Trading Glossary
A-Z reference of trading terms and definitions
ATR
Average True Range - A volatility indicator that measures the average range between high and low prices over a period. Used for position sizing and setting stop-losses.
Backtest
Testing a trading strategy on historical data to see how it would have performed. Essential for validating strategies before live trading.
Bear Market
A market condition where prices are falling or expected to fall. Generally defined as a 20% or more decline from recent highs.
Bid-Ask Spread
The difference between the highest price a buyer will pay (bid) and the lowest price a seller will accept (ask). Represents a transaction cost.
Bollinger Bands
A technical indicator with three lines: a moving average in the middle, and two bands above and below based on standard deviations. Shows volatility and potential reversal points.
Breakout
When price moves above a resistance level or below a support level with increased volume. Often signals the start of a new trend.
Bull Market
A market condition where prices are rising or expected to rise. Characterized by investor optimism and buying activity.
Candlestick
A type of price chart that shows the open, high, low, and close prices for a period. Green/white candles are bullish, red/black are bearish.
Consolidation
A period when price moves sideways in a range, often after a significant move. Usually precedes a breakout in either direction.
Correlation
A statistical measure of how two securities move in relation to each other. Range from -1 (opposite) to +1 (identical movement).
Day Trading
Buying and selling securities within the same trading day. Positions are not held overnight.
Divergence
When price and an indicator (like RSI) move in opposite directions. Often signals a potential trend reversal.
Drawdown
The decline from a peak to a trough in portfolio value. Max drawdown shows the worst historical loss from peak to bottom.
EMA
Exponential Moving Average - A moving average that gives more weight to recent prices. More responsive to new information than SMA.
Entry Point
The price at which a trader enters a position. Determined by strategy signals, support/resistance levels, or other criteria.
Exit Point
The price at which a trader closes a position. Can be a profit target, stop-loss, or signal-based exit.
FOMO
Fear Of Missing Out - The anxiety of missing a profitable trade. Often leads to poor decisions like chasing prices.
Gap
A price gap occurs when a stock opens significantly higher or lower than its previous close. Common after earnings or major news.
Golden Cross
A bullish signal when a short-term moving average crosses above a long-term moving average (e.g., 50-day crosses above 200-day).
Indicator
A mathematical calculation based on price, volume, or other data used to forecast market direction. Examples: RSI, MACD, Moving Averages.
Limit Order
An order to buy or sell at a specific price or better. Guarantees price but not execution.
Liquidity
How easily a security can be bought or sold without affecting its price. High-volume stocks have more liquidity.
Long Position
Buying a security with the expectation that it will rise in value. "Going long" = buying.
MACD
Moving Average Convergence Divergence - A momentum indicator showing the relationship between two moving averages. Used for trend and momentum signals.
Market Order
An order to buy or sell immediately at the best available price. Guarantees execution but not price.
Max Drawdown
The maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained. Key risk metric.
Mean Reversion
The theory that prices tend to return to their average over time. Basis for strategies like RSI and Bollinger Bands.
Momentum
The rate of acceleration of a price trend. Strong momentum means price is moving quickly in one direction.
Moving Average
A calculation to analyze data points by creating averages of subsets. Smooths out price data to identify trends.
Overbought
A condition where a security is believed to have risen too far, too fast. RSI above 70 is often considered overbought.
Oversold
A condition where a security is believed to have fallen too far, too fast. RSI below 30 is often considered oversold.
P&L
Profit and Loss - The total gain or loss from trading activities. Can be realized (closed positions) or unrealized (open positions).
Paper Trading
Simulated trading with fake money to practice strategies without financial risk. Same as virtual trading.
Position
The amount of a security owned (long) or owed (short). "Opening a position" = entering a trade.
Position Sizing
Determining how much capital to allocate to each trade. Critical for risk management.
Price Action
The movement of a security's price plotted over time. The foundation of all technical analysis.
Profit Factor
Gross profit divided by gross loss. A profit factor above 1.0 indicates a profitable strategy.
Resistance
A price level where selling pressure tends to prevent further price increases. The "ceiling" for price.
Risk/Reward Ratio
The potential profit of a trade compared to its potential loss. A 2:1 ratio means targeting $2 profit for every $1 risked.
RSI
Relative Strength Index - A momentum oscillator that measures the speed and magnitude of price changes. Ranges from 0 to 100.
Scalping
A trading strategy that profits from small price changes. Scalpers make many trades for small gains.
Sharpe Ratio
A measure of risk-adjusted return. Higher values indicate better return per unit of risk taken.
Short Position
Selling a borrowed security with the expectation it will fall in value, to buy it back cheaper. "Going short" = betting on decline.
Slippage
The difference between expected trade price and the actual execution price. More common in fast-moving or illiquid markets.
SMA
Simple Moving Average - The arithmetic mean of prices over a specific period. Each price point is weighted equally.
Stop-Loss
An order to sell a security when it reaches a certain price to limit loss. Essential risk management tool.
Support
A price level where buying pressure tends to prevent further price decreases. The "floor" for price.
Swing Trading
Trading strategy that holds positions for several days to weeks. Captures medium-term price swings.
Take Profit
An order to close a position at a predetermined profit level. Locks in gains automatically.
Technical Analysis
Analyzing securities by studying historical price patterns, volume, and indicators. Based on the idea that history tends to repeat.
Timeframe
The period each bar or candle represents on a chart (1 minute, 1 hour, 1 day, etc.). Different strategies work on different timeframes.
Trailing Stop
A stop-loss order that moves with the price, maintaining a set distance or percentage below the highest price reached.
Trend
The general direction of price movement. Uptrend = higher highs and higher lows. Downtrend = lower highs and lower lows.
Volatility
The degree of variation in a security's price over time. Higher volatility = bigger price swings = more risk and opportunity.
Volume
The number of shares or contracts traded in a security during a period. High volume confirms price moves.
VWAP
Volume Weighted Average Price - The average price a stock has traded at throughout the day, based on both volume and price.
Walk-Forward Analysis
A backtesting method that repeatedly optimizes on past data and tests on future data. Most realistic validation method.
Whipsaw
A rapid price movement in one direction followed by a sharp reversal. Causes losses for trend-following strategies.
Win Rate
The percentage of trades that are profitable. A 60% win rate means 6 out of 10 trades make money.
Ready to Apply What You've Learned?
Start paper trading with real market data and test your strategies risk-free.