Trading glossary

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52-week high

The highest price a stock has traded at over the last year, about 252 sessions. Research by George and Hwang (2004) found that stocks trading near it tended to keep outperforming; a close above it on heavy volume is a common breakout entry.

A

Accumulation

In the Wyckoff method, a trading range after a decline in which large holders absorb shares from discouraged sellers without pushing the price up. The schematic runs from a selling climax through a spring and a sign of strength to the markup; it is a map, not a template every chart must match.

ATR stop

A stop-loss placed a fixed multiple of the average true range away from the entry price or a recent high, commonly 1.5 to 3 ATR. The distance adapts to each stock's normal movement, so a volatile stock gets a wider stop and, for the same dollar risk, fewer shares.

Average true range (ATR)

A volatility measure introduced by J. Welles Wilder in 1978. Each day's true range is the largest of high minus low and the distances from the previous close to the high and to the low; ATR averages it, usually over 14 days. It shows how far a stock typically moves, gaps included.

B

Backtest

A test that applies a trading system's fixed rules to historical prices to estimate how the rules would have performed, including costs and realistic fills. The result is hypothetical: it describes behaviour on past data and does not predict future returns.

Base

A sideways consolidation after a strong advance, lasting weeks to months, in which the range narrows and volume dries up as supply is absorbed. William O'Neil described these patterns in his study of leading stocks; a breakout above the base is a classic entry.

Bid-ask spread

The gap between the highest price buyers are bidding and the lowest price sellers are asking. A market order buys at the ask and sells at the bid, so a round trip gives up about one full spread; it is wider in thinly traded stocks and around the open and the close.

Breakout

A move in which price closes beyond a level that has contained it, such as resistance, the top of a base or the highest high of the past n sessions. Traders often look for above-average volume as confirmation; many breakouts still fail, so a breakout entry needs a stop from the start.

C

Cash-secured put

A short put option backed by enough cash to buy the shares if assigned, strike × 100 per contract. The seller collects a premium up front and commits to buying 100 shares at the strike if the stock finishes below it at expiry, so a fall below the strike is cushioned only by the premium.

Chandelier exit

A trailing stop popularised by Chuck LeBeau that hangs below the highest high of a recent window, typically the highest high of the last 22 days minus 3 × ATR(22). It rises as the stock makes new highs and never moves down.

Covered call

An options position that holds 100 shares of a stock and sells one call option against them, usually with a strike above the current price. The seller keeps the premium and, in exchange, agrees to sell the shares at the strike if the stock finishes above it, giving up gains beyond that level.

D

Distribution

In the Wyckoff method, a trading range after an advance in which large holders sell into demand while news is good and the public is confident. It typically includes a buying climax, upthrusts and signs of weakness before the markdown begins.

Donchian channel

Bands drawn at the highest high and the lowest low of the last n sessions, named after Richard Donchian. A close above the upper band is a breakout to a new n-day high; the 20-day version is the entry of the Turtle traders’ first system.

Drawdown

The decline in account equity from its most recent peak, measured in dollars or as a percentage of that peak. A drawdown lasts until equity sets a new high; the deeper it is, the larger the gain needed to recover, since a 50% loss requires a 100% gain.

E

Expectancy

The average result per trade that a set of rules has produced: win rate × average win − loss rate × average loss, usually measured in R or in dollars. Positive expectancy after costs is the basic requirement for a system; it describes past results and is not a forecast.

Exponential moving average (EMA)

A moving average that gives more weight to recent closes: EMA today = EMA yesterday + α × (close − EMA yesterday), with α = 2 ÷ (n + 1). It turns earlier than a simple average of the same length but also reacts more to short-lived moves.

F

False breakout

A move beyond support or resistance that quickly reverses and closes back inside the range, trapping traders who acted on the break. In Wyckoff terms, a false break below a range is a spring and a false break above one is an upthrust.

Fixed fractional sizing

A position sizing method that risks the same percentage of current equity on every trade, often 0.5% to 2%: shares = account risk ÷ per-share risk. Because the dollar risk shrinks after losses and grows after gains, it slows the damage of losing streaks.

G

Gamma exposure (GEX)

An estimate of how much stock options market makers would need to buy or sell to stay hedged as the underlying moves. Positive GEX means hedging tends to lean against moves and dampen volatility; negative GEX means it tends to follow moves and amplify them. It rests on assumptions about dealer positions.

Gap

A jump in price from one session to the next, so that the stock opens well above or below the previous close with no trading in between. Earnings reports and overnight news are common causes, and a stop order caught in a gap fills at the next available price, often beyond the stop.

Golden cross

The 50-day moving average crossing above the 200-day average; the opposite cross is called a death cross. Because both averages are slow, the signal describes trends lasting months and is more useful as a gauge of the market regime than as a precise entry.

H

Historical volatility (HV)

How much a stock has actually moved over a past window, usually the annualised standard deviation of daily returns over 20 or 60 sessions. Also called realised volatility, it is often compared with implied volatility to judge whether options are priced high or low.

I

Implied volatility (IV)

The level of future volatility that an option's market price implies, worked backward with a pricing model such as Black-Scholes and quoted as an annualised percentage. It reflects the size of moves the market is paying for, not their direction.

IV crush

The sharp fall in implied volatility after a scheduled event, most often an earnings report. With the uncertainty resolved, option premiums can drop even when the stock moves, so a correct view on direction does not by itself make a long option profitable.

K

Kelly criterion

A formula published by John L. Kelly Jr. in 1956 for the fraction of capital to risk on each bet that maximises long-run growth: f = p − (1 − p) ÷ b, where p is the win rate and b the payoff ratio. Because p and b are only estimates in trading, many practitioners use a fraction of the Kelly amount.

L

Look-ahead bias

An error in a backtest that uses information not yet available at the moment of the decision, such as filling an order at the same close that generated the signal, or using financial data before its release date. It makes results look better than anything achievable in practice.

Losing streak

A run of consecutive losing trades. Even with a positive expectancy, long streaks are normal over many trades: at a 40% win rate, the chance of eight or more losses in a row somewhere in 100 trades is about one in two. Position size should allow for them.

M

Market breadth

A measure of how many stocks take part in a market move, as opposed to how far a cap-weighted index moves. Common gauges include advancers versus decliners, new highs versus new lows and the share of stocks above their 200-day average. A rally led by only a few large companies is called narrow.

Market structure

The sequence of swing highs and swing lows on a chart. Higher highs and higher lows define an uptrend, lower highs and lower lows a downtrend, and overlapping swings a range. A break in that sequence is often the first sign that the trend is changing.

Maximum drawdown

The largest peak-to-trough decline in equity over a given period, usually stated as a percentage of the peak. It is a standard measure of how hard a system or account has been to hold; a past maximum is not a limit on future drawdowns.

Mean reversion

The tendency of a price that has moved unusually far, unusually fast, to snap partly back toward its recent average. Short-term mean-reversion trades buy sharp declines in otherwise healthy stocks and exit within days, often with a time stop rather than a tight stop.

Moving average

The average closing price over a fixed number of recent sessions, recalculated each day. It smooths daily noise and shows the direction of the trend at the cost of lagging price. The 50-day and 200-day averages are widely watched on US stocks.

O

Open interest

The number of option contracts that remain open at the end of a trading day: opened and not yet closed, exercised or expired. Unlike volume, which counts every contract traded during the session and restarts at zero, open interest carries over from day to day.

Overfitting

Tuning a system's rules and parameters so closely to past data that they capture random noise rather than a lasting pattern. An overfitted system shows excellent backtest results that fade on new data; checking nearby parameter values and testing on unused data help reveal it.

P

Payoff ratio

The average winning trade divided by the average losing trade, both taken as positive amounts. Read together with the win rate, it determines expectancy: the lower the win rate, the higher the payoff ratio a system needs to break even.

Pivot

In base patterns, the buy point at which a stock clears the top of its base, usually the highest high of the consolidation; traders often limit entries to a few percent above it. It differs from floor-trader pivot points, which are calculated from the prior high, low and close.

Position sizing

The decision of how many shares or contracts to trade, based on the account size, the risk accepted per trade and the distance to the stop. Common methods include fixed dollar amounts, fixed fractional sizing, volatility-based sizing and the Kelly criterion.

Profit factor

Gross profit from all winning trades divided by gross loss from all losing trades. A value above 1 means winners earned more in total than losers lost; a value below 1 means the opposite. Small samples can produce misleadingly high readings.

Pullback

A temporary decline within an uptrend, often back toward a rising moving average or a former resistance level. A pullback trade buys that decline on the assumption that the trend is still in force, which usually gives a lower entry and a clearer place for the stop than a breakout.

Put/call ratio

The number of put contracts divided by the number of call contracts, measured on the day's volume or on open interest. A reading above 1 means more puts than calls. It is used as a gauge of options-market sentiment and is often read in a contrarian way at extremes.

R

R multiple

A trade's result expressed as a multiple of its initial risk, R, which is the distance from entry to the initial stop. A trade that gains twice its initial risk is +2R; one stopped out as planned is −1R. The idea, popularised by Van K. Tharp, makes trades of different sizes comparable.

Relative strength

How a stock has performed compared with a benchmark such as the S&P 500, or with other stocks, over the same period. High relative strength means it has risen more or fallen less than the comparison. It is not the same as the RSI, which compares a stock only with its own past.

Relative Strength Index (RSI)

A momentum oscillator introduced by J. Welles Wilder in 1978 that compares the size of recent gains with recent losses on a 0 to 100 scale, usually over 14 sessions. Readings above 70 and below 30 are conventionally called overbought and oversold; they measure stretch, not a reversal signal.

Resistance

A price area where selling has tended to halt an advance, often near a prior high or the top of a trading range, where earlier buyers may sell to break even. A close well above resistance is what traders call a breakout.

Risk of ruin

The probability that a series of losses reduces an account to a level at which the trader can no longer continue, or chooses to stop. It rises with the risk taken per trade and falls as win rate and payoff ratio improve, which is why many traders keep the risk per trade small and fixed.

Risk-reward ratio

A planning measure that compares a trade's potential gain at its target with its potential loss at its stop. Risking $2 per share to aim for $6 gives a reward-to-risk ratio of 3, written 3:1 or 3R. It describes the plan, not the probability of reaching the target.

Role reversal

The tendency of broken resistance to act as support when price returns to it, and of broken support to act as resistance. The first retest after a breakout is usually the most significant; a close back inside the old range means the breakout has failed.

RS line

A line made by dividing a stock's closing price by a benchmark's close each day, usually the S&P 500. Its level means nothing on its own; a rising line shows the stock outperforming and a falling line lagging. An RS line at a new high before the price is a closely watched sign of leadership.

S

Sector rotation

The movement of capital from one group of industries to another as investors reassess growth, interest rates and risk. Following it shows which sectors are leading and lagging beneath the headline index; shifts in leadership are clear in hindsight but hard to time in advance.

Sign of strength (SOS)

In Wyckoff accumulation, a strong advance to or through the top of the trading range on wide up bars and expanding volume. It is usually followed by a shallow pullback that holds well above support, called a last point of support (LPS).

Slippage

The difference between the price expected when an order is placed and the price at which it actually fills. It comes from bid-ask spreads, fast markets, gaps and order size relative to liquidity, and it reduces the result of every trade, most of all for short-term systems.

Spring

In a Wyckoff accumulation range, a brief drop below support that quickly reverses back into the range, catching late sellers and triggering stops. Ideally it occurs on light volume, and a later test that holds above the spring low adds confirmation.

Stop-loss

A price decided in advance at which a losing position is closed, set where the trade idea is shown to be wrong, for example beyond support or a swing low. A stop order limits losses under normal trading but cannot guarantee the exit price when the stock gaps.

Support

A price area where buying has tended to halt a decline, often near a prior low, the floor of a trading range or a rising moving average. It marks where demand appeared in the past; it does not guarantee that price will turn there again.

Survivorship bias

The distortion that arises when a test or study includes only stocks that still exist today, leaving out companies that went bankrupt, were acquired or were delisted. Because many of the excluded names performed poorly, results usually look better than they really were.

Swing high and swing low

A swing high is a peak with lower highs on both sides; a swing low is a trough with higher lows on both sides. A fixed rule, such as N bars on each side or a minimum reversal of two ATRs, keeps the marking consistent from chart to chart.

T

Time stop

An exit rule that closes a trade if it has not made a set amount of progress within a set number of sessions. It frees capital and risk budget tied up in trades that are going nowhere; the trade-off is that some slow starters are closed before they move.

Trade review

A regular examination of closed trades, usually weekly or monthly, that compares what was done with what the plan required. It separates rule breaks from normal losses, looks for recurring patterns in the journal and ends with one or two points to work on next.

Trading journal

A record of every trade that captures the plan made before entry, the fills actually executed, the result in dollars and in R, and whether the rules were followed. Over time it supplies the data for statistics such as win rate and expectancy, and the material for trade reviews.

Trading plan

The document in which a trader fixes, before the session, the markets and systems traded, the trading schedule, the risk limits per trade, per day and overall, and the review routine. Decisions during the session then apply the plan; changes are made at a scheduled review, not in the middle of a trade.

Trading system

A complete set of rules for one kind of trade: the stocks it applies to, the entry trigger, the initial stop, the exit and the position size. Because every decision is defined in advance, a trading system can be backtested and its live results compared with the test.

Trailing stop

A stop that follows the price as a trade moves in its favour and never moves back, for example under the 10-day low, below a moving average or a set number of ATRs under the high. It lets a winning trade run, at the cost of giving back part of the open profit before the exit.

Trend following

An approach that buys after price has already moved in one direction, such as a new 20-day high, and holds until rules say the trend has ended. It makes no forecast of how far a move will go; typical results are many small losses and a few large winners.

U

Unusual volume

A session in which a stock trades far more shares than normal, usually measured as the day's volume divided by its 50-day average volume. It shows that participation has changed, often around news, but not who is buying or selling or which way price will move next.

Upthrust

In the Wyckoff method, a brief move above the top of a trading range that fails and falls back inside. When it occurs late in a distribution range it is called an upthrust after distribution (UTAD) and is the mirror image of a spring.

V

VIX

The Cboe Volatility Index, which measures the volatility the options market expects for the S&P 500 over the next 30 days, derived from S&P 500 index option prices and quoted in annualised percentage points. Because it tends to jump when stocks fall, it is often called the fear gauge.

Volatility contraction

A period in which a stock's daily ranges narrow well below normal, seen in tools such as a Bollinger Band squeeze, NR7 days or inside days. Quiet periods tend to be followed by larger moves, but contraction does not reveal the direction of the next move.

Volume

The number of shares traded in a period. It is most useful compared with the stock's own average and with the price movement it accompanies: a wide bar in the trend's direction on rising volume shows effort and result in agreement, while heavy volume with little progress suggests the other side is absorbing it.

W

Win rate

The share of closed trades that ended with a profit. On its own it says little: a system that wins 35% of the time can have positive expectancy if winners are much larger than losers, and one that wins 80% can lose money if a few losses are large.

Wyckoff method

An approach to reading supply and demand developed by Richard D. Wyckoff (1873–1934). It studies each bar's spread, where it closes and the volume behind it, compares effort (volume) with result (price movement), and maps trading ranges as accumulation or distribution.