Wall Street Trading Glossary

Alpha - A measure of performance; a risk-adjusted measure of the excess return of an investment, above the benchmark index referenced as a base of comparison. Thus, traders obviously seek returns in excess of say, the SPX benchmark index, they seek alpha.

Austrian Economics - Influential in the 19th and 20th centuries but in recent times viewed as outside the main stream thought. An opposite approach to Keynesian economics.  Austrian approach says the complexity of human behavior makes mathematical modeling of markets extremely difficult so it is best to take a more hands off approach to the markets . Companies should be allowed to fail rather than the government stepping in to provide bailouts.  Ludwig von Mises is the most recognizable name associated with Austrian economics.

Bag Holder - The last sucker that comes into a trade, buying too late, exactly at the top, or shorting to late, exactly at the bottom. Wall Street relies on Joe Sixpack to be the regular bag holder.

Beta - An indicator of risk; a measure of a stock's volatility in relation to the market. The market is a beta of one.  A stock that moves more than the market has a beta greater than one, a stock that moves less than the market has a beta less than one.  High beta is typically high risk high return.  Low beta is less risk less return.

Bid and Ask - Highest price, and lowest price, that a trader will pay for a stock.

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Block Trades - Large players typically trade in large share lot transactions of 10,000 shares or more.  A trader is best served to trade in blocks of 100, 1000 or 10000 lots since the trades are cleaner, and paperwork and trading is easier.  Keystone prefers trading in blocks of 100 shares for stocks priced over $10 and blocks of 1000 shares for stocks priced under $10.

Blue Chip - In poker, a blue chip is the most valuable chip.  This carries over into stock trading so the largest cap stocks, perceived to be the safest and strongest, such as the Dow 30, are called blue chips.

Bond Vigilantes - Refers to the bond market that fights govenment policies by selling bonds (which increases yields). Many government policies, like quantitiative easing, money printing, are inflationary, and a higher inflation environment demands higher yields (lower bond prices) to allow for the added risk.  The bond vigilantes provide balance to the markets and remind politicians that the markets have underlying problems.

Bot - Robot, typcially a loose reference referring to programmed trading using robots, quants and algorithms.

Bottom Line - The earnings per share value for a stock, typically appearing on the bottom of an income statment. One of the two key numbers reported for earnings season; the top line and the bottom line.

Breakout - The price level where the price moves out of the trend channel; when price crosses thru an important trendline.

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Candlestick Analysis - A charting methodology using candles for each time period.  The candle represents the open and close for that time period and also the shadows extending from the candle on each end represents the high and the low. Keystone's charts show the candlesticks routinely.  Candlestick patterns such as a doji and spinning top indicating possible trend changes, a hanging man candle indicating a potential top and a hammer indicating a potential bottom.  Study these set ups as well as three black crows, engulfing candles and many others.

Cyclical - Referring to the shorter term moves in the markets; weeks, months, a couple few years. Cyclical follows the economic cycle; bull runs typically continue along 2 to 4 years. Bear moves tend to be shorter duration.  Keystone views the current markets as a two-year cyclical bull from 2009 to 2011 inside an 18-year secular bear that is running from 2000 to around 2018.

Cyclical Stocks - Stocks that are considered cyclical, which are affected by the ebb and flow of the markets and business cycle, are steels like X or NUE, equipment manufacturers such as CAT, and other industrical and chemical names, companies that prosper in the upturns, like IR, BHP, DD, etc... Think in terms of things that are needed as the economy expands such as chemicals, lumber, commodities, equipment, manufacturing, etc..., but, all good things come to an end, and as the economic cycle peaks and rolls over, these same stocks are hit harder than secular, or non-cyclical, stocks.

Day Trading - Trading where you enter and exit positions during the same day; intraday trading; scalping. Traders make quicker trades that result in smaller profits but the multiple trades add up.

Diversification - A prudent investment startegy where you typically do not place more than 20% of your holdings in any one type or style of investment, and most definitely not in in one individual stock.  This startegy provides protection to a portfolio since a big move down in one single stock or sector will not seriously damage your portfolio. You can diversify within your stock holdings making sure the picks are from differnet sectors, or diversify as a part of your larger picture investment strategy by maintaining exposure across many asset classes; stocks, bonds, treasuries, currencies, CD's, money markets, real estate, gold, silver, art, cash, etc...

Dove - Concerning Fed policy, doves are typically more concerned about keeping unemployment low at the expense of inflation. Dove's favor low interest rates, a Keynesian appoach.

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Dr. Copper - Copper leads the broad markets since it is such a key industrial metal. It is the doctor, the leader, the all-knowing precursor of broad market direction.

Exchange Traded Fund (ETF) - Indexes, baskets of indexes, sectors, baskets of sectors, countries, commodities, curencies, almost anything is traded as an ETF nowadays.  ETF's enable a trader to move in and out daily like any stock, only incurring commission charges.  Compare this to mutual funds with fees and limits on when you exit and enter.

Fade - A trader that is often wrong so it is best to do the opposite of what they say, 'fade' them. Also references a trade where a rising price is sold, or a falling price is bot, you 'fade' the move.

Forex - Foreign Exchange Market or Currency Market where currencies are traded.

Fundamental Analysis (Fundies) - Using analytical analysis, P/E ratio's, cash flow, earnings, and other accounting type data to project future stock movements.  Analytical minds, engineers, scientists, and accountants tend to trade better using fundamental analysis while creative people, writers, artists, musicians and visual folks trade best with TA.  Fundies work well for long term traders and investors. Always explore both fundies and TA to determine what fits your personality.

Futures - A financial contract obligating the buyer to purchase and asset, or the seller to sell an asset, at a predetermined future date and price.

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GSE - Government-sponsored enterprise. A financial services corporation  created by the United States Congress. Fannie Mae and Freddie Mac, Ginnie Mae. Since these entities are backed by the faith of the U.S., then all the taxpayers are ultimately on the hook to always bail them out, and more billions are needed.

Hawk - Concerning Fed policy, hawks are typically more concerned about inflation and its negative effects on the economy and are in favor of hiking rates to keep a handle on inflation.

High-Frequency Trading - Computerized trading strategies that hold positions for small increments of time; seconds and less than seconds, the complete opposite of long term investment trading.  Recent estimates suggest that over 70% of current U.S. equity trades are high-frequency trades.

Implied Volatility - The market's forecast of the future volatilty of the underlying security, and is directly reflected in an option's premium.

Joe Sixpack - A generic term referencing the regular common folks in the U.S. In trading, Joe Six is usually the gullible bag holder.

Intermediate Term Trading (IT) - Keystone labels the week and month time frame as IT.

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Keynesian Econmics -Macroeconomic theory based on 20th century economist John Maynard Keynes.  Keynes favors government involvement and large stimulus packages to spur the economy in troubled times. Unfortunately, many government programs continue indefinitely, adding to more bureaucracy resulting in counter productivity.  The Austrian economists take the opposite side of Keynesian economists.

Long Term Trading (LT) - Keystone labels the month and year time frame as LT. Or, tongue-in-cheek, what happens when a short term trade goes bad--it turns into a long term investment.

LTBH (Long Term Buy and Hold) Trading - Holding trades over the long term time frame of months and years. A fool's folly over the last decade and more since the decreased value of the dollar has eroded any stock market gains.  Folks using the buy and hold strategy are brainwashed by pundits to buy and hold but this strategy will continue to struggle as long as the dollar loses value.  On top of that, if the broad markets weaken, there is a double whammy making a LTBH strategy inferior to more active trading.  LTBH does have some attractiveness from the standpoint of overall diversification, use of divvy stocks and use of speculative stocks--trying to find the next Microsoft in its infancy.

Option - The right, but not the obligation, to buy (call) or sell (put) a specific amount of a stock or instrument at a specified price (strike) during a specified period. The amount is usually 100 share lots for stock options. The option buyer is the holder and the option seller is the writer.

Pairs Trading - Taking a long and short position on two stocks in the same sector creating a hedge.

Programmed Trading - A technique that uses automatic electronic trading.  More specifically, trading baskets of stocks where the basket is made up of at least 15 stocks of over one million in value.  This type of trading is employed by many hedge funds via mathematical algorithms.  The change from fractions to decimals for stock prices greatly increased programmed trading.  

Pump and Dump - A typical Wall Street scheme where pundits, through tv, radio, print or other media, tout a stock as the greatest thing since sliced bed, screaming from the rooftops that you are a fool if you do not buy it.  Of course some novice traders are fools, and buy it, only to realize later the pundit had an interest in pumping the stock since he needed to distribute and unload his shares to suckers because the stock was about to collapse. The pundit pumped it and dumped it, making his money and screwing Joe Sixpack, the bag holder.

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Quant - A quantitive analyst.  The term quant is a hip buzz word nowadays so it has taken on all kind of nuanced meanings.  Quant may refer to the individual math and computer wiz as well as referring to the firm in general that employs the quants, as well as referring to the alogrithmic program itself.  Quants use numerical, statistical, mathematical, quantitative and related techniques to provide a trading advantage and increase the profitablilty of investment management firms, hedge funds and stock trading institutions.

Quantitative Analysis - Mathematical techniques applied to finance, investments and stock trading.

Position Trading - Trading over the week and month time frame; short term to intermediate term trading.  Typically longer than swing trading since the swing trading is entering and exiting on peaks and troughs where position trading will ride out pull backs if long, or pops if short.  Trading is performed with the intermediate trend in mind and a more relaxed time frame of weeks and months instead of the faster paced day and swing trading.

Roach Motel - A trade that you get in but can't get out. An old tv commercial would publicize roach traps in this manner.  Sometimes a trade you enter long falls so quickly, you are in a quandry of whether to take the loss and exit, or give it a chance, you feel you are stuck. In trading, you are never stuck, more often then not, taking the loss and exiting is the best course.

Running Money - Slang for handling and managing investments.

S/R - Support and resistance. As a stock price moves up it must move thru areas of resistance overhead adn as it moves down it is supported by price levels underneath.  The support levels are determined thru common closing, open, high and low numbers as well as levels where high volume moves occur.

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Secular - Referring to the LT movement of stocks and indexes.  Secular bull markets typically run about 2 years but can run much longer like 2003 thru 2007. Secular trends are the multi-month, and especially multi-year trends, sometimes a couple decades as shown by the 18-year cycle. A secular bull ran from 1982 until 2000.  Keystone believes we remain in a secular bear currently from 2000 that will continue into the 2015-2019 area.  Keystone also uses secular to describe the recent longer term moves for his signal indicators for the markets so the semantics can get confusing. Except for some brief trouble during summer 2010, the broad markets have been in a secular bull since the March 2009 bottom.  Keystone has no problem with calling the current markets a cyclical (two-year) bull within a secular bear (2000-2018).

Secular Stocks - Stocks that are considered secular, since they is always a steady need not typically interrupted by any economic cycles, are PG, K, PFE, MRK. Think in terms of things you use no matter what the economy is doing like soap, detergent, toilet paper, medications, that type of thing. Secular stocks do not typically feel the wild swings that cyclical stocks do but their returns tend to be lower. You are relinquishing some return for a more stable and safer stock.

Short Term Trading (ST) - Keystone labels the minute, hour, day and week time frame as ST.

Statistical Arbitrage - Techniques that take advantage of mispricing of one or more assets based on the expected value of those assets.  Some hedge funds are dedicated to statistical arbitrage techniques.  StatArb typcially focuses on any one or all of the following four key areas; first, operating substantial mathematical and computational trading and infrastructure systems, second, taking advantage of mean reversion strategies, third, using short holding periods, and fourth, trading large share blocks.

Swing Trading - Trading in the day to week time frame, sometimes up to a month or more; short to intermediate term trading.  A shorter term style of trading using lows and highs as entry and exit areas to take advantage of volatility swings; channel trading; support and resistance trading; trend reversal and retracement trading.

Technical Analysis (TA) - Using stock chart patterns, trend lines, support and resistance, Elliott wave anlaysis, candlesticks and other visual indicators to project future stock movements.  Creative people, writers, artists, musicians and visual folks trade best with TA while analytical minds, engineers, scientists, and accountants tend to trade better using fundamental analysis.  TA believes that everything known is built into price already.  TA is better for short term trading while fundies are better for the LTBH. Always explore both as you determine what fits your personality.

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Top Line - Company revenues.  Sales. Healthy revenues indicate demand for the product. One of the two key numbers reported for earnings season; the top line and the bottom line.

Trannies - Nickname for the transportation sector. TRAN, DJT or IYT.

Value Trap - A stock that sells off over time and the price appears so attractive that surely you cannot go wrong buying it-it is such a great value.  But, lo and behold, it continues to fall, or move sideways, stagnant for weeks, months, sometimes years.

Vega - An option's price sensitivity to a one percentage-point change in its implied volatility.

Window Dressing - Money managers are paid based on what assets are held at the end of the month.  Therefore, the managers make a bad quarter look better buy adding winning stocks to the portfolio during the last few days of the month, so the indexes are prone to float upwards.

ZIRP (Zero Interest Rate Policy) - Chairman Bernanke and the FOMC maintaining rates at or near zero for an extended period of time to help stimulate the economy.

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