Definitions and Terminology

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A

ABSR Trend Gauge - A modified oscillator combining a trend indicator and a trend strength indicator that measures a trends direction (negative = down, positive = up) and the velocity of the price action. Levels below -30 indicate a potentially over sold market and possible up reversal. Levels above 30 represent a potentially overbought market and potential down reversal.

Autocorrelation - The possible correlation of the returns of one time series with another time series. Positive autocorrelation is often associated with trending markets while negative autocorrelation can imply markets with price reversal tendencies. Autocorrelation can also be used to gauge the presence of seasonality or cyclical price behavior.

Annualized Standard Deviation - Standard Deviation Multiplied by Square Root of Return Time Periods in a Year.  (Ex. Monthly: ANN STD DEV = Standard Deviation of Monthly ROR X Square Root of 12)

B

Backwardation (Normal Backwardation) - A term describing the shape or term structure of the futures/forward curve. When the slope of the forward curve is negative or downward sloping ie futures prices are below cash/spot prices, the market is said to be in backwardation. For consistency, ABSR measures backwardation and contango using the nearest futures contract to expiration as the estimated spot/cash price.

Basis - A spread value between the current cash/spot price and the nearest to expiration futures contract. Calculated as Basis = Cash Price - Futures Price. Basis is negative when markets are in contango and positive when in backwardation.

Benchmarking - The process of selecting an index or other source of returns as a standard for comparison during performance analysis.

Bottom Quartile - The price point at which 25% of observed prices are below and 75% of observed prices are above. Used as a measure of richness or cheapness from a historical standpoint.

C

Cash Price - The price of a good for immediate delivery. Also called the spot or current price.

Cattle On Feed - USDA (NASS):  Steers and heifers being fed a ration of grain, silage, hay and/or protein supplement for slaughter market that are expected to produce a carcass that will grade select or better. It excludes cattle being "backgrounded only" for later sale as feeders or later placement in another feedlot.

Collateral Yield - Interest earned from the excess collateral above that required for margin purposes.

Compound Annual Return - Rate of return produced if compounded at each return period. (Ending VAMI / Beginning VAMI) ^ (12 / Number of Months)

Contango - A term describing the shape or term structure of the futures/forward curve. When the slope of the forward curve is positive or upward sloping ie futures prices are above cash/spot prices, the market is said to be in contango. For consistency, ABSR measures backwardation and contango using the nearest futures contract to expiration as the estimated spot/cash price.

Contract (Month Symbol) - Refers to the listing months available for an individual commodity future. January (F), February (G), March (H), April (J), May (K), June (M), July (N), August (Q), September (U), October (V), November (X), and December (Z).

Contracts - A term used to describe a specific number of exchange traded futures.

Convergence - The process by which the future or forward contract converges to the spot/cash price over time. Convergence can be measured by the distance the basis is from zero, as (barring transaction costs) the cash and futures price must be equal at expiration.

Convenience Yield - the economic benefit received for holding a physical commodity in current inventory.

Cost of Carry - For commodity futures contracts, the cost of carry represents the financial difference between maintaining a position in the cash market and maintaining a position in the futures. Cost of carry generally refers to any interest, storage, insurance, costs as well as any convenience yield. Futures prices based on the cost of carry model are calculated as: Futures Price = Spot Price + Cost of Carry.

D

Deferred Contract - A contract month for a future or forward that expires after the nearest or nearby contract. Also referred to as a distant contract.

Divergence - In technical analysis, divergence is a reference to a change in the pattern of an established trend. When the momentum of a trend begins to show signs of weakness ie lower highs in a bull market or higher lows in a bear market when call this negative or positive divergence respectfully.

E

Excess Return (ER) - Returns generated exclusively from futures price changes.

Exchange-for-Physical (EFP) - Offsetting a position in futures by exchanging the physical commodity for cash with an individual who has the opposite position in the futures contract. The price of the offsetting position is negotiated privately (off exchange).

Expiration - (Futures) Set by the exchange the contract is listed on, it is the last trading date (LTD) for the contract.

Exponential Moving Average (EMA) - An EMA is a moving average that has been smoothed by weighting. Exponential smoothing increases the responsiveness of new data while decreasing the volatility of the average due to older data dropping out of the average. EMAs are considered the superior method to use for technical analysis.

F

Forward Curve - A reference to the shape of futures prices or yields with regard to interest rates. For commodity futures, the forward curve generally represents the additional "cost of carry" over a specified time.

Futures Contracts - Similar to a forward contract, a futures contract is an exchange traded agreement for the purchase or sell of a commodity at a standardized contract size, delivery grade, and delivery date. Unlike forwards, futures are traded via centralized marketplace (exchange) and backed by a clearing organization.

G

Gann Angles - Developed by W.D. Gann, Gann Angles are geometric angles used to measure support and resistance within a trend as well as the probability of a trend reversal. Specific combinations of time and price units are assigned angle degrees used to draw support and resistance lines.

Growth Index - The ABSR growth index is calculated by adding historically observed rates of changes to an initial index value of 100. The ABSR Growth Index also includes an interest rate cost of carry adjustment to offset general inflation over the marketing year. Growth indices are used to measure and visually represent the potential seasonality of an investment.

H

Hedging - A market transaction used as a substitute for an anticipated future cash transaction. It is primarily a means to mitigate price risk.

Hook - A market indicator that describes a trap or hook for trend followers. A Hook occurs when a price breaks out above a resistance level or below a support level and then immediately reverses the move. The further the market reverses from the breakout point, the more powerful the likely continuation of the reversal. aka Springboard

I

Implied Volatility - The standard deviation that is calculated or "implied" from the market price of an  option.

Initial Margin - Set by the exchange, initial margin is the good faith collateral deposit made at the initiation of a futures position.

J

Japanese Candlestick Charts - A bar chart method that emphasizes the range between the opening and closing prices (body) using opposing colors to highlight positive and negative movement. Candlestick charts are a popular method for viewing short term market sentiment.

K

Kurtosis - An indicator of the peak and tails of a distribution. Computed as the 4th central moment divided by the standard deviation of the variable raised to the fourth power. Excess Kurtosis is (Kurtosis - 3), 3 = the kurtosis of a normal distribution.

L

Liquidity - The amount of excess trading capital (cash and cash equivalents) available for new positions. The level of trading activity that occurs in a specific investment vehicle that effects the ease of entry and exit into that investment. Liquidity can impact slippage, bid/ask spreads, and the depth of the market.

Long Position - In futures, a long position is established by buying a futures contract. Also referred to as going long. Long positions are initiated when the market participant believes the price of the commodity will rise in value.

M

Maintenance Margin - Set by the exchange, maintenance margin is generally 75%-80% of the initial margin. If the collateral held for a position falls below the maintenance margin level, a margin call is required.

Marketings - USDA (NASS): Steers and heifers shipped out of feedlots to a slaughter market.

Marketing Weight - The United States Department of Agriculture's observed percentage of a commodity crop being marketed during a specific calendar month.

Marketing Year - ABSR observes the United States Department of Agriculture's Local Marketing Year (LMY) calendar for each individual commodity.

Mean - The arithmetic average of a set of values. Commonly known as the average.

Mean Return - The average return of a series of returns.

Median - The halfway point of a list of values. It represents the value where half of the observations are below and half are above.

Moving Average (Simple, SMA, MA) - The average of a time series of values that "moves" or changes with each new observation. Moving averages are often used to determine the trend in a data series.

N

Nearest or Nearby Contract - The contract month for a futures that is nearest to the cash contract and next to expire or mature.

O

Open Interest - The number of futures contracts obligated for delivery before the contract expiration.

Option - The right but not the obligation to buy (call) or sell (put) an underlying security at a specific price on or before (American Style) an agreed upon date. The buyer (long) of the option pays a premium to the seller (short) for the specified call or put.

Oscillators - A technical market indicator that measures the velocity or speed at which a market is moving in a single direction (up or down). Oscillators generally move between to fixed levels (generally 0 to 100) with the midpoint being a neutral level. Levels in the top and bottom quartile represent a market that may have moved too far to fast and are overbought or oversold.

P

Peak/Trough Price Occurrences - ABSR peak/trough price occurrences represents the historical percentage of observations market prices were in the top 25% / bottom 25% during a specific period.

Placements - USDA (NASS):  Steers and heifers put into a feedlot, fed a ration which will produce a carcass that will grade select or better, and are intended for the slaughter market.

Q

Qstick - A price momentum oscillator focusing on the difference between the opening and closing prices of a bar. It is calculated as the simple moving average (SMA) of the close minus the open.

R

Realized Volatility - the actual observed volatility (standard deviation) of returns of an asset over a specified period of time.

Roll - The act of moving a long or short position in futures from one contract month to another contract month. It can also refer to the period of time whereby the nearby contract is near expiration and market participants are extending their positions into the next nearest contract. During the roll period the open interest of the near contract will decline ultimately falling below the next nearest contract.

RSI - The Relative Strength Index  was developed by J. Welles Wilder, Jr. and is a popular price momentum indicator. Despite its name, it does not make any comparisons to another commodity or index, but instead attempts to quantify price momentum by analyzing changes in closing price.  RSI is calculated as RSI = 100 - (100/ (1+RS)) where RS is the ratio of the exponentially smoothed moving average gains divided by losses for n periods (generally 14 periods).

S

Seasonality - Many economic indicators and commodity prices exhibit seasonal price behavior based on known fundamental factors. This anticipated price behavior is commonly referred to as seasonality and in the case of commodities is often reflected in the prices of forward or future contracts.

Sharpe Ratio - A popular measure of risk adjusted returns developed by William F. Sharpe. It is the average return earned in excess of the risk free rate per unit of volatility.  Computed as (ROR - Risk Free Rate)/ Standard Deviation of Returns.

Short Position - In futures, a short position is established by selling a futures contract. Also referred to as going short or a short sell. Short positions are initiated when the market participant believes the price of the commodity will fall in value.

Skewness - used to describe the shape (asymmetry) of a return distribution. Computed as the 3rd central moment divided by the standard deviation of the variable cubed.

Spot Price - The price of a good for immediate delivery. Also called the cash or current price.

Standard Deviation - A measure of variance of a set of random numbers. Computed as the square root of variance. Often referred to as volatility.

Stochastic Oscillator - Developed by George Lane the Stochastic Oscillator is a short term price velocity indicator. It consists of two smoothed indicators %K (fast) and %D (slow). The indicator is widely used as a reference for overbought (%K & %D above 75) and oversold (%K & %D below 25) price conditions.

T

Top Quartile - The price point at which 75% of observed prices are below and 25% of observed prices are above. Used as a measure of richness or cheapness from a historical standpoint.

Total Return (TR) - The excess return (ER) plus the collateral return or yield.

U

Underlying - Generally referring to the futures contract that a derivative (usually call or put options) is tied to.

V

Value Added Monthly Index (VAMI) - The growth of an average investment in (Generally shown as $1,000). Assumes reinvestment of all profits and interest received. Formula: (1 + Current ROR) X (Previous  Monthly VAMI).

Variance - A measure of dispersion for a random variable or set of numbers. Computed as the average of the square root of each deviation from the mean of the set of numbers. (The 2nd central moment of a return distribution).

Volatility - An investment term that is synonymous with standard deviation of returns.

Volume - The total number expressed in contracts of transactions between a buyer and a seller of a futures contract in a given time period (Daily, Weekly, Yearly, etc).

W

Weighted Futures Price (WFP) - An ABSR calculation used to measure the average price of the futures for a one year cycle of contract months putting greater emphasis on the contracts nearest to expiration. Example: Corn, Jan 8, 2016.  Mar16 = 357.00, May16 = 362.75, Jul16 369.00, Sep16 = 374.75, Dec16 = 383.00. WFP =((357.00 * 5) + (362.75 * 4) + (369.00 * 3) + (374.75 * 2) + (383.00))/15 = 365.03.

X

Y

Z

 

Recommended References:

"New Concepts in Technical Trading Systems", 1978, J. Welles Wilder, Jr.

"The Encyclopedia of Technical Market Indicators", 2003, Robert W. Colby, CMT

"Futures, Options, & Swaps", Third Edition 1999, Robert W. Kolb

"Trend Following", 2009, Michael W. Covel

"The Complete Turtle Trader", 2007, Michael W. Covel

"Reminiscences of a Stock Operator", 1923, Edwin Lefevre

"Street Smarts", 1995, Laurence A. Connors and Linda Bradford Raschke

"Technical Analysis of the Futures Markets", 1986, John J. Murphy

"Market Wizards", 1989, Jack D. Schwager

"Options, Futures, and Other Derivatives", 1988, John C. Hull