THARP'S GLOSSARY OF TERMS
moving average A moving average that is either quick, or slow, to signal a market
entry depending on the efficiency of the move in the market.
rule or set of rules for computing, that is, a procedure for
calculating a mathematical function.
position-sizing strategy in which position size is increased when
one wins and decreased when one loses.
taking advantage of discrepancies in price or loopholes in the
system to make consistent low-risk money. This strategy usually
involves the simultaneous purchase and sale of related items.
allocation The procedure by which many professional traders decide how to
allocate their capital. Due to the lotto bias, many people think of
this as a decision about which asset class (such as energy stocks
or gold) to select. However, its real power comes when people use it
to tell them “how much” to invest in each asset class. Thus, it
is really another word for “position sizing.”
directional movement (ADX) An indicator that measures how much a market is trending. Both
bullish and bearish trends are shown by positive movement.
true range (ATR) The
average over the last X days of the true range, which is the
largest of the following: (1) today’s high minus today’s low;
(2) today’s high minus yesterday’s close; or (3) today’s low
minus yesterday’s close.
backtesting The process of testing a trading strategy on prior time periods, usually
with just one instrument at a time. Instead of applying a strategy
to a future time period, which could take years, a trader can do a
simulation of his or her trading strategy on relevant past data in
order to gauge its effectiveness.
Most technical analysis strategies are tested with this
style of trading in which the instrument being traded is thought to
move in a range of price. Thus when the price gets too high (that
is, over bought), you can assume that it will go down. And when
the price gets too low (that is, oversold), you can assume that it
will probably move up. This concept is discussed in Chapter 5.
the opinion that the market will be going down in the future.
situation that represents the best of possible outcomes. Many books
show you illustrations of their key points about the market (or indicator)
that appear to perfectly predict the market. However, most examples
of these points are not nearly as good as the one that is selected,
which is known as a “best-case example.”
tendency to move in a particular direction. This could be a market
bias, but most of the biases discussed in this book are
spread market makers offer to potential investors who want to open a
position with them. Typically, this spread is how the market makers
make their profit. If you want to sell, you’ll get the lower price
(that is, the market maker’s bid price), and if you want to buy,
you’ll get the higher price (that is, the market maker’s ask
move up from a consolidation or band of sideways movement.
the opinion that the market will be going up in the future.
option that gives you the right to buy the underlying instrument at
a particular price until the expiration date. It is a right to buy,
but not an obligation.
type of bar chart, developed by the Japanese, in which the price
range between the open and the close is either a white rectangle (if
the close is higher) or a black rectangle (if the close is lower).
This type of chart has the advantage of making the price movement
more obvious visually.
amount of money in the underlying stock of a company.
theory that physical systems generally move from stability to chaos.
This theory has recently been used to explain explosive moves in the
markets and the nonrandomness of the markets.
sharp price decline following a sharp price increase. When a
position is moving up, it will often move up dramatically at the end
of the move; this is called a climax move. It’s usually
followed by a drop in price, which is called a climax reversal.
Fees that you pay a
broker to trade in the market.
products that are traded at a futures exchange. Examples of such
products are grains, foods, meats, and metals.
pause in the market during which prices move in a limited range and
do not seem to trend.
unit of a commodity or future. For example, a single unit or
contract of corn is 5,000 bushels. A single unit of gold is 100
of the three ways of measuring your equity.
In this particular case, you subtract the allocation of each
position and assume that it is gone until the position is closed.
What remains, upon which to base your position sizing for
other positions, is your core equity.
options trading strategy by which an investor buys one instrument
and sells another related instrument and receives money for the
transaction. This is
called a credit spread because the investor received money to
make the transaction.
A term developed by
Ryan Jones for describing how to lower your position sizing after
losses. It refers to a
number whereby you move delta down at a faster rate than you moved
it up. (See delta).
options trading strategy by which an investor buys one instrument
and sells another related instrument and pays money to make the
transaction. This is called a debit spread because it costs
the investor money to make the transaction.
of freedom A
statistical term used to describe the quantity that equals the
number of independent observations less the number of parameters to
be estimated. More degrees of freedom generally help in describing
past price movement and hurt in predicting future price movement.
In fixed ratio position sizing, delta refers to the
factor by which you determine how you add bigger positions.
In fixed ratio position sizing one increases a
position size by one unit as a function of some fixed ratio of the
account, which Ryan Jones calls delta.
Delta can be used to
both increase and decrease position sizing with fixed ratio position
sizing. Refers to
decreasing the position sizing based upon a fixed ratio of the
account called delta.
phenomenon A theory developed and trademarked by Jimmy Sloman and marketed by
Welles Wilder that purports to predict the movement of the markets
by what happens in our solar system.
Delta can be
used to both increase and decrease position sizing with fixed ratio
position sizing. Refers
to increasing the position sizing based upon a fixed ratio of the
account called delta.
stop-loss criterion developed and copyrighted by Cynthia Kase that
depends on the standard deviation of price movement.
movement An indicator attributed to J. Welles Wilder using the
largest part of today’s range that is outside of yesterday’s
stop-loss order to determine your worst-case loss in a position.
See stop-loss order.
that depends on the instincts of the trader as opposed to a
systematic approach. The best discretionary traders are those who
develop a systematic approach and then use discretion in their exits
and position sizing to improve their performance.
term used to describe two or more indicators failing to show
diversification Investing in independent markets to reduce the overall
One of the six types of markets in which the price is going
down, and the market shows little day-to-day movement.
One of the six types of markets in which the price is going
down, but the market shows a lot of up and down movement, as opposed
to a down-quiet market.
decrease in the value of your account because of losing trades or
because of “paper losses” that may occur simply because of a
decline in value of open positions.
theory developed by R. N. Elliott that holds that the market moves
in a series of five up waves followed by a series of three
correction down waves.
That part of your system that signals how or when you should
enter the market.
units model A position-sizing model in which you purchase an equal dollar
amount of each position.
secured by ownership in the company.
value of your account.
form of position sizing in which the position sizing changes based
upon your equity moving above or below some average.
value of your account over time, illustrated in a graph.
The method you use to determine your equity in
anti-martingale position sizing.
Three such methods are presented in this book: total equity,
core equity, and reduced total equity.
part of your trading system that tells you how or when to exit the
much you can expect to make on the average over many trades.
Expectancy is best stated in terms of how much you can make
per dollar you risk. Expectancy is the mean R of an R-multiple
distribution generated by a trading system.
term used to express expectancy multiplied by
opportunity. For example, a trading system that has an expectancy of
0.6R and produces 100 trades per year will have an expectunity
that gives a prediction that then fails to happen.
most common levels used in retracement analysis, which are 61.8
percent, 38 percent, and 50 percent. When a move starts to reverse
the three price levels are calculated (and drawn using horizontal
lines) using a movement’s low to high. These retracement levels
are then interpreted as likely levels where countermoves will stop.
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.
indicator that selects only data that meets specific criteria. Too
many filters tend to lead to overoptimization.
fixed ratio position
A method in which position sizing is altered to some ratio of
your account, called delta, rather than some percentage of your
financial state that occurs, according to Van Tharp, when your
passive income (income that comes from your money working for you)
is greater than your expenses. For example, if your monthly expenses
$4,000 and your money working for you brings in $4,300 per month,
then you are financially free.
person who trades on the floor of a commodities exchange. Locals
tend to trade their own account, while pit brokers tend to trade for
a brokerage company or a large firm.
foreign exchange. A huge market in foreign currencies made by large
banks worldwide. Today there are also much smaller companies that
allow you to trade forex, but they take the side of the bid-ask
spread opposite from you.
of the market to determine its supply-and-demand characteristics. In
equities markets, fundamental analysis determines the value, the
earnings, the management, and the relative data of a particular
contract obligating its holder to buy a specified asset at a
particular time and price. When commodity exchanges added stock
index contracts and currency contracts, the term futures was
developed to be more inclusive of these assets.
fallacy The belief that a
loss is due to occur after a string of winners and/or that a gain is
due to occur after a string of losers.
concepts for predicting market movements. These concepts were
developed by the famous stock market forecaster W. G. Gann. One of
the concepts is a Gann square, which is a mathematical system
to find support and resistance based on the extreme high or low
price for a given period. The attainment of a particular price
level in the square, according to Gann, tells you the next probable
area on a price chart in which there are no trades. Normally this
occurs after the close of the market on one day and the open of the
market on the next day. Lots of things can cause this, such as an
earnings report coming out after the stock market has closed for the
climax move that begins with a gap at the opening.
ratio position sizing In
this method you simply adjust the speed at which position sizing
increases with FRPS.
group heat Each
group, be it a sector of stocks or a grouping of commodities, will
tend to move together. Thus,
it is important to control the total open risk in any one group,
known as the group heat.
Someone who makes high-risk trades or investments.
hit rate The
percentage of winners you have in your trading or investing. Also
known as the reliability of your system.
Grail system A
mythical trading system that perfectly follows the market and is
always right, producing large gains and zero drawdowns. No such
system exists, but the real meaning of the Holy Grail is right on
track: it suggests that the secret is inside you.
summary of data presented in a supposedly meaningful way to help
traders and investors make decisions.
initial risk The difference between your stop level and your entry price when you open
a position in the market. It
is usually referred to as R in this book.
day in which the total range of prices falls between the range of
prices of the prior day.
use of the price moves of one market to predict what will happen to
another market. For example, the price of the dollar might change
depending on what happens with Treasury bonds, British pounds, gold,
buy-and-hold strategy that most people follow. If you are in and out
frequently or you are willing to go both long and short, then you
that the human mind uses to make decisions.
These shortcuts make decision making quite quick and
comprehensive, but they lead to biases in decision making that often
cause people to lose money. A number of these biases are discussed
in Chapter 2.
expected equity drop (LEED) Used by Gallacher to describe a person’s risk
limits. It refers to the largest drop in equity that a trader or
investor can tolerate.
the relationship between the amount of money one needs to put up to
own something and its underlying value. High leverage, which occurs
when a small deposit controls a large investment, increases the
potential size of profits and losses.
change in price that reaches the limit set by the exchange in which
the contract is traded. Trading usually is halted when a limit move
order to your broker in which you specify a limit as to how much you
want to buy or sell a position for. If your broker cannot get this
price or better, the order is not executed.
ease and availability of trading in an underlying stock or futures
contract. When the volume of trading is high, there is usually a lot
a tradable item in anticipation of a future price increase. Also see
idea that has a positive expectancy and is traded at a risk level
that allows for the worst possible situation in the short term so
that one can realize the long-term expectancy.
moving average convergence divergence.
The percentage of the total price of something that an
exchange requires you to have in order to open and hold a position
in the market. It is
usually set by the exchange that controls the trading of that
to market A term used to describe the fact that open positions are credited
or debited funds based on the closing price of that open position
during the day. If you have an open position, it’s considered to
be worth whatever the closing price is at the end of the day.
maker A broker, bank, firm, or individual trader that makes a
two-way price to either buy or sell a security, currency, or futures
order to buy or sell at the current market price. Market orders are
usually executed quickly, but not necessarily at the best possible
A form of position sizing in which your core equity is sized
at a conservative level while profits (market’s money) are sized
at a more aggressive level. In
other words, market’s money refers to your profits in the market.
position-sizing strategy in which the position size increases after
you lose money. The classic martingale strategy is where you double
your bet size after each loss.
adverse excursion (MAE) The maximum loss attributable to price movement against the
position during the life of a particular trade.
ending equity When you simulate a
position sizing strategy, two of the data points that you probably
will keep track of are the minimum and maximum amounts of money that
you have in your account at the end of each run of the simulation.
When the simulation is complete, the maximum and minimum from
all of the simulations is known as the maximum and minimum ending
mean return When you do a number
of simulations, you want to know the mean (average) return of each
simulation. The largest
of these is known as the maximum mean return.
median return. When you do a number
of simulations, you want to know the median (half are above and half
are below) return of each simulation.
The largest of these is known as the maximum median return.
The average or the sum of all of the numbers divided by the
total number of numbers.
mechanical trading A form of trading in which
all actions are determined by a computer with no additional human
The middle point of a sequence of numbers arranged in
sequence. In other
words, half the numbers are above the median and half the numbers
are below it.
rehearsal The psychological process of preplanning an event or strategy in
one’s mind before actually doing it.
scenario trading A trading concept in which the trader uses his
or her macro assessment of what is going on in the markets to
develop trading ideas.
process of determining how some form of peak performance (such as
top trading) is accomplished and then the passing on of that
training to others.
An indicator that represents the change in price now from some
fixed time period in the past. Momentum is one of the few leading
indicators. Momentum as
a market indicator is quite different from momentum as a term
in physics to express the quantity that equals mass times velocity.
money management A term that has been frequently used to describe
position sizing but that has so many other connotations that people
fail to understand its full meaning or importance. For example, the
term also refers to (1) managing other people’s money, (2)
controlling risk, (3) managing one’s personal finances, and (4)
achieving maximum gain.
monte carlo simulation
A simulation that determines the probability of trading
results based on multiple trials.
method of representing a number of price bars (that is, showing
the high, low, open, and close in a specific period of time) by a
single average of all the price bars. When a new bar occurs, that
new bar is added, the last bar is removed, and a new average is then
moving average convergence divergence (MACD) A
technical indicator developed by Gerald Appel that follows the
difference between a series of moving averages. The indicator has
two lines, the MACD line and a signal line. A buy signal is
generated when the MACD line rises above the signal line. A sell is
generated when the MACD line falls below the signal. Because the
MACD is generated from moving averages, it has a unique ability to
capture wide-swinging moves in markets. Divergence, trendlines, and
support can also be applied to the MACD to generate additional
Changing the value of your position sizing variable multiple
times when some performance criterion is met.
expectancy system A
system in which you will never make money over the long term. For
example, all casino games are designed to be negative expectancy
games. Negative expectancy systems also include some highly reliable
systems (that is, those with a high hit rate) that tend to have
occasional large losses.
programming (NLP) A
form of psychological training developed by systems analyst
Richard Bandler and linguist John Grinder. It forms the foundation
for the science of modeling excellence in human behavior. However,
what is usually taught in NLP seminars are the techniques that are
developed from the modeling process. For example, we have modeled
top trading, system development, position sizing, and wealth
building at the Van Tharp Institute.
What we teach in our workshops is the process of doing those
things, not the modeling process itself.
What you wish to accomplish as a trader with your account or
your system. Objectives
can be stated in terms of the desired goal, the worst-case drawdown
to be avoided, or some combination of the two.
There are many ways of thinking about objectives, probably as
many ways as there are traders.
The purpose of position sizing is to help you meet your
position value The price of an
open position multiplied by the current number of units that you
The difference between the current price and the value of the
stop for all positions that you have open in the market.
It’s another word for portfolio heat.
optimal f A method for
determining position sizing developed by Ralph Vince that depends
upon the worst-case loss you have experienced to date.
The method uses iteration to determine position sizing.
optimal position size
The best position sizing method to achieve your objectives.
target risk percentage The optimal
portfolio heat divided by the number of trades you’re a likely to
The position sizing percentage that gives you the largest
probability of reaching your stated goal.
those parameters and indicators that best predict price changes in
historical data. A highly optimized system usually does a poor job
of predicting future prices.
right to buy or sell an underlying asset at a fixed price up to some
specified date in the future. The right to buy is a call option,
and the right to sell is a put option.
trading strategy by which one opens two options positions at the
same time and profits from the difference in the price of the two
positions. See debit spread and credit spread.
indicator that detrends (normalizes) price. Most oscillators tend to
go from 0 to 100. Analysts typically assume that when the indicator
is near zero, the price is oversold, and that when the price
is near 100, it is overbought. However, in a trending market,
prices can be overbought or oversold for a long time.
indicator that has a U-shaped function, based on the function y =
ax2+ bx + c. Because it rises at an
increasing rate over time, it is sometimes used as a trailing stop
that tends to keep one from giving back much profit. In addition, a
market is said to be parabolic when it starts rising almost
vertically as many high-tech stocks did in 1999, sometimes doubling
A change from one way of thinking to another. It's a
revolution, a transformation, a sort of metamorphosis. It does not
just happen, but rather it is driven by agents of change.
that occurs because your money is working for you.
term that is used to describe one’s maximum drawdown from the
highest equity peak to the lowest equity trough prior to reaching a
new equity high.
percent margin model
A position sizing strategy that is based upon the margin set
by the exchange in order to determine your position sizing.
risk model A
position-sizing model in which position sizing is determined by limiting the risk on the position to a certain percentage of
percent volatility model A
position-sizing model in which position sizing is determined by
limiting the amount of volatility (which is usually defined by the
average true range) in a position to a certain percentage of your
The total open risk in your portfolio at any given time.
This generally should not exceed 20%.
most important of the six key elements of successful trading. This
term, invented in the first edition of this book, refers to the part
of your system that really determines whether or not you’ll meet
your objectives. This element determines how large a position you
will have throughout the course
of a trade. In most cases, algorithms that work for determining
position size are based on one’s current equity.
expectancy A system (or game) that will make money over the long term if
played at a risk level that is sufficiently low. It also means that
the mean R-value of a distribution of R multiples is a
error that is made when you take into account future data that you
should not know. For example, if you buy on the open each day, if
the closing price is up, you will have the potential for a great
system, but only because you are making a
guess about the future. Most people want to make money through
guessing future outcomes, that is, prediction. Analysts are employed
to predict prices. However, great traders make money by “cutting
losses short and letting profits run,” which has nothing to do
(P/E) ratio The ratio of the price of a stock to its earnings. For example, if
a $20 stock earns $1 per share each year, it has a price/earnings
ratio of 20. The average P/E of the S&P 500 over the last 100
years has been about 17.
ratio of the price of a stock to its sale. For example, if a stock
sells for $20 and has $1 per share in total sales, then it has a
price-to-sales ratio of 20.
methodology A methodology that a trader keeps to himself because (1)
he doesn’t want to share its secrets or (2) he doesn’t want to
answer questions about what he does.
psychological loss A loss as a result of your
natural biases and psychology (usually larger than 1R).
option that gives someone the right to sell the underlying instrument
at a predetermined price up to a specific expiration date. It is the
right to sell but not the obligation.
term used to express trading results in terms of the initial risk.
All profits and losses can be expressed as a multiple of the initial
risk (R) taken. For example, a 10R multiple is a
profit that is 10 times the initial risk. Thus, if your initial
risk is $10, then a $100 profit would be a 10R-multiple
profit. When you do this, any system can then be described by the R-multiple
distribution that it generates.
That distribution will have a mean (expectancy) and standard
deviation that will characterize it.
term used to express the initial risk taken in a given position, as
defined by one’s initial stop loss.
event determined by chance. In mathematics, a number that cannot be
reduced total equity
One of the three equity
models. In this case,
you subtract out any allocation that you make for new positions, but
when you raise your stops, you add back any amount that would be
saved by raising your stops. The
resulting number is your reduced total equity, which is then used to
determine position sizing.
strength index (RSI) A futures market indicator described by J. Welles Wilder, Jr., that
is used to ascertain overbought and oversold conditions. It is based
on the close-to-close price change.
accurate something is or how often it wins. Thus, “60 percent
reliability” means that something wins 60 percent of the time.
resistance An area on a chart up to which a stock can trade but cannot
seem to exceed for a certain period of time.
Determines the trading goal (i.e., the retire amount).
The probability of reaching our goal less the probability of
having our worse case drawdown.
movement in the opposite direction of the previous trend.
A retracement is usually a price correction.
average return on an account (on a yearly basis) divided by the
maximum peak-to-trough drawdown. Any reward-to-risk ratio over 3
that is determined by this method is excellent. It also might refer
to the size of the average winning trade divided by the size of the
average losing trade.
risk The difference in price between the entry point in a position
and the worst-case loss that one is willing to take in that
position. For example, if you buy a stock at $20 and decide to get
out if it drops to $18, then your risk is $2 per share. Note that
this definition is much different than the typical academic
definition of risk as the variability of the market in which
you are investing.
Moving a futures contract into the next most liquid trading
month when the contract expires.
term that refers to the process of both getting into and exiting a
futures contract. Futures commissions are usually based on a round
turn as opposed to being based on charges for both getting in and
The amount of drawdown in your account at which you would
A form of position sizing in which you keep adding to the
position size based upon certain pre-determined criteria until you
reach some maximum level.
A form of position sizing in which you reduce your size when
the open risk or open volatility exceeds a pre-determined level.
The purpose is to maintain a constant risk, or volatility, in
term that refers to the actions, usually of floor traders, who buy
and sell quickly to get the bid and ask prices or to make a quick
profit. The bid price is what they will buy it for (and what
you’ll get as a seller), and the ask price is what
they’ll sell it for (and what you’ll get as a buyer).
based on consistent, predictable changes in price during the year
due to production cycles or demand cycles.
(bull or bear) market A term that refers to long-term tendencies in the market to
increase valuations (bull) or decrease valuations (bear).
Secular tenden cies can last for several decades, but they say
nothing about what the market will do in the next few months or even
the next year.
term that refers to a part of your trading system in which certain
criteria must be present before you look for an entry into the
market. People used to describe trading systems by their setups. For
example, CANSLIM is an acronym for the setup criteria of William
A ratio developed by Nobel Laureate William F. Sharpe to
measure risk-adjusted performance. It is calculated by subtracting
the risk-free rate from the rate of return for a portfolio and
dividing the result by the standard deviation of the portfolio
actually owning an item that you are selling. If you were using this
strategy, you would sell an item in order to be able to buy it later
at a lower price. When you sell an item before you have actually
bought it, you are said to be shorting the market.
market that moves neither up nor down.
One of the six types of markets in which the price moves very
little over time and the market also shows little day-to-day
One of the six types of markets in which the price moves very
little over time, but the market shows a lot of day-to-day movement.
difference in price between what you expect to pay when you enter
the market and what you actually pay. For example, if you attempted
to buy at 15 and you end up buying at 15.5, then you have a half
point of slippage.
floor trader assigned to fill orders in a specific stock when the
order has no offsetting order from off the floor.
in markets that are considered to be very volatile and thus quite
“risky” in the academic sense of the word.
The process of trading two related markets to exploit a new
relation ship. Thus, you might trade Japanese yen in terms of
British pounds. In doing so, you are trading the relationship
between the two currencies.
A term that refers to the process of getting ready to get into a
position. This is one of
the Ten Tasks of Trading from Dr. Tharp’s model.
standard deviation The positive square root of the expected value of the
square of the difference between some random variable and its mean.
A measure of variability that has been expressed in a normalized
step up/step down
function A mathematical
function that has a fixed way to move up or move down in value.
overbought-oversold indicator, popularized by George Lane, that is
based on the observation that prices close near the high of the day
in an uptrend and near the low of the day in a downtrend.
(stop loss, stop order) An order you put with your broker that turns into a market
order if the price hits the stop point. It’s typically called a stop
(or stop-loss order) because most traders use it to make
sure they sell an open position before it gets away from them. It
typically will stop a loss from getting too big. However, since it
turns into a market order when the stop price is hit, you are not
guaranteed that you’ll get that price. It might be much worse.
Most electronic brokerage systems will allow you to put a stop order
into their computer. The computer then sends it out as a market
order when that price is hit. Thus, it does not go into the market
where everyone might see it and look for it.
price level that historically a stock has had difficulty falling
below. It is the area on
the chart at which buyers seem to come into the market.
term that refers to short-term trading designed to capture quick
moves in the market.
set of rules for trading. A complete system will typically have (1)
some setup conditions, (2) an entry signal, (3) a worst-case
disaster stop loss to preserve capital, (4) a profit-taking exit,
and (5) a position-sizing algorithm. However, many commercially
available systems do not meet all of these criteria. A trading
system might also be described by the R-multiple distribution
system quality number (SQN) A method used in
this book to determine the quality of a system.
It is based upon the statistical t-score.
The System Quality Number is also used as a basis for
determining how to position size to meet your objectives.
minimum fluctuation in the price of a tradable item.
technique A trading technique that attempts to assist people in entering the
market just before an up move or in selling just before a down move.
One of the three equity
models that determines the value of your account by your cash and
the total value of your open positions in the market.
trade distribution A
term that refers to the manner in which winning and losing trades
are achieved over time. It will show the winning streaks and the
opportunity One of the six keys to profitable trading. It refers to how often a
system will open a position in the market.
Opening a position in the market, either long or short, with the
expectation of either closing it out at a substantial profit or
cutting losses short if the trade does not work out.
cost The cost of trading, which typically includes brokerage
commissions and slippage, plus the market maker’s cost.
stop-loss order that moves with the prevailing trend of the market.
This is typically used as a way of exiting profitable trades. The
stop is only moved when the market goes in your favor. It is never
moved in the opposite direction.
following The systematic process of capturing extreme moves in the market
with the idea of staying in the market as long as the market
continues its move.
day A day that generally continues in one direction, either up
or down, from the open to the close.
connecting the tops (or bottoms) of rising or falling markets.
This line is believed to reflect the market trend. Market
technicians tend to believe that when the price “breaks” the
trendline, then the trend is probably over.
However, it often means that they
simply have to draw a new trendline.
trademarked entry technique that is based on the assumption that
markets typically reverse after 20-day channel breakouts.
two-tier position sizing Position sizing
that starts at some level and then moves to another level when some
predetermined criteria are met.
per fixed amount of money model A position-sizing model in which you typically buy one unit of
everything per so much money in your account. For example, you might
buy one unit (that is, 100 shares or one contract) per $25,000.
One of the six kinds of markets in which the price is moving
up, but the day-to-day activity of the market is not active.
One of the six kinds of markets in which the price is moving
up, and the day-to-day activity of the market is fairly active.
term that indicates how “real” something is. Does it measure
what it is supposed to measure?
How accurate is it?
exercise in giving some value on the price of a stock or commodity
based on some model for determining value. See value trading.
term that refers to a concept in which positions are opened in the
market because they have good value. There are numerous ways to
measure value. However,
a good way of thinking about it is that if the assets of a company
are worth $20 per share and you can buy the company for $15 per
share, then you are getting a good value. Different value traders
will have different ways to define value.
term that refers to the range of prices in a given time period. A
high-volatility market has a large range in daily prices, whereas a
low-volatility market has a small range of daily prices. This is one
of the most useful concepts in trading.
entry technique that calls for entering the market when it moves a
specific amount from the open, based on the previous daily ranges of
the market. For example, a “1.5 ATR volatility breakout” would
call for entering the market when it moved (up or down) more than
1.5 times the average true range of the last X days from
The percentage of closed trades in which you make money.
A situation that represents the least desirable of possible
outcomes. Typically, you need to plan for the possibility that this
might happen through the proper use of position sizing.
This will usually guarantee that you will survive as a