Stock sell-offs are tough for long-term buy-and-hold investors to swallow. But they are a necessary and natural element of a functional marketplace. Laws of supply and demand and investor appetite fuel both uptrends and downtrends. As investors, it’s important to be aware of both of these phenomena so that we can plan accordingly.

Sell-offs also conjure up a special vocabulary of finance and investing words in the media that may be unfamiliar. Here is a cheat sheet of some of that lingo for the next time you find yourself in a downdraft.

Bond Yields

Rising bond yields are often blamed for a sell-off in stocks. As the Fed raises overnight lending rates and the yield, or return, on U.S. Treasury bond prices rise, it makes them more attractive to investors, large and small, who are looking for a safer and less volatile place to put their money than stocks.

Bond yields have been so low for so long, but they are starting to creep higher, drawing more money to them and away from stock. Aside from their effect on equities, though, there are various reasons why yields matter.

Buy the Dips

“Buy the dips” is trader slang for buying securities following a decline in prices, with the inkling that they have fallen for no apparent reason and should recover and keep rising in short order. It’s kind of like an unexpected sale at your favorite retailer, except you think the value of the things you buy on that sale day will get more valuable over time. It doesn’t always work out in the stock market, but people like saying it.

Capitulation

In a way, you can think of capitulation as ripping your computer off the desk, hurling it across the room, and throwing the mother of all tantrums. But really it’s another way of saying that you can’t bear the losses anymore in a particular security or market and you are going to cut your losses and sell. When markets or a particular stock sell off in heavy volume, many investors are tempted to abandon ship and sell their stakes as well, or capitulate. That only exacerbates the losses.

Circuit Breaker

A circuit breaker is like the breaker box in your basement. However, this one can shut off the juice at the major securities exchanges. Exchanges like the New York Stock Exchange (NYSE) and Nasdaq are sometimes compelled to flip the switch when there is too much of an imbalance between sell and buy orders.

With more and more trades being pushed through computer algorithms, those imbalances can be more frequent. They last anywhere from a few minutes to several hours, but it’s all in the name of smoothing out the order flow so markets can effectively match buyers and sellers. Trading is halted for 15 minutes when a Level 1 circuit breaker is triggered by a 7 percent decrease from the S&P 500’s closing price.

Correction

In general, a correction is a 10% decline of the price of a security, market, or index from its most recent high. A correction should not be confused with a crash or just a bad day in the markets; these happen fairly frequently and can last anywhere from a couple of days to several months. Stocks can be in a correction before the index they are included in falls into one.

Implied Volatility

Implied volatility refers to the estimated changes in a security’s price and is generally used when pricing options. In general, implied volatility increases when the market is bearish—when investors believe that the asset’s price will decline over time—and decreases when the market is bullish—when investors believe that the price will rise over time.

Inflation

Simply put, inflation is the rate at which the level of prices for goods and services rises, which can drive the purchasing power of a currency lower. The Federal Reserve pays particular attention to rising inflation when it sets overnight lending rates or the Federal Funds Rate, as it is known.

Since the Fed has been raising rates of late and plans to continue to do so a few more times, at least, it makes borrowing costs more expensive which can impede growth and thus profits. It may sound complicated, but you can understand the relationship between interest rates and stock markets.

Short Selling

Basically, short selling is a bet that a security or index will decline wherein a short seller borrows shares to offer them for sale. The idea is to sell such shares, of which the short seller has no ownership, at a higher price hoping that the price falls by the time the trade needs to be settled. That would enable the short seller to acquire shares at the lower price and deliver them to the buyer, making a profit equaling the difference in prices.

While, if done right, short selling can be profitable, it can amount to massive losses if the trade goes the other way. It is definitely not a strategy for beginners.

Tariff

Tariffs are increased duties that are levied by countries on goods they import to protect domestic industries. These levies make the imported goods less attractive to domestic consumers. But even as this is expected to be a shot in the arm for the domestic economy, it has other consequences like upsetting trade partners who may retaliate, setting off a trade war. When this occurs with a significant trading partner, the future of large corporations that conduct business in those countries comes under question, putting pressure on the stock markets.

Volatility

Technically speaking, volatility is a statistical measure of the dispersion, or returns, for a given security or market index. That’s another way of saying it’s a measurement of change (or beta) of a security or index against its normal patterns or benchmarks it is weighed against. In the stock market, one way of measuring volatility is to look at the Chicago Board of Options Volatility Index (VIX).

There are many other ways to measure volatility, depending on what you are looking at or measuring. If you think of it as a measurement of the rate of change that reflects uncertainty or risk, you are on the right track.

Whether you consider yourself a technical analyst or not, there are very few investing techniques that do not at least give a nod to the technical side of investing. Some investing styles use nothing but technical analysis, with their practitioners often claiming that they know nothing of stock fundamentals because all they need is in the charts. This segment of investing didn’t sprout from nothing. In this article, we will look at the men that pioneered the field of technical analysis. (See also: Technical Analysis.)

All Things Flow From Dow

Charles Dow occupies a huge place in the history of finance. He founded The Wall Street Journal – the benchmark by which all financial papers are measured – and, more importantly for our purpose, he created the Dow Jones Industrial Index. In doing so, Dow opened the door to technical analysis. Dow recorded the highs and lows of his average daily, weekly and monthly, correlating the patterns with the ebb and flow of the market. He would then write articles, always after the fact, pointing out how certain patterns explained and predicted previous market events.

However, Dow can’t take all – or even a majority of – the credit for the theory bearing his name. Dow Theory would have only acted as a hindsight confirmation of loose principals if it weren’t for William P. Hamilton. (See also: Giants of Finance: Charles Dow.)

First One Into the Water: William P. Hamilton

Dow Theory was a collection of market trends linked heavily to oceanic metaphors. The fundamental, long-term trend of four or more years was the tide of the market – either rising (bullish) or falling (bearish). This was followed by shorter-term waves that lasted between a week and a month. And, lastly, there were the splashes and tiny ripples of choppy water insignificant day-to-day fluctuations.

Hamilton used these measures in addition to a few rules – such as the railroad average and the industrial average confirming each other’s direction – to call bull and bear markets with laudable accuracy. Although he did call the 1929 crash too early (1927, 1928), he made a final appeal on Oct. 21, 1929, three days before the crash and mere weeks before his death at the age of 63.

The Practitioner: Robert Rhea

Robert Rhea took Dow Theory and turned it into a practical indicator for going long or short in the market. He literally wrote the book on the topic: “The Dow Theory” (1932). Rhea was successful at using the theory to call tops and bottoms – and able enough to profit from those calls. Very soon after mastering Dow Theory, Rhea didn’t need to trade on his knowledge. He only had to write it down.

After calling the market bottom in 1932 and a top in 1937, the fortunes made by subscribers to Rhea’s investment letter, Dow Theory Comments, brought in thousands more subscribers. As with Hamilton, however, Rhea’s life as a market prognosticator was short – he died in 1939. (See also: Dow Theory Tutorial.)

The Wizard: Edson Gould

Perhaps the most accurate forecaster with the longest track record, Edson Gould, was still making calls up to 1983 at the age of 81. Gould also made most of his money from writing newsletters rather than investing, selling subscriptions for $500 in 1930. He caught all of the major bull and bear market points, making several eerily accurate predictions, such as the Dow rising 400 points in a 20-year bull market, that the Dow would top 1,040 in 1973 and so on.

Gould used charts, market psychology and indicators including the Senti-Meter – the DJIA divided by the dividends per share of the companies. Gould was so good at his trade that he continued to make accurate calls from beyond the grave. Gould died in 1987, but in 1991, the Dow hit 3,000, as he’d predicted. At the time of his prediction in 1979, the Dow had yet to break 1,000.

[The work of these pioneers formed the foundation for a huge array of technical tools used by traders today to develop profitable trading strategies. To learn more, check out the Technical Analysis course on the Investopedia Academy, which includes interactive content and real-world examples to boost your trading skills.]

The Chartist: John Magee

John Magee wrote the bible of technical analysis, “Technical Analysis of Stock Trends” (1948). Magee was one of the first to trade solely on the stock price and its pattern on the historical charts. Magee charted everything: individual stocks, averages, trading volumes – basically anything that could be graphed. He then poured over these charts to identify broad patterns and specific shapes like weak triangles, flags, bodies, shoulders and so on.

Unfortunately for Magee, early on, he was better at looking after his clients than his own portfolio, often selling out in his own portfolio based on gut feelings despite strong hold signals from his charts. From his 40s to his death at 86, however, Magee was one of the most disciplined technical analysts around, refusing to even read a current newspaper lest it interfere with the signals of his charts. (For more, see: Analyzing Chart Patterns.)

The Omissions

There is bound to be some controversy with a list like this. Where is the infamous Jesse Livermore, the trader whose gut calls on price ticks are arguably the first successful technical trades? What about R. N. Elliott? What about WD Gann?

Well, Livermore did little in the area of theorizing and died broke. Elliott tweaked technical analysis with his own hypothesis, but his theories are difficult to test and even harder to trade – involving something of mysticism piled on top of numbers. Similarly, Gann’s lines, while seemingly useful in concept, are so sensitive to error that their practicality is questionable. Both of these men were purported to have made fortunes trading on their theories, but there is no solid record to back that up as there is for Livermore. Certainly no multi-million-dollar estate was left behind by either.

The Bottom Line

Dow, Hamilton, Rhea, Gould and Magee are on the main track of technical analysis, each carrying the theory and practice a little further. There are of course, many branching side paths that, while interesting detours, didn’t advance this main thrust. Every time an investor – fundamental or technical – talks about getting in low or picking entry and exit points, they are paying homage to these men and the techniques for which they laid the foundation. (See also: Introduction to Types of Trading: Technical Traders.)