Glossary

to more traditional chart methods can lead to significant insights. While we do not recommend this as a primary tool, EquiVolume can help clarify patterns that are otherwise opaque.

Exponential Moving Average (EMA): A front-weighted moving average in which each preceding period has diminished importance according to a geometric curve. The EMA is characterized by a very complicated formula that can be elegantly simplified to a computationally simple method, making this a very popular smoothing approach.

Fibonacci: An Italian mathematician known best for discovery of the ratio 1.618 to 1 which may be found many places in nature. It is a derivative of a number series in which each succeeding number is the sum of the prior two. Starting at 1, it goes 1,1,2, 3, 5, 8, 13, 21, 34, 55, 89, 144.... For example, 144/89 = 1.618 and 89/144 = 0.618. Many believe these ratios to be an aspect of the internal order of the markets.

Filters: Mathematical tools that smooth raw data to aid analysis. My favorites are percentage filters, which eliminate all fluctuations below a specified magnitude. See Arthur Merrills Filtered Waves (see the Bibliography).

Five-Point Patterns: A method of categorizing price patterns using a mathematical filter. There are 32 possible five-point patterns: 16 Ms and 16 Ws.

Fund: Typically a single entity in which several investors have pooled their funds to accomplish a common goal.

Fundamental Analysis: An analytical approach that focuses on the underlying fact set to forecast the future price of a security. For example, an analysis of a companys growth prospects may cause an analyst to believe that a security is too cheap and therefore should be bought. Fundamental analysts believe that their analysis is correct and, if the market price differs, that the market price is incorrect and thus an opportunity exists. Technical analysts believe that the market is correct.

Fundamental Indicators: Valuations of a business or the economy based on the measurement of the cashflow, book value, sales, revenues, etc. Traditionally accounting measures, but often more encompassing these days.

Glossary

Futures: Contracts that obligate the holder to buy or deliver a commodity at a specific price by a specific date. Usually futures contracts involve a good-faith deposit to ensure performance.

Gann, W. D.: The primary exponent of the internal-order-to-the-markets approach to investing. Gann followers think that there is a secret key to the markets, which, if found, would make the followers wealthy. See Elliott Wave.

Gap: A discontinuity in the price structure caused when prices change abruptly; generally caused by new information entering the market while it is closed. Technicians widely regard gaps as important components of the price structure that contain significant information.

Group Power: A daily analytical service available on the web, www.BollingerBands.com, or delivered via e-mail that analyzes the trends in a rational industry-group structure.

Groups: Price indices of groups of companies with similar business characteristics. Rational groups are groups of companies in similar businesses that also have similar trading patterns.

Growth Fund: A mutual fund specializing in growth stocks.

Growth Stock: A stock whose primary determinant of value is the future prospects of the company rather than the present state of the company. Specifically a stock that is expected to grow at a continuingly high rate. A growth-stock company generally pays low or no dividends and thus is hard to analyze using traditional analytical techniques. Occasionally companies arise for which there is no valuation metric; this was the central issue of Internet mania.

Hart, Ed: The late, great commentator on the Financial News Network. Known best for his acerbic commentary and argot such as "compression," "tension on the tape," and the description of the U.S. dollar as a "widows and orphans short."

Head and Shoulders: A technical chart formation consisting of three parts delineated by a neckline and an associated volume pattern. Most often found at tops, it can also be found at bottoms in an inverted form.

Glossary

Hedge: The combination of two or more securities in such a manner that one offsets certain characteristics (risks) of the other. The object is to combine two securities to make up one trading strategy or position.

Hedge Fund: A specialized type of mutual fund holding simultaneous long and short positions and/or employing leverage. Often hedge funds have international characteristics.

High: The highest price recorded in a given period.

Histogram: A chart with vertical lines representing each data point drawn from a baseline-usually zero-to the data point. A popular technique for plotting indicators.

Hotline: A service that provides updates of investment advice based on the latest market conditions. Originally delivered by telephone, then by fax, and more likely by e-mail these days.

Index: A data series adjusted to some base value, typically 100, as of the starting date or a given reference date. Used to measure stock performance, inflation, or currency values.

Industry Group Analysis: An approach to the market that considers stocks to be members of groups sharing similar business characteristics. Various academic studies have shown industry group and market sectors to be important factors in the returns of portfolios. See Group Power.

Industry Groups: Collections of stocks having similar business characteristics. See Rational Groups.

Inflation: The trend of decreasing purchasing power over time- typically stated per unit of currency. A 2 percent annual inflation rate means it would take $1.02 to buy next year what can be bought for $1.00 today.

Intermediate Term: A time frame that encompasses market moves of medium importance. Corrections in major bear and bull markets or individual legs within those markets are good examples. May be adjusted according to an investors time frame.

Intraday Intensity: A volume indicator that depicts the flow of funds for a security based on where it closes in its range. Developed by David Bostian. The formula is (2 * close - high - low)/(high-low) * volume.

Japanese Volume: See Accumulation Distribution.