The New Market Wizards: Conversations with America's Top Traders (62 page)

Put/call ratio.
The volume of put options divided by the volume of call options. A put/call ratio is one example of a contrary opinion or overbought/oversold measure. The basic premise is that a high ratio, which reflects more puts being purchased than calls, implies that too many traders are bearish and the ratio is hence considered bullish. Analogously, a low put/call ratio would be considered bearish.

Put option.
A contract that provides the buyer with the right—but not the obligation—to sell the underlying financial instrument or commodity at a specific price for a fixed period of time.

Pyramiding.
Using unrealized profits on an existing position as margin to increase the size of the position. By increasing the leverage in a trade, pyramiding increases the profit potential as well as the risk.

Reaction.
A price movement in the opposite direction of the predominant trend.

Relative strength.
In the stock market, a measure of a given stock’s price strength relative to a broad index of stocks. The term can also be used in a more general sense to refer to an overbought/oversold type of indicator.

Resistance.
In technical analysis, a price area at which a rising market is expected to encounter increased selling pressure sufficient to stall or reverse the advance.

Retracement.
A price movement counter to a preceding trend. For example, in a rising market, a 60 percent retracement would indicate a price decline equal to 60 percent of the prior advance.

Reversal day.
A day on which the market reaches a new high (low) and then reverses direction, closing below (above) one or more immediately preceding daily closes. Reversal days are considered more significant (“key”) if accompanied by high volume and a particularly wide price range.

Ring.
A synonym for
Pit
.

Risk control.
The use of trading rules to limit losses.

Risk/reward ratio.
The ratio of the estimated potential loss of a trade to the estimated potential gain. Although, theoretically, the probability of a gain or loss should also be incorporated in any calculation, the ratio is frequently based naively on the magnitudes of the estimated gain or loss alone.

Scalper.
A floor broker who trades for his own account and seeks to profit from very small price fluctuations. Typically, the scalper attempts to profit from the edge available in selling at the bid price and buying at the offered price—a trading approach that also provides liquidity to the market.

Seat.
A membership on an exchange.

Sentiment indicator.
A measure of the balance between bullish and bearish opinions. Sentiment indicators are used for contrary opinion trading. The put/call ratio is one example of a sentiment indicator.

Short.
A position implemented with a sale, which profits from a declining price market. The term also refers to the trader or entity holding such a position.

Slippage.
See
Skid
.

Skid.
The difference between a theoretical execution price on a trade (for example, the midpoint of the opening range) and the actual fill price.

Speculator.
A person who willingly accepts risk by buying and selling financial instruments or commodities in the hopes of profiting from anticipated price movements.

Spike.
A price high (low) that is sharply above (below) the highs (lows) of the preceding and succeeding days. Spikes represent at least a temporary climax in buying (selling) pressure and may sometimes prove to be major tops or bottoms.

Spread.
The combined purchase of a futures contract (or option) and sale of another contract (or option) in the same or a closely related market. Some examples of spreads include long June T-bonds/short September T-bonds. long Deutsche marks/short Swiss francs, and long IBM 130 call/short IBM 140 call.

Stop order.
A buy order placed above the market (or sell order placed below the market) that becomes a market order when the specified price is reached. Although stop orders are sometimes used to implement new positions, they are most frequently used to limit losses. In this latter application, they are frequently called
stop-loss orders
.

Support.
In technical analysis, a price area at which a falling market is expected to encounter increased buying support sufficient to stall or reverse the decline.

System.
A specific set of rules used to generate buy and sell signals for a given market or set of markets.

Systems trader.
A trader who utilizes systems to determine the timing of purchases and sales, rather than rely on a personal assessment of market conditions.

Tape reader.
A trader who attempts to predict impending market direction by monitoring closely a stream of price quotes and accompanying volume figures.

Technical analysis.
Price forecasting methods based on a study of price itself (and sometimes volume and open interest) as opposed to the underlying fundamental (i.e., economic) market factors. Technical analysis is often contrasted with fundamental analysis.

Tick.
The minimum possible price movement, up or down, in a market.

Trading range.
A sideways price band that encompasses all price activity during a specified period. A trading range implies a directionless market.

Trend.
The tendency of prices to move in a given general direction (up or down).

Trend-following system.
A system that generates buy and sell signals in the direction of a newly defined trend, based on the assumption that a trend, once established, will tend to continue.

Uptick rule.
A stock market regulation that short sales can be implemented only at a price above the preceding transaction.

Uptrend.
A general tendency for rising prices in a given market. Volatility. A measure of price variability in a market. A volatile market is a market that is subject to wide price fluctuations.

Volume.
The total number of shares or contracts traded during a given period.

Whipsaw.
A price pattern characterized by repeated, abrupt reversals in trend. The term is often used to described losses resulting from the application of a trend-following system to a choppy or trendless market. In such markets, trend-following systems will tend to generate buy signals just before downside price reversals and sell signals just before upside price reversals.

Books by Jack Schwager:

MARKET WIZARDS

Interviews with Top Traders

ISBN 0-887-30610-1 (paperback)

This bestselling classic offers interviews with the world's most successful traders of futures, currencies and stocks. Advice from these true trading champions, coupled with Schwager's ability to capture the excitement and intensity of their day-to-day work makes this "one of the most fascinating books ever written about Wall Street." (Martin W Zweig, Market Forecaster)

STOCK MARKET WIZARDS

Interviews with America's Top Stock Traders

ISBN 0-06-662058-9 (hardcover)

The past decade has witnessed the most dynamic bull market in U.S. Stock history, a collapse in commodity prices, and dramatic failures in some of the world's leading hedge funds. This third book in the “Market Wizards” series features interviews with stock market traders and investors who managed to significantly outperform a stock market that moved virtually straight up.

“A terrific tool for all amateur and professional investors … revealing the trading philosophies and disciplines of those on the front line in our business.”—
Stan Druckenmiller, CEO, Duquesne Capita! Management