Bottom.  This is the lowest price over a period of three or more days during which the stock trend changed from the downtrend to up-trend. In other words, this is the price point where buyers out-powered sellers, and were able to push prices higher. (Here is my precise definition: (1) Prices are going down for some time.  It could be two, three or more days; (2) Stock, let’s say, makes a low of 45 dollars on day X.  The high on that day was 48 dollars; (3) Let us call this high price, 48 dollars, on the low price day (X) a Key Price.  As soon as we have three consecutive days on which stock does not trade below this Key Price, 48 dollars, the low price of day X will become a Minor Bottom, 45 dollars in this case. Minor Bottom means buyers' strength outnumbers selling pressure and vice versa for a Minor Top.)

Minor Top.  This is the opposite of Minor Bottom.  This is the highest price over a period of three or more days during which the stock trend changed from up-trend to a downtrend. In other words, this is the price point where sellers were able to push prices down.

Open Price.  This is the price at which a stock starts trading for a day.  If you are looking at weekly prices, Monday’s Open price, or Tuesday’s Open price, if Market was closed on Monday, is the Weekly Open price.

Pennant.  This is a pattern that is formed usually exactly in the middle of/at exactly mid-way in a rapid up- or downtrend. The pattern of a pennant -- a straight line up and then a body of narrowing price fluctuations and lowering volume. This price movement is like a tri-angle.

Progressive Stop-loss. A method in which the stop-loss level is changed as the price of the stock moves in a trader’s favour.

Protective Stop-loss. As an example, for a 120.00$ stock with average volatility and a target return of 30%, the Stop-loss can be placed at 3%, less margin than in a normal Stop-loss.  Such a Stop-loss will protect us from big unexpected losses so it is often referred to as a Protective Stop-loss.

Pull-back. A small price movement during which a stock moves opposite to its major trend.

Reaction. A Reaction is a temporary pause of the bullish trend.  It is a temporary short term (minor) down (or a Side-ways) trend that takes place within a major up trend. This is a like a pause before it continues its upward movement.  This type of movement that is contra to the main trend is called a Reaction in the Bull trend. 

Reactionary Trend.  A temporary trend usually with lower volume that lasts from two days to a few weeks within a major up or a down trend and is against the price movement suggested by the major trend.

Restart (signal): This signal takes place when the stock in a reactionary down-trend (up-trend) makes a new low (high) price during the session and then abruptly changes its direction on a relatively heavy volume, and manages to close higher (lower) than Today’s Open as well as the Previous Day’s Close prices. It indicates a continuation of the up-trend. 

Reverse (signal).  A signal very similar to a RESTART signal with only difference being, REVERSE takes place in the major (primary) trend and indicates the change of trend from up- to down-down (SELL), or from down- to up-trend (BUY).  On the contrary, RESTART signal takes place at the end of a Reactionary trend.

Risk-Taker/Risk-Tolerant. An investor or trader who is willing to take risk of losing money in return for an opportunity to earn profit. 

Sell-off. A sudden appearance of significant selling pressure causing prices to fall abruptly.

Short. Sell first even if you don't own the stock with the hope of buying it back later at a lower price.

Side-ways Trend.  The stock seems to be locked in a certain range.  It fluctuates between two prices. It moves up from its low price to its high price and then it starts drifting down again. However when it comes back to its initial Bottom (low) price, somehow Demand picks up and/or Supply dries up, so the stock again goes up to its initial Top (high), and so on.  As a rule, there is one important thing to remember and that is that the longer a stock spends in Side-ways (Channel or Triangles), the more powerful the trend is going to be after the stock breaks out.

Spike.  A one-day event

Stop-Limit. A buy Stop Limit order for a stock currently quoting at 11$ is to buy the stock at say 11.45$ or lower ONLY AFTER it has traded above the Stop price of say 11.31$. A sell Stop Limit order for a stock quoting at 20$ might be like to sell the stock at 19.70$ or above only after it has traded below our Stop price of 19.79$, for example.

Another version of STOP LIMIT order is a STOP MARKET order. Here, there is no limit but just a Stop price. As soon as the stock trades above (below) the Stop price, our Buy (Sell) order becomes a market order.

Stop-Loss.  A price level at which you should stop or limit your loss in a position.  If you bought stock ABC at 25$, your Stop-loss would be somewhat lower than 25$. It can be 24, 23, 20 or even 15$.  If price of ABC, after you bought it at 25$, goes below your Stop-loss level, you will sell it and book the loss.

Likewise one who shorts stock ABC at 25$, Stop-loss would be any price that is higher than 25$.  When ABC moves up contrary to the initial expectation of its going down, and hits the Stop-loss level, one should call it quits and square up his position.  Thus, in a short sell, the Stop-loss price is higher than the sale price.

Strong Bear day.  A Day on which a stock’s Close price is significantly below that day’s Open.

Strong Bull day. A Day on which a stock’s Close price is significantly above that day’s Open price.

Strong Open day.   A Day on which a stock’s Open price is significantly above Previous Day’s Close price.

Symmetrical Triangle.  This movement is similar to a Channel but in this formation, the Tops get lower and Bottoms get higher as the stock moves on.

Target Price.   The estimated price at which you should book profit in a position taken in response to occurrence of a specific signal

Top.  A Top is the highest price that a stock makes over the last few weeks. It is like a peak, the turning point between the change from an up- to a downtrend.

Trade-off: A situation where you can pursue more profit by taking additional risk or can attempt to reduce risk by scarifying some gains.

Trend line. An arbitrary line that is drawn on a stock price chart and touches most of the tops or bottoms in stock prices.

Trend Reversal.  Trend reversals usually take place either (i) during market hours when trading is taking place (Intra-Day), or (ii) outside market hours when trading is not taking place or the Market is closed (Inter-Day).

Up-trend.  The stock is going up and is making new high prices over a period of time.

U-Turn Signal.  Stock that seems to be going down at the start of the day has a happy ending with its price going up towards the end of the day. 

Volume:  This is the total number of stocks traded for the day or for the week.

Volume Spike: A sudden and significant jump in volume. A significant day for a stock from trading perspective.

Weak Open day.  A Day on which a stock’s Open price is significantly below Previous Day’s Close price.

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