Trading Terms Glossary

A

Algorithmic trading

Trading where a set of written rules, run by software, decides when to enter and exit. A trading bot is one form of it.

Arbitrage

Trying to profit from a price difference for the same or linked assets in different places or forms. The gap is usually small and can vanish before an order fills.

Ask

The lowest price at which a seller is currently willing to sell. A buy order at market fills at the ask.

Average down

Buying more of an asset after its price has fallen, which lowers the average entry price. It also increases the size of the position that is losing.

B

Backtest

A replay of a set of trading rules over past prices to see what they would have done. It is hypothetical, because no real order was ever placed.

Bid

The highest price at which a buyer is currently willing to buy. A sell order at market fills at the bid.

Bollinger Bands

An indicator that draws a moving average with a band above and below it, set a number of standard deviations away. The bands widen when prices move more.

Broker

A firm that gives you access to a market and carries out your orders. Its rules on margin, costs and execution vary, so read the terms of yours.

D

Dark pool

A private venue where large orders are matched without showing the order book to the public before the trade.

DCA bot

A bot that buys in steps, either on a schedule or as price falls, to build one position at a lower average price. Its risk is a position that keeps growing while price keeps falling.

Demo account

A practice account that trades with pretend money at live or near-live prices. Fills in a demo can be easier than real ones.

Dollar-cost averaging

Buying a fixed amount of an asset at regular times, whatever the price. A DCA bot automates this, sometimes with extra buys after falls.

Drawdown

A fall in account value from a previous peak, usually shown as a percent of that peak. Maximum drawdown is the deepest such fall in a period.

E

Equity

The value of an account if every open position were closed now: the balance plus or minus the open profit or loss.

Equity curve

A line chart of account equity over time. Its shape shows the size and timing of gains and losses.

Expectancy

The average amount a trade is expected to make or lose, from the win rate, the average win and the average loss. It is only as reliable as the sample behind it.

Expert advisor

A program that runs inside a desktop trading platform and places orders by rule. People often shorten it to EA.

F

Forward testing

Running a strategy on new prices it has never seen, in real time, with a demo or small account. It checks what a backtest cannot.

G

Grid trading

Placing buy and sell orders at set price steps above and below a start price, to take a small gain on each swing. It loses when price leaves the grid and keeps going.

H

Hedging

Opening a position that offsets the risk of another one, for example a short against a long. It reduces some exposure and adds costs.

Heikin-Ashi

A way of drawing candles that averages values from the previous candle, which smooths the look of a trend. Its prices are calculated, not actual traded prices.

High-frequency trading

Trading at very high speed and volume, often holding positions for a fraction of a second. It depends on infrastructure that retail setups do not have.

I

Ichimoku cloud

A set of five lines drawn on a chart, with a shaded area called the cloud, used to describe trend and levels.

K

Kelly criterion

A formula for the stake that maximises long run growth, given the win chance and the payoff. It is sensitive to errors in those inputs.

L

Leverage

Using borrowed exposure so a position is larger than the money put up for it. It enlarges losses as much as gains.

Liquidation

The forced closing of a leveraged position by the exchange when the margin left no longer covers its losses.

Look-ahead bias

A testing error where a rule uses information that would not have been known at the time of the trade, which makes a backtest look better than it could have been.

Lot

A standard unit of trade size in forex and some other markets. Lot sizes differ by instrument and broker, so check the contract size.

M

Margin

The deposit a broker or exchange holds to keep a leveraged position open. It is not a fee.

Margin call

A warning or action when account equity falls too close to the margin needed for open positions. What happens next depends on the broker.

Market maker

A firm or program that quotes both a buy and a sell price so others can trade, and earns the gap between them.

Martingale

A sizing rule that increases the stake after each loss, usually by doubling. It ends a losing run with a large position and a small account.

Maximum drawdown

The largest fall from a peak to a later low in an account or test. It describes the worst stretch, not a limit.

Monte Carlo simulation

Running a model many times with random draws to see the spread of possible outcomes instead of a single path.

N

Negative balance

An account that has fallen below zero because losses were larger than the deposit. Whether it can happen, and who bears it, depends on the broker.

O

Order book

The live list of buy and sell orders waiting at each price on a market.

Order flow

The study of the orders actually traded and resting in the order book, to see the pressure on each side.

Overfitting

Tuning a strategy so closely to past data that it fits noise, not a repeatable pattern. It tends to look excellent in a backtest and fail on new data.

P

Paper trading

Tracking trades on paper or in a simulator without real money, to test a plan.

Pip

The smallest usual price step in many forex pairs, often the fourth decimal place. Its money value depends on the pair and the lot size.

Position size

How much of an asset a single trade holds. It sets how much a given price move gains or loses.

Profit factor

Total gross profit divided by total gross loss. A value above 1 means winners outweighed losers in that sample, before the limits of that sample are considered.

R

Requote

A broker reply that offers a new price after you asked to trade at an earlier one, because the price moved.

Risk of ruin

The chance that a series of losses takes an account to a set low level or to zero, from the win rate, payoff and size per trade.

Risk-reward ratio

The amount risked on a trade compared with the amount aimed for. It says nothing alone about how often the target is reached.

RSI

The relative strength index: an oscillator from 0 to 100 that compares recent gains with recent losses.

S

Sharpe ratio

A measure of average return above a baseline, divided by the variation of returns. It treats upward and downward swings alike.

Slippage

The difference between the price you expected and the price you got. It is larger in fast or thin markets.

Sortino ratio

Like the Sharpe ratio, but it divides by the variation of losses only, so upward swings are not counted as risk.

Spread

The gap between the bid and the ask. It is a cost paid each time you enter and exit.

Stop hunting

The claim that price is pushed to levels where many stop orders sit. Whether it occurs in a given case is hard to prove from outside.

Stop-loss order

An order set to close a position if price reaches a chosen level, to cap the loss. In a fast market it may fill at a worse price.

Stop-out

The level at which a broker begins closing positions automatically because margin is too low. The level is set by the broker.

Supertrend

A trend indicator drawn as a line above or below price, based on average true range, that flips side when price crosses it.

Survivorship bias

A testing error that counts only the assets, funds or bots that lasted, so results look better than the full group.

Swap

A charge or credit for holding a position past a daily cut-off time. It depends on the instrument and the broker.

T

Take profit

An order set to close a position when price reaches a target in your favour.

Trade copier

Software that repeats trades from one account on one or more other accounts.

Trailing drawdown

A loss limit that moves up as account equity rises, so the allowed fall is measured from the highest point reached.

Trailing stop

A stop order that follows price at a set distance as it moves in your favour and stays put when it moves back.

V

Value at risk

An estimate of the loss that should not be exceeded over a period with a stated confidence, for example 95 percent. It says nothing about the size of the loss beyond that line.

VWAP

Volume weighted average price: the average price over a period, weighted by the volume traded at each price.

W

Walk-forward testing

A way of testing in which a strategy is tuned on one stretch of data and tested on the next, then the window moves along.

Win rate

The share of trades that closed with a profit. It means little without the size of the average win and loss.

Z

Zone recovery

A method that opens opposite trades with growing sizes after a losing trade, to recover the loss when price moves back. It needs margin that grows with each step.