Random walk theory An efficient market hypothesis, stating that prices move randomly versus their intrinsic value. Therefore, no one can forecast market activity based on the available information.
Rate of change A momentum oscillator in which the oldest closing price is divided into the most recent one.
Ratio call spread A compound option strategy that consists of a number of long calls with lower strike prices and a larger number of short calls with a higher strike price. The maximum profit is realized when the currency price is at the higher strike price. This combination has two break-even points. The downside break-even point consists of the sum of the lower strike price and the debit, divided by the number of long calls. The upside break-even point consists of the sum of the higher strike price and the maximum profit potential, divided by the number of naked calls. The maximum loss is twofold. The maximum downside risk is the net premium. The upside risk is unlimited.
Ratio put spread A compound option strategy that consists of a number of long puts with higher strike prices and a larger number of short puts with a lower strike price. The maximum profit is realized when the currency price is at the lower strike price. This combination has two break-even points. The downside break-even point consists of the difference between the lower strike price and the maximum profit potential, divided by the number of naked puts. The upside break-even point consists of the difference between the higher strike price and the debit, divided by the number of long calls. The maximum loss is twofold. The maximum downside risk is unlimited. The upside risk is the net premium.
Ratio spread A compound option strategy in which the number of long options is different from the number of short options.
Rectangle A continuation formation that resembles the outline of a parallelogram. The price objective is the height of the rectangle.
Regulation Q Regulation passed by the Federal Reserve that prohibited payment of interest on demand deposits and prescribed maximum rates banks could pay on time deposits. These ceilings had been imposed since 1933 by the U.S. government. The regulation is not currently in effect.
Relative Strength Index An oscillator that measures the relative changes between the higher and lower closing prices. The RSI is plotted on a 0 to 100 scale. The 70 and 30 values are used as warning signals, whereas values above 85 indicate an overbought condition (selling signal), and values under 15 suggest an oversold condition (buying signal).
Replacement risk A form of credit risk that holds that counterparties of failed banks will find their books unbalanced to the extent of their exposure to the insolvent party. In order to rebalance their books, these banks must enter new transactions.
Repurchase agreements (repos) Daily operations executed by the Federal Reserve. A repurchase agreement between the Federal Reserve and a government securities dealer consists of the Fed's purchasing a security for immediate delivery, with the agreement to sell the same security back at the same price at a predetermined date in the future (usually within 15 days). This arrangement amounts to a temporary injection of reserves in the banking system.
Resistance level The peaks representing the price level at which supply exceeds demand.
Reversal patterns Patterns that occur at the end of the trend, signaling the trend change.
Rollover (tomorrow/next or torn/next) swap A swap designed for spot trades' maintenance. It was designed to change the old spot date to the current spot date (on the front office's side) and to enable the bank to make the payments to the counterparty (on the back office's side).
Rounded bottom A bullish reversal pattern that consists of a very slow and gradual change in the direction of the market.
Rounded top (saucer) A bearish reversal pattern that consists of a very slow and gradual change in the direction of the market.
Runaway or measurement gap A price gap that occurs within solid trends. It is also called a measurement gap because it tends to occur about midway through the life of a trend.