Technical Analysis Terms

Here you can review a short list of the jargon used in reference to the technical analysis and futures.

Definitions are not intended to suggest the correct legal significance or exact meaning. They were collected from several sources to help in your understanding of the futures and options industry.

B

Bar Chart
A chart that graphs the high, low, and settlement prices for a specific trading session over a given period of time.

Bollinger Band
An indicator used to compare volatility and relative price levels over a specified time period. Three bands are plotted: a simple moving average, an upper band of the simple moving average plus two standard deviations, and a lower band of the simple moving average minus two standard deviations. When the markets become more volatile, the bands widen, or move farther away from the average. When the markets are less volatile, the bands contract, or move closer to the average.

C

Candlestick Chart
Candlestick charts provide a quick visual picture of the relationship between opening and closing prices and their relative strengths or weaknesses, especially for extended periods. The body, which looks like a candle, represents the difference between opening and closing prices. Shadows, which look like wicks, represent price action above and below the body.

Channel
The range of prices between support and resistance levels that a market has traded in for a specific time period.

Charting
The use of graphs and charts in the technical analysis of futures markets to plot price movements, volume, open interest or other statistical indicators or price movement.

Chaos Theory/Trading
Also called non-linear dynamics, chaos theory involves complex analysis but is essentially a tool to determine whether repetitive patterns and cycles exist in the markets; that is, the presence of an underlying order. It involves the study of historical price action and use of mathematical and statistical tools.

Closing Out
Liquidating an existing long or short futures or options position with an equal and opposite transaction. Also called offsetting.

Commitments of Traders Report (COT)
A weekly report from the Commodity Futures Trading Commission providing a breakdown of each Tuesday’s open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. Open interest is broken down by aggregate commercial, non-commercial, and non-reportable holdings.

Congestion
A period of time characterized by repetitious and limited price fluctuations.

Correction
A temporary reversal in prices following a significant trending period.

Counter-Trend Trading
The method by which a trader takes a position contrary to the current market direction in anticipation of a change in that direction.

D

Directional Movement Index (DMI)
A trend-following indicator used to determine market trends. It has three components--one for upward price movement, one for downward price movement, and a third that measures the difference in these up-and-down market forces to arrive at an index showing the strength of a trend.

Double Bottom
Chart pattern describing a drop in price, a rebound, and another drop to the same or close to the level of the first drop, then another rebound. The chart typically looks like a “W” in shape, and the two bottom points of the W represent support areas.

Double Top
Chart pattern describing a rise in price, a fall, another rise to the same or close to the level of the first rise, then another fall. The chart typically looks like an “M” in shape, with the two top points of the M representing resistance areas.

E

Elliott Wave Theory
A theory named after Ralph Elliott, who contended that stock market trends move in discernable and predictable patterns reflecting the basic harmony of nature. In technical analysis, it reflects a charting method based on the belief that all prices act as wavers, rising and falling rhythmically in a pattern of five up and three down. Waves essentially reflect psychology or the marketplace as it makes its normal rallies and corrections.

F

Fibonacci
Leonardo Fibonacci was a thirteenth-century Italian mathematician who discovered the significance and unique properties of a simple number series, in which each numeral is added to the previous to create the next one in the series: 0,1,2,3,5,8,13, etc. Fibonacci numbers, and more significantly the ratio of those numbers to each other, can be found throughout nature and cycles. Fibonacci ratios are used in technical analysis to predict retracement areas during pullbacks, as well as targets, called “extensions,” for projected price moves.

G

Gann Theory
A method of predicting price movements through the relationship of geometric angles in charts depicting time and price. The methodology was created by W.D. Gann, a financial astrologer who was born in 1878 and became one of the most successful traders of his time. Gann techniques can be complex, but are based on price study, time study and pattern study and operate under the premise markets are cyclical in nature.

Gap
Price areas on a chart where no trading takes place. Gaps happen often in markets that trade only part of a day because price-moving events and announcements take place during times when markets are closed. Follow-up price action may cover them, or “fill the gap.”

H

Head and Shoulders
A chart formation that resembles a human head and shoulders and is generally considered to be predictive of a price reversal. A head and shoulders top (which is considered predictive of a price decline) consists of a high price, a decline to the support level, a rally to a higher price than the previous high price, a second decline to the support level, and a weaker rally to about the level of the first high price. The reverse (upside down) formation is called a head and shoulders bottom (which is predictive of a price rally).

L

Liquid Market
A market in which selling and buying can be accomplished with minimal effect on price.

M

Momentum
The relative change in price over a specific time interval. Often equated with speed or velocity and considered in terms of relative strength.

Moving Average
A statistical price analysis method of recognizing different trends. A moving average is calculated by adding the prices for a predetermined number of days and then dividing by the number of days.

Moving Average Convergence/Divergence (MACD)
MACD analysis uses three moving averages, often exponential. Two of them are based on the number of price periods used and the third an average of the difference between the two moving averages. The difference between the readings of the two moving averages is usually shown as a histogram, while the average of that difference is shown as a moving average line plotted on top of the histogram. An important part of MACD analysis is how its movements compare with price movements to determine strength or weakness in the market.

O

Open Interest
The sum of all long or short futures contracts in one delivery month in one market that have been entered into and not yet liquidated by an offsetting transaction or fulfilled by delivery.

Oscillator
A term for indicators used to determine overbought and oversold conditions, often useful when a clear trend can’t easily be determined. Oscillators include stochastics, moving average convergence/divergence, relative strength index and momentum.

Overbought
A term used to describe a technical opinion on a market that has risen too steeply and too fast in relation to underlying fundamental factors.

Oversold
A term used to describe a technical opinion of a market has declined too steeply and too fast in relation to underlying fundamental factors.

P

Parabolic Indicator
A strategy that uses trailing stops and a reverse method called stop-and-reversal (SAR) to pinpoint entry and exit points. Price action above the SAR would signal a bullish posture, price action below, a bearish posture.

Point-and-Figure Chart
A method of charting that uses prices to form patterns of movement without regard to time. It defines a price trend as a continued movement in one direction until a reversal or predetermined criterion is met. Xs are used to represent upticks, while Os represent downticks.

R

Rally
An upward movement of prices.

Range
The difference between the high and low price of a commodity during a given trading session, week, month, year, etc.

Relative Strength Index
The Relative Strength Index compares periods with up closes with periods that have down closes to produce an index reading reflecting the strength of price changes on a scale of 0 to 100. The index provides overbought or oversold signals, and divergence/convergence with prices is an important part of the analysis.

Resistance
A price area where new selling is expected to emerge to dampen a continued rise. Areas of resistance are found above current prices.

Retracement
A move opposite the direction of the main market trend.

Reversal
A change in the direction of prices.

S

Squeeze
A market situation in which the lack of supplies tends to force shorts to cover their positions by offsetting at higher prices.

Stochastics
Stochastics measures the closing price relative to the low of the range for a selected period to indicate rising or falling momentum, providing trading signals when its lines cross into overbought or oversold territory. As an overbought/oversold indicator, the stochastic indicator attempts to forecast turns in market action.

Support
The place on a price chart where it is expected buying of futures contracts will be sufficient to halt a price decline. Areas of support are found beneath current prices.

T

Technical Analysis
An approach to forecasting commodity prices that examines the patterns of price change, rates of change, and changes in volume of trading and open interest, without regard to underlying fundamental market factors.

Trend
The general direction, either up or down, in which prices have been moving.

Trend lines
Lines drawn across successively higher bottoms in uptrending price action or progressively lower tops in downtrending price action. Prices crossing a trend line may indicate a change in direction has occurred.

V

Volatility
A measurement of the change in price over a given time.

Volume
The number of purchases and sales of futures contracts or options on futures contracts made during a specified period of time.