The Stock Market can be a very daunting place especially if you don’t know the lingo! What I wanted to do was outline some of the more common terms used within the market to give you the user a better idea of what those money makers are really talking about.

Anyone can Google ‘Stock Market Terms’ and be hit with a huge number of results, so in all internet fashion I present to you the Stocks for Breakfast ‘Top 10 Stock Market Terms‘.

Macd - Moving Average Convergence/Divergence

Technical Explanation - This is one of the most commonly used indicators in the chartist’s arsenal. Developed by Gerald Appel, the indicator is derived by plotting the difference between two exponential moving averages, with the default parameters of 12 and 26 periods. A second line, the trigger line, is calculated by using a shorter period moving average of the first line, which uses 9 periods by default.

Lamens Explanation - An Indicator that provides clues as to weather a share price may embark on a new direction.

Bollinger Bands

Technical Explanation - The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions. 

Lamens Explanation - 3 bands that measure the average, high and lows of a share. 

DMI – Directional Movement Index

Technical Explanation - An indicator developed by J. Welles Wilder for identifying when a definable trend is present in an instrument. That is, the DMI tells whether an instrument is trending or not.

Lamens Explanation - The Directional Moving Index is plotted as three lines on a scale of 0 to 100, the direction of these lines and the use of crossovers can show the changes in the current market trends.

Stochastic Oscillator

Technical Explanation - Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator that shows the location of the current close relative to the high/low range over a set number of periods. Closing levels that are consistently near the top of the range indicate accumulation (buying pressure) and those near the bottom of the range indicate distribution (selling pressure).

Lamens Explanation – An indicator that displays the average highs and lows of a share and when there are recommended times to ‘buy’ or ’sell’

Days High and Low

Technical Explanation – The share/s highs and lows. For instance a Share opens at $34.50, moves down to $29.20 then up to and closes at $37.80, the high was $37.80 and the low $29.20.

Lamens Explantion – As above, can’t get any simpler!

Pump and Dump

Techincal Explantion - ”Pump and dump” is a form of microcap stock fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price. Once the operators of the scheme “dump” their overvalued shares, the price falls and investors lose their money. Stocks that are the subject of pump-and-dump schemes are sometimes called “chop stocks”.

Lamens Explanation – Form of fraud whereby owners of cheap shares ‘pump’ the market with artificial  information to raise the price then ‘dump’ the shares to make a profit while investors lose money.

Inside News

Technical Explanation – Information from individuals with potential access to non-public information about a company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information.

Lamens Explanation – Information leaked officially or un-officially to the public. Usually smarter to follow instituions or certified individuals on research or reporting like Wise-Owl or Think Minc. See Pump and Dump above

Daily Chart

Technical Explanation - A line graph that displays the intraday movements of a given security/share. This contrasts to longer term charts, such as those that show a security’s/shares movement over a period of days, months or even years.

Lamens Term – Updated charts that display information on a range of securities/shares be it Gold, Oil, Dow Jones or individual shares. To view our daily charts hit the tab at the top or here

Volume

Technical Explanation - The number of shares or contracts traded in a security or an entire market during a given period of time. It is simply the amount of shares that trade hands from sellers to buyers as a measure of activity. If a buyer of a stock purchases 100 shares from a seller, then the volume for that period increases by 100 shares based on that transaction.

Lamens Terms – The total number of shares or contracts traded within the market during a period of time… pretty simple!

Stock Code

Technical Explanation - A ticker symbol, also known as a stock symbol, is a unique string of letters that identifies a particular stock on one of two electronic tapes that report market transactions.

The consolidated tape includes companies that trade on the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), regional exchanges and other markets. A second tape includes companies that trade on the Nasdaq Stock Market.

Lamens Terms – A shortned version of an exchange or company/business name eg ASX – Australian Stock Exchange

Bonus, because its popped up a few times in this Top 10.. so this makes it a Top 10 + 1

Security

Technical Explanation - An instrument representing ownership (stocks), a debt agreement (bonds) or the rights to ownership (derivatives)

Lamens Terms – What you have, got and own

Now I hope that clears up a few things and if you think I missed some more important terms,  have any questions or have your own Top 10 Stock Market Terms feel free to contact us.

Sources: ASX, Bollinger Bands, Geckosoftware, Stockcharts, Wikipedia, Investopedia, Financial Dictionary

SFB

Interpretation

Triple moving averages are simply three different moving averages plotted on the same chart. Many industry professionals believe that the trend is bullish when a short-term moving average is higher than the medium-term moving average and the medium-term moving average is higher than the long-term moving average. For example a bullish trend or buy signal would be indicated by the 15-day moving average being higher than the 45-day moving average and the 45-day moving average being higher than the 90-day moving average. A bearish trend or sell signal would be indicated by the 15-day moving average being below the 45-day moving average and the 45-day moving average being below the 90-day moving average. When the moving averages are not in ascending or descending order as described above, the trend is said the be neutral and there are no buy or sell signals.

Case Study

Today, there a many websites and software packages that can plot triple moving averages automatically. This means that there is no longer a need to manually calculate the moving averages. The chart above demonstrates how triple moving averages may have been used to capture a very profitable bullish trend. The moving averages used in the above chart are 15-days (short-term), 45-days (medium-term) and 90-days (long-term). On 4 April 2000, Woolworths Limited (WOW) was trading at $5.60. The moving averages produced a bullish signal where the 15-day moving average was higher than the 45-day moving average and the 45-day moving average was higher than the 90-day moving average. The moving averages turned bearish on 13 December 2001 with WOW trading at $10.81 capturing a bullish trend of 89%.

SFB

Interpretation

Symmetrical triangles can be characterized as areas of indecision where a market pauses and future direction is questioned. Rallies are quickly met by selling and dips are seen as bargains. Each new high is lower than the previous and new bottoms are found above previous lows. The formation of symmetrical triangles is often accompanied by diminishing volume as a result of the market’s indecision. Eventually, this indecision results in an explosive breakout of the symmetrical triangle formation often on heavy volume. Most breakouts occur before the triangle is completed. Breakouts that occur at the end of the triangle’s formation are often false breaks and should be avoided. Symmetrical triangles often breakout in the direction of the original trend and the technical target is derived by adding the largest vertical height of the triangle to the breakout level.

Case Study

Many people believe that chart patterns are very subjective. But many chart patterns can be easily identified like the symmetrical triangle in Foster’s Group Limited (FGL) in the chart above. It can be seen that FGL forms a symmetrical triangle with volume decreasing during this period. The break out is then supported by increased volume and FGL rallies to the technical target.

SFB

Interpretation

Moving averages are used by many investors as it is believed that prices will generally trade near an average price. The edges of the envelope represent buyers or sellers who have pushed prices to extremes. When price hits an extreme it usually turns around and finds a new stability point. When prices trade above the upper band, the stock is considered overbought and when prices trade below the lower band, the stock is considered oversold. For more volatile stocks, the percentage offset used may be increased to analyse extreme movements better. Larger offsets are more conservative as many stocks do not deviate too far from their moving averages. Using a larger offset would imply that trading opportunities are only signalled when a stock trades very far from its moving average.

Case Study

There is no set rule as to how wide the envelope should be. Many professionals use trial-and-error to test the suitability of the offset applied. Today, there are many websites and software packages that can plot moving average envelopes automatically. The chart above demonstrates how moving average envelopes may have been used to capture trading opportunities with Australian Gaslight Company (AGL). The moving average envelope used in the above chart is a 30-day moving average based off closing prices with an upper and lower offset of 4%. The chart shows how a moving average envelope may have been used to determine buying and selling opportunities between 2002 and 2004.

SFB

Interpretation

Double Tops occur when prices are in an uptrend and the market reaches a point where buying interest is met and begins to dry up. Sellers may begin to take profits and that price level will become a major resistance level due to supply and demand. After reaching this market top a corrective phase will usually push the market lower. A temporary bottom is reached and acts as the key support level. As the market rallies back to major resistance, the market may anticipate that prices will trade above the previous high. If this does not occur, the second top may continue to hold resistance and push the market lower. If price trade below the key support level is established, this signals a change from an uptrend to a downtrend.

The projected downside target is the measured height between the key support level and the double top (see chart above).

Case Study

Lend Lease Corporation Limited (LLC) enjoyed a bullish trend and first peaked at $24.00. From the peak, LLC declined around 26% to find support and form a trough at $17.80. In October 2000, LLC failed to rally through the first peak at $24.00 and the reversal was confirmed when key support at 17.80 was quickly broken on heavy volume. Sellers entered the market and LLC quickly traded to the projected downside target.

SFB

Interpretation

In depth explanations on how the RSI is calculated is very advanced and beyond the scope of this newsletter. However, a simple explanation will be made here. The RSI is calculated in several steps: within a given period (n-days), the individual differences between the upward closing prices (Close today > Close yesterday) and downward closing prices (Close today < Close yesterday) are added up and afterwards divided by the number of observations (n-days) minus one. The result is the day’s average value of the upward and downward strength of the underlying stock. The relative strength is calculated by dividing the average upward strength by the average downward strength. Finally, the RSI is found by the following formula: RSI = 100 – 100 1 + Relative Strength Many industry professionals believe that the best time to use the RSI is when a stock is trading sideways. A buy signal occurs when the RSI trades
below 30 and trades back above 30. A sell signal occurs when the RSI trades above 70 and trades back below 70. In summary, buy and sell signals occur as the RSI is leaving the overbought/oversold area.

Case Study

Today, there a many websites and software packages that can plot the RSI automatically. This means that there is no longer a need to manually calculate the RSI. The chart above demonstrates how the 14- day RSI may have been used to capture very profitable trading opportunities in Telstra Corporation Limited (TLS).

SFB

Interpretation

When a Head & Shoulders pattern forms in an uptrend, the market begins to slowdown and the forces of supply and demand come to balance. Profit takers sell at the high (Left Shoulder) and first support is found at the beginning of the neckline. Buyers return to the market and prices are pushed to a new high (Head). Sellers step in again and the price retreats to test the downside to find support at the joining point of the neckline. Tentative buying re-emerges and prices rally again but fail to break the previous high (Right Shoulder). The pattern is complete once the price retreats and falls below the neckline. After breaking neckline support, the projected downside target is found by measuring the distance from the neckline to the top of the head and subtracting that distance from the break of the neckline. It is
important to note that volume usually declines during the Head & Shoulders formation and increases as the neckline is broken (see chart above). As the market trades to new highs, the decline in volume is an early indication that buyers are not committed. The increase in volume as the neckline is breached demonstrates the commitment of sellers and previous buyers getting out.

Case Study

Woolworths Limited (WOW) enjoyed a bullish trend and first peaked at $16.33 (Left Shoulder), then pulled back and rallied to $16.89 (Head). From the peak, WOW declined to $15.76 to find support (at the Neckline) and rallied back to $16.48 (Right Shoulder). Recently, WOW has been sold heavily and has broken support at the neckline. The chart above shows volume declining during the formation of the Head & Shoulders pattern. Volume during the recent sell-off volume has been increasing and demonstrates the commitment of sellers. The neckline now acts as resistance and the projected downside target is somewhere near $14.55.

SFB

Interpretation

The MACD is a trend following momentum indicator that shows the relationship between two moving averages. The MACD is calculated by subtracting the 26-day moving average from a 12-day moving average. A 9-day moving average (dotted line) called the signal line is then plotted on top of the MACD.

There are 3 common methods to interpret the MACD: Moving average crossovers, centreline crossovers and divergences. Moving average crossovers occur when the MACD crosses its 9-day moving average (or signal line). When the MACD falls below the signal line it is a signal to sell and when the MACD rises above the signal line it is a signal to buy. Centreline crossover occurs when the MACD moves above the zero line and into positive territory. This is a clear indication that momentum has changed from negative to positive and vice versa. Divergences occur when the security diverges from the MACD indicating the end of the current trend. For example, the price of the security may be trading a new low, but the MACD may have already turned upwards diverging against the price of the security. The concept of divergences is a more advanced topic and will be covered later.

Case Study

Today, there a many websites and software packages that can plot the MACD automatically. The chart above demonstrates how the MACD may have been used to capture very profitable trading opportunities in St George Bank Limited (SGB) by identifying turning points in changing trends.

SFB

We read and hear about these things yet what do they mean and more importantly how can we use then to our benefit?

What most people fail to realise is that we are all trying to achieve something – the question is what? That’s where we get stuck because if we have no purpose, we have no drive and with no drive life is just one long rut. Each day blends into the next and we dream of escape, escaping into the markets and making millions trading stocks, or to a villa in Tuscany, or a beach in Brazil. We read the books, subscribe to the charting software, read the papers, listen out for tips hoping for the next big winner, or religiously study our charts for the next breakout.

When it finally does happen we say to ourselves ‘I’d better wait for more of a confirmation’ or ‘it’s too early’ and before we know it, we just missed the big one. The thought of putting our hard earned cash on the line becomes too nerve-wracking…yet we’ll go out and buy the first tip some so called expert gives us!

Shifting Paradigms

So this begs the question, ‘what are we actually trying to achieve?’ Put simply, if we don’t know where we’re going, how will we know when we get there? It’s just like planning a holiday, first we select our destination, then we work out how to get there.

Why would trading or investing or anything to do with money be any different from say, planning a holiday? If the average person put as much effort into their finances as they did planning a holiday their life would be very different indeed.

Beliefs – The What and the Why

Beliefs, as defined by Merriam Webster’s Dictionary are “a degree of conviction of the truth of something esp. based on a consideration or examination of the evidence.” Beliefs are the rules we live by. All our behaviours are based on them, and you wouldn’t be reading this if you believed it held no value. Yet have you considered where your beliefs come from and have you ever evaluated your beliefs to see if they are serving you well? They act as self-fulfilling prophecies, regulating what you will and won’t do and we all follow them religiously, without question.

What beliefs do you have about money?

Take a few moments with pen and paper to answer the following;
1) What does money mean to you?
2) How do you feel about it?
3) What is your first memory of money?
4) How is money discussed within the family unit?
5) How do your mother and father deal with money?
6) How do they differ in their approach?
7) Do you feel rich or poor?

Consider your answers to the seven questions. If you investigate further do you notice how your beliefs are essentially nothing more than feelings of certainty about what something means to you? In other words, a belief is a degree of conviction, and the stronger the conviction the stronger the belief. Yet beliefs are dynamic and they change. We’ve all believed things as kids that we now think are silly. Our lives are governed by our beliefs and our beliefs govern our behaviour.

There’s a saying that goes-

“If we always do what we have always done, we will always get what we have always got”.

Do you have any negative beliefs about money from your childhood because that is going to directly affect your decision making today. Have you ever purchased a stock on a tip? Have you ever purchased a stock without a stop in place? Worse still, have you ever purchased a stock and not followed your stop? We are guilty because we are all human. Everything you do, you do for a reason and it’s either to avoid something or to gain something because that’s what you believe to be true.

Consider the following…

A recent study published earlier this year by Physicist Yi-Cheng Zhang and other researchers from the University of Fribourg in Switzerland set up an internet-based game in which human traders play a virtual market populated by virtual traders. The human players looked at recent market movements and had to decide whether the next change would be up or down. When the market changed in a relatively simple way, the players were quite good at spotting the likely next movement. But when the market dynamics became complex, the players effectively abandoned their attempts to work out rationally what would happen next (Physica A, vol 331, p 651). Many of them just kept repeating the same prediction. ‘It seems,’ said team member Joseph Wakeling, ‘that the capacity of humans to act logically is limited, and in more complex situations they try other methods to make decisions.’ *

How do we change our beliefs? Well, that’s the 64 million dollar question; however it’s actually much easier than you may think. Stay tuned for Part 2 of this article, where we will go into the practices you can implement to bring about these shifts in beliefs.

* Source New Scientist Mark Buchanan article “It’s the economy, stupid” 

SFB

Can you make decisions quickly or does everything seem to take forever? If you do get around to making that decision do you question yourself?

The word decision, as defined by the Merrian-Webster Online dictionary is “the act or process of deciding; a determination arrived at after consideration.” So why is it often so hard to decide?

What’s really going inside these heads of ours? Cast your mind back to the June Diamond Report – did you answer the questions from the previous education feature (Issue 9, June 05, 2005 ‘Beliefs, Focus, Values…’)? Were you surprised with the results; did you even complete them?

Well, if haven’t well here’s another chance. If you did do them, we suggest you do them again and
compare your answers;

1) What does money mean to you?
2) How do you feel about it?
3) What is your first memory of money?
4) How is money discussed within the family unit?
5) How do your mother and father deal with money?
6) How do they differ in their approach?
7) Do you feel rich or poor?

Last time we discussed beliefs and how they affect every area of our lives (see Article 7), from how we feel to our choice of clothing. Today we are going to discuss beliefs and how they control us in a little more detail and start to measure the impact they have upon our lives.

Stop for a moment and reflect: you want to become a successful trader / investor; you want to make lots and lots of money trading the markets, yet there are some unresolved / underlying issues with money, and decision-making. Do you want to make money or lose it? The first rule of investing / trading is cut your losses short and let your profits run. When the chips are down could you make the cut?

Be honest here, would you hire yourself if you applied for a job as a professional trader? Honestly, if you answer ‘no’ how do you expect to make money from trading and investing, if you yourself admit you would not cut it as a professional?

What’s really going on inside that head of yours? Who’s in control up there? Again in our last session we covered “beliefs” and how beliefs are nothing more than feelings of certainty about what something means to you. What beliefs do you have about the decisions you make?

What does all this really mean decisions, beliefs, emotions….? We experience the world from the inside out; what you are focusing on right now directly affects your experience of the world.

How you sit or stand, the rate of your breathing, any sensations you are feeling, your beliefs, representational systems, physiology, all contribute to our experience. If something is happening externally to us, how does this information get inside and cause an experience?

The five senses- sight, sound, touch, taste and smell are all external stimuli, yet all are somehow represented internally within our mind and bodies.

Take for example the feeling of ‘stress’. How do you experience this, what do you feel, where does the feeling originate? What do you say to yourself, what pictures do you imagine? Something external is happening and yet we feel this on the inside.

What is it?

SFB