A key to weathering – and potentially profiting from – a market correction is planning and implementation.
Street Lingo: How to Talk like a Trader
If you’re interested in active trading, some of your first questions probably won’t involve complex strategies but simple vocabulary. The peculiar idioms that describe market events can feel like a foreign language, so we’ve compiled a few words and phrases to help you translate from your own trading desk.
“The New York Stock Exchange was founded in 1817, so generations of Wall Street professionals have developed a language of their own,” said Brian Bachelier, Scottrade’s vice president of active trader strategy. “It can be understandably confusing to a newcomer, but helpful as you research your plan.”
Dead Cat Bounce
With apologies to feline fans everywhere, this phrase employs morbid humor to convey that even a dead cat will bounce when falling from great height. It refers to the occasional, brief bounces that can occur in a decline. The false rally provides temporary relief from the prevailing bearish trend, but changes nothing with respect to the true direction of the market.
All Boats Rise with the Tide
Individual stock price movement is tied to the overall market direction. A roaring bull market will tend to lift most stocks (boats) through aggressive buying in hopes of catching the wave. Traders will even buy underperforming stocks with the assumption of a price increase to match the greater trend.
The inspiration for countless visual gags in old cartoons, a whipsaw allows two people to cut lumber through fast, violent motion. For traders, this push-and-pull movement symbolizes an unforeseen change of direction in the stock price, usually after a trade is placed in hopes of sustained previous momentum.
Catch a Falling Knife
Imagine your favorite action hero performing this feat, demonstrating perfect timing on an extremely dangerous maneuver with spectacular results. Buying into embattled securities or industries can be rewarding if the trader manages to “catch the bottom” and hold through a rebound. However, the term implies near certainty of suffering damages by the attempt.
When stretched to its limit, a rubber band will snap back to its original state. A “rubber band effect” has several meanings across professional disciplines, but traders look for market deviations and plan for an eventual return to its average.
When traders short a stock, an unexpected rapid price increase could squeeze them out of their positions to limit losses and avoid margin calls. The stock price gains further upward momentum from short sellers covering their positions, usually at a loss, but quickly enough to prevent further damage.
Next Step: When you’re ready to flex your new vocabulary, visit our Quotes & Research page to investigate how these concepts unfold in the market. If you’re a Scottrade client, you can log in and go to the client Quotes & Research section.
The content provided is for informational and/or educational purposes only and should not be considered a recommendation or an endorsement of any specific investment strategy. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved your financial circumstances, and your investment objectives. You are fully responsible for your investment decisions.
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