General Trading-Related Terms
- Fear, Uncertainty, and Doubt (FUD): Spreading of fear and misinformation to gain an advantage.
- Fear Of Missing Out (FOMO): The emotion you feel when you panic buy.
- HODL: Buy and hold on to it for a long time!
- BUIDL: Keep your head down and build the next financial system.
- SAFU: Funds are safe!
- Return on Investment (ROI): How much money you are making (or losing).
- All-Time High (ATH): The highest price ever recorded!
- All-Time Low (ATL): The lowest price ever recorded.
- Do Your Own Research (DYOR): Don’t trust, verify.
- Due Diligence (DD): Smart people make decisions based on facts.
- Anti Money Laundering (AML): Regulations that prevent criminals from hiding their money.
- Know Your Customer (KYC): Regulations that make exchanges verify your identity.
Note: Make sure as well to read the trading glossory at: https://algostorm.com/trading-glossary/
A bear market can be described as a period of declining prices in a financial market. Bear markets can be extremely risky and difficult to trade for inexperienced traders. They can easily lead to great losses and scare investors from ever returning to the financial markets. How come?
There’s this saying among traders: “Stairs up, elevators down.” This means that moves to the upside may be slow and steady, while moves to the downside tend to be more sharp and violent. Why is that? When the price starts crashing, many traders rush to exit the markets. They do that to either stay in cash or lock in profits from their long positions. This can quickly result in a domino effect where sellers rushing to the exit leads to even more sellers exiting their positions, and so on. The drop can be amplified even more if the market is highly leveraged. Mass liquidations will have an even more pronounced cascading effect, resulting in a violent sell-off.
With that said, bull markets can also have phases of euphoria. During these times, prices are increasing at an extreme rate, correlations are higher than usual, and a majority of assets are going up in tandem.
Typically, investors are “bearish” in a bear market, meaning that they expect prices to decline. This also means that market sentiment is generally quite low. However, this may not mean that all market participants are in active short positions. This just means that they expect prices to decline and may be looking to position themselves accordingly if the opportunity presents itself.
A bull market (or bull run) is a state of a financial market where prices are rising. The term bull market is often used in the context of the stock market. However, it can be used in any financial market – including Forex, bonds, commodities, real estate, and cryptocurrencies.
You may have heard traders from Wall Street use the terms “bullish” and “bearish". When a trader says they are bullish on a market, it means that they expect prices to rise. When they are bearish, they expect prices to decline.
Being bullish can often mean that they are also long that market, though that may not necessarily be the case. Being bullish may not necessarily mean that a long trade opportunity is present right now, just that prices are rising or are expected to rise.
It’s also worth noting that a bull market doesn’t mean that prices don’t fall or fluctuate. This is why it’s more sensible to consider bull markets on larger time frames. In this sense, bull markets will contain periods of decline or consolidation without breaking the major market trend.
So, in this sense, the definition of a bull market depends on what time frame we’re talking about. Generally, when we’re using the term bull market, we are talking about a time frame of months or years. As with other market analysis techniques, higher time frame trends will have more validity than lower time frame trends.
As such, there may be prolonged periods of decline in a high timeframe bull market. These counter-trend price movements have a notoriety for being especially volatile – though this can vary greatly.
Bull Market vs. Bear Market
These are opposite concepts, so the difference isn’t particularly difficult to guess. Prices are continuously going up in a bull market, while prices are continually going down in a bear market. This also results in differences in how it may be best to trade them.
In a bull market, traders and investors will generally want to be long. While in a bear market, they either want to be short or stay in cash.
In some cases, staying in cash (or stablecoins) may also mean "shorting" the market, since we’re expecting prices to decline. The main difference is that staying in cash is more about preserving capital while shorting is about profiting off the decline in asset prices. But if you sell an asset expecting to buy it back lower, you’re essentially in a short position – even if you are not directly profiting from the drop.
One additional thing to consider is fees. Staying in stablecoins will likely not incur any fees, as there typically isn’t a cost to custody. However, many short positions will require a funding fee or interest rate to keep the position open. This is why quarterly futures may be ideal for long-term short positions, as there is no funding fee associated with them.
What is a Pullback?
A pullback is a pause or moderate drop in a stock or commodities pricing chart from recent peaks that occur within a continuing uptrend. A pullback is very similar to retracement or consolidation, and the terms are sometimes used interchangeably. The term pullback is usually applied to pricing drops that are relatively short in duration – for example, a few consecutive sessions – before the uptrend resumes.
Important Points To Remember:
- A pullback is a temporary reversal in the price action of an asset or security.
- The duration of a pullback is usually only a few consecutive sessions. A longer pause before the uptrend resumes is generally referred to as consolidation.
- Pullbacks can provide an entry point for traders looking to enter a position when other technical indicators remain bullish.
What Does a Pullback Tell You?
Pullbacks are widely seen as buying opportunities after a security has experienced a large upward price movement. For example, a stock may experience a significant rise following a positive earnings announcement and then experience a pullback as traders with existing positions take the profit off the table. The positive earnings, however, are a fundamental signal that suggests that the stock will resume its uptrend.
Most pullbacks involve a security’s price moving to an area of technical support, such as a moving average or pivot point, before resuming their uptrend. Traders should carefully watch these key areas of support since a breakdown from them could signal a reversal rather than a pullback.
Pullbacks typically don’t change the underlying fundamental narrative that is driving the price action on a chart. They are usually profit-taking opportunities following a strong run-up in a security’s price.
What Is a Reversal?
A reversal is a change in the price direction of an asset. A reversal can occur to the upside or downside. Following an uptrend, a reversal would be to the downside. Following a downtrend, a reversal would be to the upside. Reversals are based on overall price direction and are not typically based on one or two periods/bars on a chart.
Certain indicators, such a moving average, oscillator, or channel, may help in isolating trends as well as spotting reversals. Reversals may be compared with breakouts.
Important Points To Remember:
- A reversal is when the direction of a price trend has changed, from going up to going down, or vice-versa.
- Traders try to get out of positions that are aligned with the trend prior to a reversal, or they will get out once they see the reversal underway.
- Reversals typically refer to large price changes, where the trend changes direction. Small counter-moves against the trend are called pullbacks or consolidations.
- When it starts to occur, a reversal isn’t distinguishable from a pullback. A reversal keeps going and forms a new trend, while a pullback ends and then the price starts moving back in the trending direction.
What Does a Reversal Tell You?
Reversals often occur in intraday trading and happen rather quickly, but they also occur over days, weeks, and years. Reversals occur on different time frames which are relevant to different traders. An intraday reversal on a five-minute chart doesn’t matter to a long-term investor who is watching for a reversal on daily or weekly charts. Yet, the five-minute reversal is very important to a day trader.
An uptrend, which is a series of higher swing highs and higher lows, reverses into a downtrend by changing to a series of lower highs and lower lows. A downtrend, which is a series of lower highs and lower lows, reverses into an uptrend by changing to a series of higher highs and higher lows.
Trends and reversals can be identified based on price action alone, as described above, or other traders prefer the use of indicators. Moving averages may aid in spotting both the trend and reversals. If the price is above a rising moving average then the trend is up, but when the price drops below the moving average that could signal a potential price reversal.
Trendlines are also used to spot reversals. Since an uptrend makes higher lows, a trendline can be drawn along those higher lows. When the price drops below the trendline, that could indicate a trend reversal.
If reversals were easy to spot, and to differentiate from noise or brief pullbacks, trading would be easy. But it isn’t. Whether using price action or indicators, many false signals occur and sometimes reversals happen so quickly that traders aren’t able to act quickly enough to avoid a large loss.
Difference Between a Reversal and a Pullback
A reversal is a trend change in the price of an asset. A pullback is a counter-move within a trend that doesn’t reverse the trend. An uptrend is created by higher swing highs and higher swing lows. Pullbacks create the higher lows. Therefore, a reversal of the uptrend doesn’t occur until the price makes a lower low on the time frame the trader is watching. Reversals always start as potential pullbacks. Which one it will ultimately turn out to be is unknown when it starts.
What Is a Breakout?
A breakout refers to when the price of an asset moves above a resistance area, or moves below a support area. Breakouts indicate the potential for the price to start trending in the breakout direction. For example, a breakout to the upside from a chart pattern could indicate the price will start trending higher. Breakouts that occur on high volume (relative to normal volume) show greater conviction which means the price is more likely to trend in that direction.
Important Points To Remember:
- A breakout is when the price moves above a resistance level or moves below a support level.
- Breakouts can be subjective since not all traders will recognize or use the same support and resistance levels.
- Breakouts provide possible trading opportunities. A breakout to the upside signals traders to possible get long or cover short positions. A breakout to the downside signals traders to possibly get short or to sell long positions.
- Breakouts with relatively high volume show conviction and interest, and therefore the price is more likely to continue moving in the breakout direction.
- Breakouts on low relative volume are more prone to failure, so the price is less likely to trend in the breakout direction.
What Does a Breakout Tell You?
A breakout occurs because the price has been contained below a resistance level or above a support level, potentially for some time. The resistance or support level becomes a line in the sand which many traders use to set entry points or stop loss levels. When the price breaks through the support or resistance level traders waiting for the breakout jump in, and those who didn’t want the price to breakout exit their positions to avoid larger losses.
This flurry of activity will often cause volume to rise, which shows lots of traders were interested in the breakout level. The higher than average volume helps confirm the breakout. If there is little volume on the breakout, the level may not have been significant to a lot of traders, or not enough traders felt convicted to place a trade near the level yet. These low volume breakouts are more likely to fail. In the case of an upside breakout, if it fails the price will fall back below resistance. In the case of a downside breakout, often called a breakdown, if it fails the price will rally back above the support level it broke below.
Breakouts are commonly associated with ranges or other chart patterns, including triangles, flags, wedges, and head-and-shoulders. These patterns are formed when the price moves in a specific way which results in well-defined support and/or resistance levels. Traders then watch these levels for breakouts. They may initiate long positions or exit short positions if the price breaks above resistance, or they may initiate short positions or exit long position if the price breaks below support.
Even after a high volume breakout, the price will often (but not always) retrace to the breakout point before moving in the breakout direction again. This is because short-term traders will often buy the initial breakout, but then attempt to sell quite quickly for a profit. This selling temporarily drives the price back to the breakout point. If the breakout is legitimate (not a failure), then the price should move back in the breakout direction. If it doesn’t, it’s a failed breakout.
Traders who use breakouts to initiate trades typically utilize stop loss orders in case the breakout fails. In the case of going long on an upside breakout, a stop loss is typically placed just below the resistance level. In the case of going short on a downside breakout, a stop loss is typically placed just above the support level that has been breached.
What Is a Breakdown?
A breakdown is a downward move in a security’s price, usually through an identified level of support, that portends further declines. A breakdown commonly occurs on heavy volume and the subsequent move lower tends to be quick in duration and severe in magnitude.
Important Points To Remember:
- A breakdown is a downward move in a security’s price, usually through an identified level of support, that portends further declines.
- A breakdown commonly occurs on heavy volume and the subsequent move lower tends to be quick in duration and severe in magnitude.
- A breakdown can be identified by traders using technical tools such as moving averages, trendlines, and chart patterns.
Understanding a Breakdown
A breakdown can be identified by traders using technical tools such as moving averages, trendlines and chart patterns. Traders can draw trendlines on a chart that connect several swing lows to find areas where prices may be susceptible to breaking down. Heavy volume should accompany a breakdown below key support levels, which shows participation in the move lower.
Technical traders can either close out any existing long positions or short sell a security when it breaks below a support level, since that is a clear indication that the bears are in control and that additional selling pressure is likely to follow. A breakdown often signals the start of a downtrend.
When a security initially breaks down, traders should seek confirmation from several indicators and other chart time-frames to ensure the move is not a head-fake. For example, a breakdown on a 15-minute chart has a higher probability of continuing lower if the daily and weekly charts are in a downtrend. A breakdown is the bearish counterpart of a breakout. In the chart below, prices have broken down below the neckline of a head and shoulders pattern.
Trading a Breakdown
Traders could take a short position when the security’s price initially breaks down below major support. To do this, a sell stop-limit order would need to be placed just below the support level. Once prices break down, the decline is likely to be intensified as stop-loss orders for long positions are triggered with additional selling pressure coming from breakdown traders. The extra volatility caused by the breakdown may result in a mediocre fill, due to slippage.
Alternatively, traders can wait for a retracement to enter the market. They could place a limit order where the security’s price initially broke down from; that area has now become a resistance level. Entering the market on a retracement is likely to result in a better fill than trying to catch the breakdown early. The flip side is the security may not retrace back to the trader’s limit price.
Once in a short position, traders could use a trend following indicator, such as a moving average as a trailing stop. For example, when the price of the security closes above the moving average, the trade is exited. If traders believe the breakdown is the start of a new downtrend, they may want to use a longer-term moving average to try and catch the majority of the move.
What Is a Gap?
A gap is an area discontinuity in a security’s chart where its price either rises or falls from the previous day’s close with no trading occurring in between. Gaps are common when news causes market fundamentals to change during hours when markets are typically closed, for instance an earnings call after-hours.
Note: Gaps only happen with assets that do are not traded 24/7. Cryptocurrencies do not have gaps as they are traded all day long without breaks or holidays.
Important Points To Remember:
- A gap is a discontinuous space in the price chart of an asset or security, often occurring between trading hours.
- There four different types of gaps – Common Gaps, Breakaway Gaps, Runaway Gaps, and Exhaustion Gaps – each with its own signal to traders.
- Gaps are easy to spot, but determining the type of gap is much harder to figure out.
What Does A Gap Tell You?
Gaps typically occur when a piece of news or an event causes a flood of buyers or sellers into the security. It results in the price opening significantly higher or lower than the previous day’s closing price. Depending on the kind of gap, it could indicate either the start of a new trend or a reversal of a previous trend.
Gapping occurs when the price of a security or asset opens well above or below the previous day’s close with no trading activity in between. Partial gapping occurs when the opening price is higher or lower than the previous day’s close but within the previous day’s price range. Full gapping occurs when the open is outside of the previous day’s range. Gapping, especially a full gap, shows a strong shift in sentiment occurred overnight.
Some traders make it a strategy to profit from playing the gap when such a situation occurs.
The Difference Between Different Types of Gaps
There are some fundamental differences between the different types of gaps: – Common Gaps, Breakaway Gaps, Runaway Gaps, and Exhaustion Gaps.
In general, there is no major event that precedes this type of gap. Common gaps generally get filled relatively quickly (usually within a couple of days) when compared to other types of gaps. Common gaps are also known as "area gaps" or "trading gaps" and tend to be accompanied by normal average trading volume.
A breakaway gap occurs when the price gaps above a support or resistance area, like those established during a trading range. When the price breaks out of a well-established trading range via a gap, that is a breakaway gap. A breakaway gap could also occur out of another type of chart pattern, such as a triangle, wedge, cup and handle, rounded bottom or top, or head and shoulders pattern.
A runaway gap, typically seen on charts, occurs when trading activity skips sequential price points, usually driven by intense investor interest. In other words, there was no trading, defined as an exchange of ownership in a security, between the price point where the runaway gap began and where it ended.
An exhaustion gap is a technical signal marked by a break lower in prices (usually on a daily chart) that occurs after a rapid rise in a stock’s price over several weeks prior. This signal reflects a significant shift from buying to selling activity that usually coincides with falling demand for a stock. The implication of the signal is that an upward trend may be about to end soon.
Each type of gap has certain consequences for traders. For example, reversal or breakaway gaps are typically accompanied by a sharp rise in trading volume, while common and runaway gaps are not. Additionally, most gaps occur due to news, or an event such as earnings or an analyst’s upgrade/downgrade.
Common gaps happen more regularly and do not always need a reason to occur. Also, common gaps tend to get filled, whereas the other two gaps may signal a reversal or continuation of a trend.