Trading Glossary
71+ trading terms explained
A
Alpha
Alpha measures the excess return of an investment relative to its benchmark, representing the value added by active management or skill.
ATR
Average True Range (ATR) measures market volatility by calculating the average of true ranges over a specified period, typically 14 days.
B
Beta
Beta measures a security's volatility relative to the overall market, where beta of 1 indicates movement in line with the market.
Bollinger Bands
Bollinger Bands are volatility bands placed above and below a moving average, typically set at 2 standard deviations from a 20-period SMA.
Breakeven
Breakeven in trading refers to moving your stop loss to your entry price after a trade moves into profit, eliminating the risk of loss on that position.
Breakout
A breakout occurs when price moves above resistance or below support with increased volume, signaling the start of a new trend or momentum move.
Breakout Trading
Breakout trading is a strategy that enters positions when price breaks above resistance or below support, anticipating continuation of the move.
C
CAGR
Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified time period longer than one year.
Call Option
A call option gives the holder the right, but not obligation, to buy an underlying asset at a specified strike price before expiration.
Candlestick
A candlestick is a price chart element showing open, high, low, and close prices for a period, with the body showing open-to-close range.
D
Day Trading
Day trading is a strategy where all positions are opened and closed within the same trading day, avoiding overnight risk and margin requirements.
Delta
Delta measures an option's price sensitivity to changes in the underlying asset's price, ranging from 0 to 1 for calls and 0 to -1 for puts.
Divergence
Divergence occurs when price moves in the opposite direction of an indicator, potentially signaling trend weakness or upcoming reversal.
Diversification
Diversification spreads investments across different assets, sectors, or strategies to reduce the impact of any single position's loss on the portfolio.
Double Bottom
A double bottom is a bullish reversal pattern formed when price reaches a support level twice, bouncing up both times, resembling the letter W.
Double Top
A double top is a bearish reversal pattern formed when price reaches a resistance level twice, failing to break through, resembling the letter M.
Drawdown
Drawdown is the peak-to-trough decline in a trading account's equity, expressed as a percentage. A 10% drawdown means the account fell 10% from its highest point.
E
EMA
Exponential Moving Average (EMA) is a weighted moving average that gives more importance to recent prices, making it more responsive to new information.
Equity
Equity is the current value of a trading account calculated as balance plus or minus the unrealized profit or loss from all open positions.
Expectancy
Expectancy is the average amount a trader expects to win or lose per trade, calculated from win rate, average win size, and average loss size.
H
Head and Shoulders
Head and shoulders is a reversal chart pattern with three peaks where the middle peak (head) is higher than the two surrounding peaks (shoulders).
Hedging
Hedging is a risk management strategy that takes offsetting positions to protect against adverse price movements in existing holdings.
I
Implied Volatility
Implied volatility (IV) is the market's expectation of future price movement derived from option prices, key for determining option premiums.
In The Money
In the money (ITM) describes an option with intrinsic value—calls when market price exceeds strike, puts when strike exceeds market price.
L
Leverage
Leverage is borrowed capital from your broker that lets you control a larger position than your account balance — 1:100 leverage means $1,000 controls $100,000.
Limit Order
A limit order executes only at a specified price or better, guaranteeing price but not execution if the market doesn't reach that level.
Lot Size
Lot size is the number of currency units in a forex trade — a standard lot is 100,000 units, a mini lot is 10,000, and a micro lot is 1,000.
M
MACD
Moving Average Convergence Divergence (MACD) is a momentum indicator showing the relationship between two exponential moving averages (12 and 26 period).
Margin
Margin is borrowed money from a broker used to increase buying power, requiring traders to maintain a minimum equity percentage in their account.
Margin Call
A margin call is a broker's demand to deposit more funds when your account equity drops below the required margin level, typically triggered at 50-100% margin level.
Market Order
A market order executes immediately at the best available price, guaranteeing execution but not the exact price in fast-moving markets.
Maximum Drawdown
Maximum drawdown (MDD) is the largest peak-to-trough decline in a trading account's equity over a specific period, representing the worst-case loss scenario.
Mean Reversion
Mean reversion is a strategy based on the theory that prices tend to return to their average over time, buying oversold and selling overbought conditions.
Momentum Trading
Momentum trading is a strategy that buys securities showing upward price trends and sells those showing downward trends, riding the market momentum.
Moving Average
A moving average smooths price data by calculating the average price over a specified period, used to identify trends and support/resistance levels.
P
Pip
A pip is the smallest standard price movement in forex, equal to 0.0001 for most currency pairs and 0.01 for JPY pairs.
Position Sizing
Position sizing is the process of determining how many units (lots) to trade on each position based on your account size, risk tolerance, and stop loss distance.
Position Trading
Position trading is a long-term strategy where traders hold positions for weeks to months, focusing on major trends rather than short-term fluctuations.
Profit Factor
Profit factor is the ratio of gross profits to gross losses, calculated by dividing total winning trade profits by total losing trade losses.
Put Option
A put option gives the holder the right, but not obligation, to sell an underlying asset at a specified strike price before expiration.
R
R-Multiple
R-multiple expresses a trade's profit or loss as a multiple of the initial risk (R), where 1R equals the amount risked on the trade.
Resistance
Resistance is a price level where selling pressure is strong enough to prevent further advance, acting as a ceiling that prices struggle to break above.
Risk of Ruin
Risk of ruin is the statistical probability that a trader will lose enough capital to be unable to continue trading, based on win rate, R:R, and risk per trade.
Risk Per Trade
Risk per trade is the maximum amount of capital a trader is willing to lose on any single trade, typically 1-2% of total account value.
Risk-Reward Ratio
Risk-reward ratio (R:R) compares the potential profit of a trade to its potential loss, expressed as a ratio like 1:2 meaning you risk 1 unit to gain 2.
ROI
Return on Investment (ROI) measures the gain or loss generated on an investment relative to its cost, expressed as a percentage.
RSI
Relative Strength Index (RSI) is a momentum oscillator measuring price change velocity on a 0-100 scale, with above 70 overbought and below 30 oversold.
S
Scaling In/Out
Scaling is the practice of entering or exiting a trade in multiple stages rather than at a single price, allowing traders to manage risk and optimize fills.
Scalping
Scalping is an ultra-short-term trading strategy that aims to profit from small price movements, often holding positions for seconds to minutes.
Sharpe Ratio
The Sharpe ratio measures risk-adjusted return by dividing the excess return of a strategy by its standard deviation, showing return per unit of risk.
Slippage
Slippage is the difference between the price you expected to receive on a trade and the price you actually received, caused by market movement during order execution.
SMA
Simple Moving Average (SMA) calculates the arithmetic mean of prices over a specified period, giving equal weight to all data points.
Spread
The spread is the difference between the bid (sell) and ask (buy) price of a currency pair, representing the broker's primary cost to the trader.
Stop Loss
A stop loss is an order that automatically closes a trade when the price reaches a specified level, limiting the maximum loss on that position.
Stop Order
A stop order becomes a market order when price reaches a specified trigger level, used for entering breakouts or exiting losing positions.
Stop-Limit Order
A stop-limit order combines stop and limit features, triggering a limit order when the stop price is reached, offering price control but risking non-execution.
Strike Price
Strike price is the fixed price at which an option holder can buy (call) or sell (put) the underlying asset when exercising the option.
Support
Support is a price level where buying pressure is strong enough to prevent further decline, acting as a floor that prices tend to bounce from.
Swap
A swap is the interest rate differential charged or credited to a forex trader for holding a position overnight, also called a rollover fee.
Swing Trading
Swing trading is a strategy that holds positions for days to weeks, aiming to capture price swings within a larger trend.
T
Take Profit
A take profit is an order that automatically closes a trade when the price reaches a specified profit target, securing gains without manual intervention.
Theta
Theta measures an option's time decay, representing how much value the option loses each day as it approaches expiration, expressed as a negative number.
Trailing Stop
A trailing stop is a stop loss order that automatically moves in the direction of profit by a specified distance, locking in gains as the price moves favorably.
Trend Following
Trend following is a strategy that identifies and trades in the direction of established market trends using technical indicators and price action.
Trendline
A trendline is a diagonal line connecting two or more price points used to identify and confirm trend direction in technical analysis.
V
Volume
Volume is the total number of shares or contracts traded during a specific period, used to confirm price movements and trend strength.
VWAP
Volume Weighted Average Price (VWAP) calculates the average price weighted by volume, used as a benchmark for intraday trading execution quality.