Glossary of Terms
Use our glossary to find market-related terms and rules that you need to be familiar with when you plan to participate in extended-hours trading. You’ll also find definitions of the technical analysis terms
that MidnightTrader uses in its Technical Breakout stories published throughout the trading day.
The ask, or offer, is the price at which a market maker will the sell a stock.
After-hours trading encompasses any securities transaction that occurs after the 4:00 p.m. ET regular-session close and generally extending until 8:00 p.m. ET.
The bid is the price at which a market maker will buy a stock.
Designated order turnaround (DOT)
New York Stock Exchange system introduced in 1976 to electronically route smaller orders.
Direct access brokerage
Offers traders the ability to direct orders to a specific market, exchange or ECN.
Electronic communications networks (ECNs)
Alternative trading systems that bring buyers and sellers together for electronic execution of trades.
ECN display alternative
Allows an ECN to voluntarily act as an intermediary in communicating to the public quotation system the best price and size of orders for each security that is entered into the ECN by a specialist or market maker.
Extended-hours trading encompasses any securities transaction that occurs outside the regular trading session, universally accepted as the period between 9:30 a.m. and 4:00 p.m. ET.
Firm Quote Rule
Generally obligates OTC market makers to execute any order to buy or sell a subject security, other than an odd-lot order, presented to it by another broker or dealer, or any other person a broker or dealer customarily deals. The execution should be at a price at least as favorable to the buyer or seller as the broker's or dealer's published bid or offer.
Intermarket Trading System (ITS)
An electronic order routing system that facilitates intermarket trading of exchange-listed securities by allowing a broker-dealer in one market center to send an order to another market center trading the same security at a better price.
An investor names a specific price at which he will buy or sell a certain number of shares. *Due to liquidity constraints and the resulting volatility in the after-hours market, MidnightTrader and most institutions recommend using limit orders when trading after hours.
Limit Order Display Rule
Requires an over-the-counter market maker to publish immediately a bid or offer that reflects the price and full size of each customer limit order that improves the bid or offer of the OTC market maker. The quote should reflect the full size of the customer limit order that is priced equal to the bid or offer of the OTC market maker or the national best bid or offer. The Limit Order Display Rule applies to both the regular and after-hours sessions.
The Manning Rule prohibits an NASD member firm that is holding a customer limit order from trading for that member's market making proprietary account at a price that would satisfy the customer's limit order without executing that customer limit order. The rule is applicable in the extended-hours session.
Market makers are independent dealers who actively compete for investor orders by displaying quotations representing their buy and sell interest—plus customer limit orders—in Nasdaq-listed stocks. There are more than 500 market-making firms providing quotes on Nasdaq stocks.
An investor enters an order to buy or sell stock at the current market price.
Requires market makers and specialists to reflect in their quote the price of any orders they placed in an ECN if the price was better than their own public quotation.
Pre-Market trading encompasses any securities transaction that occurs prior to the 9:30 a.m. ET regular-session open, generally accepted as the time frame running from 7 a.m. to 9:30 a.m. Eastern time.
Adopted by the SEC to establish a regulatory framework for alternative trading systems (ATSs) and to more fully integrate them into the national market system. Under Regulation ATS, alternative trading systems can choose to be a market participant and register as a broker-dealer, or be a separate market and register as an exchange.
Technical Analysis Terms
A triangle with a flat upper border and rising lower border. Generally a bullish sign but not always.
A move through the lower border of a technical pattern. More reliable if accompanied by a rise in volume.
A move through the upper border of a technical pattern. More reliable if accompanied by a rise in volume.
Any technical pattern (flag, triangle, etc) or region where the market seems to be resting.
A triangle with a declining upper border and flat lower border. Generally a bearish sign but not always.
A single candle that opens and closes at the same price and is the ultimate form of a spinning top. Usually a sign of indecision and turning point.
A downtrend line connects a series of lower highs, and an upside breakout occurs when the charts penetrates the downtrend line and forms a new high above the last high in the former downtrend line.
Evening doji star
Evening star where the middle candle is a doji. Stronger bearish signal.
Three-candle pattern comprised of a strong up day, an indecision day at new highs and then a strong down day closing below the middle of the first day (a tall white candle, a spinning top and then a tall black candle).
Exponential moving average
Exponential moving average is a form of weighted average in which each older price is given less and less importance in benefit of more recent prices during the specific time frame of the average.
A corrective move against the current trend that is marked by parallel lines. Has the appearance of a flag on a flag pole and can occur in a rising or falling market. In the latter, the flag pole is upside down.
A day with a range completely contained in the previous day’s range.
A key reversal buy signal is generated when during a current period–price the low is below the previous period low and the close is above the previous period close. On a daily chart that would mean that in a current day a stock had a low that was below the previous day low, but closed higher than in the previous day. A key reversal sell signal would take place when the reverse takes place. In other words, when during a current period price the low was above the previous period low, but the close is below the previous period close. However, we should point out that this indicator gives a large number of false signals, and it's most reliable when the key reversals are accompanied by very large volume. An outside-day reversal that gaps to a fresh high (or low) and then closes below (or above) the previous day’s low (or high).
Like in physics, a market in motion tends to stay in motion unless it goes too far too fast. Momentum indicators signal overbought or oversold when they move to extreme levels.
Money flow (MF)
Money flow is an indicator that attempts to measure the amount of money buying a stock vs. the amount of money selling a stock. MF is calculated daily by multiplying the number of shares traded in the exchange by the change in closing price. Therefore, if prices close higher, money flow is a positive number. If prices close lower, money flow is a negative number. The running total is calculated by adding or subtracting the current result from the previous total. Technical analysts look at the direction of the MF in order to trade, not the actual dollar amount. The direction of the MF is what confirms underlying strength of weakness of a price trend. In addition, this indicator can also help to find a top or a bottom in a stock. If MF is declining while a stock is rising, it suggests that money is leaving the stock, in other words, that less people is willing to buy at the current high prices. On the other hand, if MF is rising while a stock is falling, it might indicate that a bottom is near, since that suggests that more people are willing to pay at the lower prices and money is entering the stock.
Morning doji star
Morning star where the middle candle is a doji. Stronger bullish signal.
Three-candle pattern comprised of a strong down day, an indecision day at new lows and then a strong down up closing above the middle of the first day (a tall black candle, a spinning top and then a tall white candle).
Moving average is the average price of a security over the previous days or years. A 50-day moving average is the average price of a security over the past 50 days. This gives an indication of a security's price trend. The longer the average (200 days vs. 50 days) the more long-term is the trend being approximated. Moving averages work best in trending markets since it is a useful indicator to confirm changes in trend. However, moving averages give as many false signals as correct ones, in particular when using a short-term moving average. Technical analysts use the 200-day moving average to determine with more accuracy the direction of a stock or the market. Comparing the 200-day average with the 50-day can also be useful to gain insight into the direction of a stock. When the short-term average moves above the long-term average, it's considered a buy signal. When the short-term moving average moves below the long-term average, it's considered a selling signal.
Moving average convergence/divergence (MACD)
This technical indicator plots the difference between a fast exponential moving average and a slow exponential moving average. When markets are rising, the fast moving average will rise faster than the slow one, and during falling markets the slow moving average will rise faster than the fast one. This indicator also gives buying and selling signals. When the fast moving average crosses the slow moving average from below, it indicates a buying signal. When the fast moving average crosses the line from above, it indicates a selling signal.
On balance volume (OBV)
On balance volume, a popular indicator developed by Joseph Granville, attempts to gauge the buying and selling pressure on a security by measuring the volume of trading accompanying any particular price bar. It keeps a running total of volume and tracks whether volume is flowing into or out of a security. If a security closes higher than the previous close, all the volume for the session is considered up-volume. If the opposite happens and the security closes lower, all the volume is considered down-volume. Like Money Flow, OBV does not care how much a stock goes up or down, but whether it's up or down for the day. Therefore, the direction of the OBV line is what analysts watch, not the actual volume level. This indicator can help confirm underlying strength or weakness of a price trend, and can also help find tops and bottoms of a stock. If OBV moves down while the price of a security moves up, it suggests that the buying pressure is weakening, and that less investors are willing to pay at the current high prices. If OBV moves up while the price of a security moves down, it suggests that selling pressure is weakening, and thus that more people are willing to buy at current low levels. For this tool to be useful reliable volume data is needed, thus on an intraday basis this might not be applicable.
A day that makes a fresh new high (or low) and closes below (or above) the previous day’s low (or high). An outside-day reversal makes a higher (or lower) high (or low) and closes below (or above the previous day’s close.
A day that trades both higher and lower than the previous day.
A condition where a rising market has gone too far too fast. When this happens and like a rubber band, the market usually snaps back a bit.
Resistance. sellers emerge to flood the market with stock.
A condition where a falling market has gone too far too fast. When this happens and like a rubber band, the market usually snaps back a bit.
Another name for a triangle but sometimes used when the triangle is long but not tall.
A trading range with clear upper and lower borders.
Relative Strength Index (RSI)
This overbought/oversold technical indicator developed by Welles Wilder helps investors gauge the current strength of a stock's price relative to its past performance. The RSI underlying assumption is that higher closes indicate strong upward price movement, while lower closes indicate weaker prices. RIS is an index of the difference between the sum of all up closes and the sum of all down closes during a short-time period, usually 14 trading periods. The usefulness of this indicator is based on the premise that the RSI will usually top out or bottom out before the actual market top or bottom, giving a signal that a reversal or at least a significant reaction in stock price is imminent. When using a 14-day RSI, an overbought signal would be given when the RSI reaches 70. The oversold signal would be when the index is at 30. In a 9-day RSI the overbought conditions would be at the 80 level, and the oversold conditions when the RSI would reach 20. However, it is not unusual for the RSI to remain in overbought or oversold territory for days or even weeks before a trend ends. Furthermore, it's entirely possible for a stock to rally while the RSI is at 70 or higher, or fall sharply when the RSI at 30 or lower.
The resistance level of a stock is the price level where the necessary supply of a stock meets the demand for the stock, thus halting an uptrend in the price of a stock or even reversing the trend. In short, a resistance level constitutes a concentration of supply.
A candle that opens and closes in a tight range. Usually indicates indecision in the market and possibly a problem with the current trend.
The support level of a stock is the price level where the necessary demand for the stock meets the selling pressure, thus stopping a downtrend in the price of a stock, or even reversing the trend. In short, a support level constitutes a concentration of demand.
Support and resistance
The support and resistance levels are used to estimate the potential duration of a trend or where a stock might run into problems. When a stock "penetrates" a support or resistance level it suggests a potential change in investor anticipation and a change in the demand/supply lines. Analyzing support and resistance helps investors identify when a move in a stock is likely to accelerate or decelerate; it helps determine when to buy or sell, determine at what level a significant change in demand or supply might occur, determine the magnitude or strength of a potential move in direction and help assert the duration of a trend.
A trendline and a parallel line containing the market as it moves.
A market or issue that is not rising, falling or consolidating. Movements appear random.
A technical pattern where rallies and declines get smaller. Also called a coil and indicates a pause before the next move. Generally a continuation indicator for the trend leading into it.
Trend lines are used to determine the direction of the market or a stock. Trend lines can extend for long periods of time or can be of a short-term nature. A breakout through a trend line can be a buy or sell signal. The more times the market touches the trend line, the more valid the line becomes—and the more valid a break of that line becomes as an indicator that the trend has changed.
An uptrend line connects a series of higher lows, and a downside breakout occurs when the chart penetrates the uptrend line and forms a new low that is below the last low in the former uptrend line.