As with many other fields, traders have their
own arcane terms and phrases to describe various conditions. Trading
newcomers may be frustrated by a lingo they do not understand and
which seems to make no sense at all. Here are some commonly used terms.
“Dead-cat bounce.”
Many times a market will experience a modest rally (a bounce) from
depressed price levels. But most of this price rise is due to short-covering
or weak long positions getting back into a market that very likely
will exert little or no upside power.
“The trend
is your friend.” This simple sentence is a very
powerful one and is important for most traders. If you trade with
the market’s trend, your odds for success are higher than if
you trade against the trend. Most successful traders employ some type
of trend-following trading strategy.
“Buy the
rumor, sell the fact.” This is a frequently
occurring phenomenon whereby a market makes a price move in anticipation
of an expected result of a fundamental event. Then, when the event
does actually occur and the result was as expected by traders, the
market price will move in the opposite direction. For example, if
grain traders expect a bullish report, the market will rally in the
days before the report’s release but then actually sell off
once the actual bullish figures are released.
“Bulls
make money, bears make money, but pigs get slaughtered.”
In other words, don’t be a greedy trader. Don’t try to
take too much profit out of a market too fast. The two biggest and
potentially most damaging human emotions in trading are “fear”
and “greed.”
“Cut your
losses short.” This trading maxim is even more
important than “The trend is your friend.” Traders must
limit their losses on their more numerous losing trades by using strict
money management and by employing buy and sell stops.
“Markets ‘discount’
events.” This phrase is
similar to the “buy the rumor, sell the fact” phrase.
Markets many times “factor in” or discount events before
they occur. For example, forecasters may predict a U.S. Corn Belt
drought. Although the growing season for soybeans and corn does not
end until early fall, corn and soybean futures prices may top out
in June. Traders factor in the damage to crops well before most of
the damage had actually occurred.
“Never
meet a margin call.” In other words, traders
should never let a trade become so much “under water”
that a margin call from the broker is initiated. “Cut your losses
short.”
“Short-covering.”
This phenomenon occurs when traders who have established short positions
decide to exit the market, either to take profits or because their
trading positions have moved too far “under water.” Many
times short-covering will occur after a market has been in a sustained
downtrend without much upside movement recently.
“Long liquidation.”
Traders decide to “ring the cash register” and take profits
from long positions or weaker longs exit the market when it appears
to be showing weakness. Long liquidation usually occurs when a market
has been in a sustained uptrend and many bulls decide to bail out,
knowing the market is vulnerable to a downside correction.
Consolidation,
also known as “sideways trading.” Many
times a market that has undergone a sustained trend will “pause”
to catch its breath or move into a consolidation phase. This means
price action on the charts turns more sideways and choppy.
A price “breakout.”
This occurs when prices move solidly above or below a “congestion
area” (or a sideways trading area) on a price chart. Many trend
traders like to trade price breakouts.
“Basing”
action. This is extended sideways trading at recent historic lower
price levels. Prices are forming a “base” at lower levels,
from which prices will eventually make an upside “breakout.”
Keep in mind that markets can also see a downside price breakout at
what was perceived to be a basing area at lower levels.
A market “correction.”
When a market has made a sustained price trend, it will make a shorter
counter move in the opposite direction. After this correction, odds
favor the eventual resumption of the trending move.
“Locals.”
These individuals trade in the futures trading pits in open-outcry
markets at the exchanges. They trade for their own accounts and are
a needed function of pit trading because they provide the important
market liquidity for better trade execution (fills).
