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72 GLOSSARY Acceleration: An indicator that measures the rate of change of the rate of change, or the second derivative of price. This measure is most useful for early warnings of changes in trend. See Velocity and Rate of Change. Accumulation: The process by which "strong hands" or "those in the know" acquire stock in anticipation of higher prices. This is a core concept for technicians. Many indicators focus on this process, particularly volume indicators. The idea is that before a big move in a stock, there is a period of detectable accumulation during which smart investors accumulate the stock in anticipation of the advance. See Distribution. Accumulation Distribution: A volume indicator based on the relationship of the open to the close of each period. Created by Larry Williams and closely related to the Japanese candlestick concept, hence also known as Japanese Volume. The formula is
Glossary (close -open)/(high -low)*volume. See Money Flow Index and Volume Indicators. Advance-Decline Line: An indicator line that is the cumulative sum of the daily number of advancing issues minus declining issues. Its long-term underperformance vis-a-vis the market averages has led many to proclaim it useless. However, as a 21-day sum in conjunction with bands, it is quite an interesting market-timing tool. Alpha: A mathematical measure of the unique return of a security after the influence of the market has been removed. Equity-Trader.com calculates separate alphas for up and down markets. Arithmetic Scale: A chart-scaling approach where the distance on the chart is equal for a given point distance regardless of price level. See Log Scale. Arms Index: The Arms Index, created by Richard Arms, is a measure that depicts the balance between the forces of buying and selling in the stock market. The components are advancing and declining issues and up and down volume. At 1.0, those forces are in balance. Above 1.0, the forces of selling predominate. Below 1.0, the buyers are in charge. Due to the long-term upward bias of the market, the average reading for this index runs in the 0.85 area. A very interesting market-timing tool, the Open Arms Index can be created from this index. Also known as the TRIN. The formula is (advances/ declines)/(up volume/down volume). See Open Arms Index. Backup: See Retracement. Balanced Fund: Generally, an investment vehicle that contains positions in both bonds and stocks. Some shift the balance as market conditions change. More recently a fund that contains long and short positions. Bands: Lines drawn around the price structure based on some measure of central tendency. See Channels and Envelopes. BandWidth: An indicator derived from Bollinger Bands. The formula is (upper band - lower band)/middle band. See The Squeeze. Bar Chart: A chart with vertical bars representing the trading that occurred during a specific time period, with price on the axis
Glossary and time on the x axis. The top of the bar is the high price of the period, the bottom of the bar is the low, the tick to the left is the opening price, and the tick to the right is the closing price. Base: A period in which a security trades in a relatively narrow range after a decline-usually as a prelude to an advance. It has recently become fashionable to refer to consolidations as bases. Bear Market: An extended period of price decline. Beta: A mathematical measure of a securitys responsiveness to the market. A beta of 1.0 is neutral, 2.0 says the security moves twice as much as the market, and 0.5 means the security moves half as much. EquityTrader calculates separate betas for up and down markets. See Alpha. Black Scholes: The best-known option valuation model. Used to calculate any number of option variables including fair value and implied volatility. A very useful tool, now built into most of the technical analysis software. See a good option book such as Options as a Strategic Investment by Lawrence McMillan, New York: New York Institute of Finance, 1986. Bollinger Bands: Bollinger Bands are bands constructed around a moving average that define in relative terms what is high and what is low. The band width is a multiple of the standard deviation of price. Bollinger Band defaults are a 20-day moving average with 2 standard deviations. Bollinger Bars: Bars for bar charts where the area between the open and close is shaded red if the close is lower than the open or green if the close is higher. The balance of the bar is blue. Essentially a marriage between a Japanese candlestick and a Western bar. Bollinger Boxes: A continuous method of specifying the proper box size for point-and-figure charts. Currently supported by RTRs TechniFilter Plus. Bomar Bands: Trading bands created by Bob Brogan and Marc Chaikin that are spread above and below an average so that 85 percent of the data over the past year is contained. Bottom: A technical formation of price that marks the low in price for a significant period. V- and W-shaped bottoms are common. The V formation is often called a spike bottom. The W
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