Trading Education

Glossary

Average Directional Index measures the strength of a prevailing trend, and whether or not there is movement or direction in a market.

Bollinger Bands draws two bands that are typically plotted two numbers of standard deviations above and below a moving average.

Calls – Options that give the right to buy the underlying futures contract.

Commodity Channel Index is used to identify the beginning and ending of cycles.

Delta – The neutral hedge ratio or the expected change in the option premium given a small change in the price of the underlying instrument; i.e., measure of the option’s sensitivity to changes in the underlying instruments.

Directional Movement Index is used to determine whether a market is in a trending or non-trending mode, helping to identify whether it is bullish or bearish.

Expiration Date – Date this contract is due to expire. Options on futures generally expire on a specific date during the month preceding the futures contract delivery month. For example, an option on a June futures contract expires in May but is referred to as a June option because its exercise would result in a June futures contract position.

Exponential Moving Average assigns more weight to recent price data and less weight to prices further back in time. It is more sensitive to price activity than the simple moving average and tends to stick closer to the trend.

Exponential Oscillator is the difference between two Exponential Moving Averages.

Futures Contract is a standardized contract calling for the delivery of a specified quantity of a commodity at a specified date in the future.

Gamma – Measures the expected change in delta, given a small change in the value of the underlying instruments; measures the stability of the option’s delta.

Historic Volatility is a statistical standard deviation calculation that shows the historic volatility of the base instrument.

Implied Volatility – A theoretical value designed to represent the volatility of the security underlying an option as determined by the price of the option. The factors that affect implied volatility are the exercise price, the riskless rate of return, maturity date and the price of the option.

Line Oscillator is a combination of two different studies. The first set of calculations compute a simple oscillator. The second part computes a simple moving average of the oscillator.

Median Price is calculated by adding the highest and lowest price of the observation period and then dividing this by two.

Momentum is the difference between today’s low and yesterday’s low.

Moving Average is generally used to identify or confirm a trend, and works best in trending markets.

Moving Average Convergence Divergence – Indicator calculates moving averages that can monitor and signal trends. It is both a trend following indicator as well as an oscillator.

Open Interest – The sum of all long or short futures contracts in one delivery month or one market that have been entered into and not yet liquidated by an offsetting transaction or fulfilled by delivery. Also called open contracts or open commitments.

Oscillator can be used to help identify divergences, short-term variations from the long-term trend, and to identify the crossing of two Moving Averages, which occur when the oscillator crosses the zero line.

Puts – Options granting the right to sell the underlying futures contract.

Relative Strength Index plots upper and lower boundaries to determine overbought and oversold market conditions.

Slow Stochastic is simply the normal stochastic smoothed via a moving average technique.

Smoothed Oscillator is an Exponential Oscillator, only with a longer period applied.

Stochastic is an oscillator that compares the difference between the closing trade price of an instrument and the period low, relative to the trading range over an observation time period.

Strike Price – the price at which the owner of an option can buy (for call options) or sell (for put options) the underlying market.

Theoretical Value – The hypothetical value of an option as calculated by the Black-Scholes Option Pricing Model.

Theta – Reflects the expected change in the option premium, given a small change in the option’s term to expiration; i.e., measure of time value decay.

Vega – Measures the expected change in the option premium, given a 1% change in the implied volatility of an option; i.e., measures sensitivity to shifting volatility levels.

Volume – The total number of contracts traded during a specific period of time. Volume can provide insight into the strength or weakness of a price trend.

Volume and Open Interest – These values are transmitted from the exchanges. However, the actual volume and open interest figures are always one day behind price information.

William’s %R examines ten trading days to determine the trading range, and then calculates where today’s closing price fell within that range.

Williams’ Accumulation/Distribution Index is a price change index, whereby the biggest price difference from today’s high or low, or yesterday’s closing price is subtracted from today’s closing price.