Trading Vocabulary and Chart Patterns: An Introduction

By: Tanner Yarton

Finance, and more specifically trading, is riddled with jargon terms for various actions and events in the markets. Below I have compiled a list of vocabulary that I’ve found important or useful throughout my trading journey. In addition to vocab, I have also included clear visuals for some of our favorite technical setups.

Enjoy, and be sure to subscribe and follow my twitter @tannerstrades for more.

Shares:

Common stock: A share of a corporation

Long: Taking a position on the buy side (expected direction: up)

Short: Taking a position by holding shares short (expected direction: down)

Option type:

Call: An option in which you are able to buy shares of a stock at a certain price as long as the underlying stock is above the strike by expiration

Put: An option that provides the right to sell shares of an underlying stock at a certain price within a time period.

Expiration date: The final selling day before an options contract becomes worthless or executed.

Strike price, or exercise price: The price at which an options contract would exercise on expiration day (what price you would buy or sell shares)

Premium: The price per share paid to hold an option. A single option is worth 100 shares, so if the contract is $0.75, the price is $75.00 ($.75*100=$75.00)

Contract name: Easily seen on TD Ameritrades Think or Swim, options contract names appear with the ticker, strike price and expiration. This is a great tool to look back on after a trade

Last: The most recent price paid for the contract, also seen as ‘mark’

Bid: The price you’re willing to pay for a contract.

Ask: The price a seller is willing to accept for the option. if you’re selling contracts, its in your best interest to get close to the ask

Change: Nominal value change in the option from the previous day to this one, can be displayed in $ or %.

Volume: Total contracts traded on a given day

Open interest: The number of options contracts currently in the market (being asked or bidded on).

Volatility: Volatility is the change in a security throughout a given time period. If a stock has an average daily range of 3%, and the stock is up 5%, it’s considered a volatile day.

Implied Volatility: Implied volatility is the expected fluctuation of a security in a period. It feels a bid reversed, but higher IV contracts will move less than lower IV contracts, since the market is pricing in large underlying moves with higher contract IV.

This is why breakouts have the greatest R/R, IV has been hampered by flat price action, and a breakout in price kickstarts the IV, thus increasing the price of the contracts.

Candles and Patterns:

Price patterns are the foundation of technical analysis and are critical in the success of trading price action. There are many patterns, my favorites are outlined below.

Stock Chart: A visual representation of price action for an individual stock, index, currency and more.

Flag: A flag can be seen sloping up, down or sideways. typically, an upsloping flag you want to see on a downtrending stock, and vice versa. Flags are a sign of relief in a rally. Be careful of upsloping flags in uptrends, as a little slip can pull back a long way, same goes for downsloping flags in a descending trend.

Wedge: Wedges are more traditional triangle shaped consolidations. In my opinion, to properly trade a wedge its wise for a trader to wait for confirmation on either side, as the tightening trends of a pennant can be quite powerful.

Ascending Triangle: Ascending triangles are similar to wedges, except pointed upwards. These triangles are bearish.

Descending triangle: the same as an ascending triangle, except flipped.

Cup and Handle: A cup and handle is a top, a long curved bottom and then a wedge or flag on the other side. This can be seen in bearish or bullish charts.

Head and Shoulders: Another pattern that can be see right side up, or inverse. A head and shoulders is exactly as described, 2 shorter peaks outside of a single tall peak.

Something that is often misunderstood about head and shoulders patterns is the need for a ‘neckline’. A neckline is some kind of support or resistance where a base is formed to validate the pattern. Without a solid neckline, as seen below, the pattern is invalid.

Double top/Bottom: The double top and bottom setup is incredibly powerful for quick trend validation. seen below:

Thats all for vocab and chart patterns today guys. Feel free to subscribe for more education content.

Hope this helps!

Tanner