Glossary of Trading Terms

What are Pivot Points?

The term pivot refers to a turning point in the price of an asset and often coincides with key levels of support and resistance. There are two basic types of price pivots: calculated pivots (those determined by using mathematical formula) and price pivots, which are determined by looking at the price action on a chart.

A calculated pivot, often called a floor trader pivot, is derived from a formula using the previous day's high, low and closing price. The result is a focal price level about which price action is likely to turn, either up or down. Calculated pivots represent potential turning points in price, while price pivots are actual historic turning points.

Price pivots are not calculated. The pivot is defined by the structural relationship between price bars. Price pivots form on all time frames, are building blocks of trend and provide objective entry and exit points for trading.

Price pivots are best conceptualized with three bars. A three-bar pivot low represents support and is formed when buying pressure turns price from down to up. It is designated by a price bar with a higher low that closes above the previous bar's high, where the previous bar's low is lower than the bar that preceded it. This is true in every time frame.

A three-bar pivot high represents resistance and is formed when sellers turn price from up to down. It is seen where a price bar with a lower high closes below the previous bar's low, where the previous bar's high is higher than the bar that preceded it. Structural pivots are more easily recognized and understood when seen in a diagram or on a price chart. This is true in every time frame.

Price pivots represent reversals and are the building blocks of trend. A series of lower pivot highs and lower pivot lows is a downtrend, and the pivot highs are connected to form a down trendline. A series of higher pivot lows and higher pivot highs is an uptrend, and the pivot lows are connected to form an up trendline.

The textbook calculation for a pivot point is as follows:

Central Pivot Point (P) = (High + Low + Close) / 3

Support and resistance levels are then calculated off of this pivot point using the following formulas:

First level support and resistance:

First Resistance (R1) = (2*P) - Low

First Support (S1) = (2*P) - High

Likewise, the second level of support and resistance is calculated as follows:

Second Resistance (R2) = P + (R1-S1)

Second Support (S2) = P - (R1- S1)

Calculating two support and resistance levels is common practice, but it's not unusual to derive a third support and resistance level as well. (However, third-level support and resistances are a bit too esoteric to be useful for the purposes of trading strategies.) It's also possible to delve deeper into pivot point analysis - for example, some traders go beyond the traditional support and resistance levels and also track the mid-point between each of those levels.

What Does Inside Day Mean?

A candlestick formation that occurs when the entire daily price range for a given security falls within the price range of the previous day. Inside day often refers to all versions of the harami pattern and can be very useful for spotting changes in the direction of a trend.

Investopedia explains Inside Day

An inside day is often used to signal indecision because neither the bulls nor the bears are able to send the price beyond the range of the previous day. If an inside day is found at the end of a prolonged downtrend and is located near a level of support, it can be used to signal a bullish shift in trend. Conversely, an inside day found near the end of a prolonged uptrend may suggest that the rally is getting exhausted and is likely to reverse.

What is Average True Range?

The True Range indicator is the greatest of the following:
-current high less the current low.
-the absolute value of the current high less the previous close.
-the absolute value of the current low less the previous close.

The Average True Range is a moving average (generally 14-days) of the True Ranges.

What Does Oversold Mean?

1. A condition in which the price of an underlying asset has fallen sharply, and to a level below which its true value resides. This condition is usually a result of market overreaction or panic selling.

2. A situation in technical analysis where the price of an asset has fallen to such a degree - usually on high volume - that an oscillator has reached a lower bound. This is generally interpreted as a sign that the price of the asset is becoming undervalued and may represent a buying opportunity for investors.

Investopedia explains Oversold

1. Assets that have experienced sharp declines over a brief period of time are often deemed to be oversold. Determining the degree to which an asset is oversold is very subjective and could easily differ between investors.

2. Identifying areas where the price of an underlying asset has been unjustifiably pushed to extremely low levels is the main goal of many technical indicators such as the relative strength index, the stochastic oscillator, the moving average convergence divergence and the money flow index

What Does Relative Strength Mean?

A measure of price trend that indicates how a stock is performing relative to other stocks in its industry.

Investopedia explains Relative Strength

It is calculated dividing the price performance of a stock by the price performance of an appropriate index for the same time period.

What Does Volume Weighted Average Price - VWAP Mean?

A trading benchmark used especially in pension plans. VWAP is calculated by adding up the dollars traded for every transaction (price multiplied by number of shares traded) and then dividing by the total shares traded for the day.

Investopedia explains Volume Weighted Average Price – VWAP

The theory is that if the price of a buy trade is lower than the VWAP, it is a good trade. The opposite is true if the price is higher than the VWAP.

What Does Simple Moving Average - SMA Mean?

A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react.

What Does Exponential Moving Average - EMA Mean?

A type of moving average that is similar to a simple moving average, except that more weight is given to the latest data. The exponential moving average is also known as "exponentially weighted moving average".

Investopedia explains Exponential Moving Average – EMA

This type of moving average reacts faster to recent price changes than a simple moving average. The 12- and 26-day EMAs are the most popular short-term averages, and they are used to create indicators like the moving average convergence (MACD) and the percentage price oscillator (PPO). In general, the 50- and 200-day EMAs are used as signals of long-term trends

What Does Stop Order Mean?

An order to buy or sell a security when its price surpasses a particular point, thus ensuring a greater probability of achieving a predetermined entry or exit price, limiting the investor's loss or locking in his or her profit. Once the price surpasses the predefined entry/exit point, the stop order becomes a market order.

Also referred to as a "stop" and/or "stop-loss order".

Investopedia explains Stop Order

Investors commonly use a stop order before leaving for holidays or entering a situation where they are unable to monitor their portfolio for an extended period.

Stops are not a 100% guarantee of getting the desired entry/exit points. For instance, if a stock gaps down, the trader's stop order will be triggered (or filled) at a price significantly lower than expected.

Traders who use technical analysis will place stop orders below major moving averages, trendlines, swing highs, swing lows or other key support or resistance levels.

What Does Adding To A Loser Mean?

The action of a trader/investor increasing a position in an asset when its price is heading in the direction that's opposite to what the investor/trader desires. This is generally not a wise investment decision because unless the asset begins to move in the desired direction, the investor's losses will increase.

Investopedia explains Adding To A Loser

An investor might add to a losing position instead of closing it because he or she gets emotionally attached to the asset and has a hard time accepting that it was a bad investment. Once the trade moves substantially in the wrong direction, however, it may be time to consider closing out or re-evaluating the reason for having the position rather than putting more money at risk.

What Does Scale Order Mean?

A type of order that comprises several limit orders at incrementally increasing or decreasing prices. If it is a buy scale order, the limit orders will decrease in price, triggering buys at lower prices as the price starts to fall. With a sell order, the limit orders will increase in price, allowing the trader to take advantage of increasing prices, thereby locking in higher returns.