Trading Glossary

Difficulty beginner

A

Ask (Offer) — The lowest price a seller is willing to accept.

ADR (Average Daily Range) — The average difference between daily high and low over a period.

ADV (Average Daily Volume) — Average number of shares traded per day over a specified period.

Alpha (α) — Excess return above a benchmark, representing skill-based performance.

Arbitrage — Simultaneous buying and selling to profit from price discrepancies.

ATR (Average True Range) — Measure of market volatility accounting for gaps.

B

Backtest — Testing a trading strategy on historical data.

Basis — Difference between spot price and futures price.

Beta (β) — Measure of an asset's sensitivity to market movements.

Bid — The highest price a buyer is willing to pay.

Book — Short for order book; list of buy and sell orders.

Bollinger Bands — Volatility bands placed above and below a moving average.

C

CAGR — Compound Annual Growth Rate.

Capitalization (Market Cap) — Total market value of a company's shares.

Carry — Cost or benefit of holding a position (interest, dividends, storage).

Circuit Breaker — Mechanism to halt trading during extreme moves.

Consolidation — Period of sideways price action after a trend.

Correlation — Statistical measure of how two variables move together (-1 to +1).

COT Report — Commitments of Traders report showing positioning of different trader categories.

D

Dark Pool — Private exchange where orders are not displayed publicly.

Delta — Rate of change of option price with respect to underlying price.

Derivative — Financial instrument whose value is derived from an underlying asset.

Drawdown — Peak-to-trough decline in portfolio value.

Duration — Bond price sensitivity to interest rate changes.

E

Edge — Statistical advantage that produces positive expectancy.

EPS (Earnings Per Share) — Company profit divided by shares outstanding.

Equity Curve — Graph of portfolio value over time.

Expected Value (EV) — Average outcome if a trade were repeated many times.

Expiration — Date when an options contract ceases to exist.

F

Factor — Characteristic that explains asset returns (value, momentum, size).

Fill — Execution of an order.

Forward Test — Testing a strategy on live data without real money.

Futures — Contract to buy/sell an asset at a predetermined price on a future date.

G

Gamma — Rate of change of delta with respect to underlying price.

Gap — Price discontinuity between close and open.

Greeks — Risk measures for options positions (delta, gamma, theta, vega, rho).

H

Haircut — Reduction in collateral value for margin purposes.

Hedging — Taking offsetting positions to reduce risk.

High-Frequency Trading (HFT) — Algorithmic trading at very high speeds.

I

Implied Volatility (IV) — Market's expectation of future volatility, derived from option prices.

Index — Benchmark measuring a group of securities.

Insider Trading — Trading based on material non-public information (illegal).

IV Rank — Current IV relative to its 52-week range.

K

Kelly Criterion — Formula for optimal position sizing based on edge and odds.

Key Level — Price level with historical significance (support/resistance).

L

Leverage — Using borrowed capital to increase position size.

Limit Order — Order to buy/sell at a specific price or better.

Liquidity — Ease of buying/selling without affecting price.

Long — Buying with expectation of price increase.

M

MACD — Moving Average Convergence Divergence indicator.

Maker — Order that adds liquidity to the book (resting order).

Margin — Borrowed money used to trade; also collateral required.

Market Order — Order to buy/sell immediately at best available price.

Market Maker — Firm that provides continuous bid/ask quotes.

Max Drawdown — Largest peak-to-trough decline.

Moving Average — Average price over a specified period.

N

NBBO — National Best Bid and Offer.

Netting — Offsetting positions to reduce exposure.

Notional — Total value of a position (price × quantity).

O

OCO (One-Cancels-Other) — Pair of orders where one cancels if the other fills.

Open Interest — Total number of outstanding derivative contracts.

Options — Contracts giving right (not obligation) to buy/sell at a set price.

Order Book — List of buy and sell orders organized by price.

Order Flow — Stream of buy and sell orders.

Overbought/Oversold — Condition where price has moved too far, too fast.

P

P&L (Profit and Loss) — Realized and unrealized gains/losses.

Pairs Trading — Strategy trading two correlated securities against each other.

Pivot Point — Technical level calculated from previous day's high, low, close.

Position Sizing — Determining how much capital to allocate to a trade.

P/E Ratio — Price-to-Earnings ratio.

Premium — Price paid for an option; also price above intrinsic value.

Price Action — Analysis based purely on price movement.

Prop Trading — Trading with firm's own capital for profit.

Q

Quantitative Trading — Systematic trading using mathematical models.

Quote — Current bid and ask prices.

R

R-Multiple — Profit or loss expressed as multiple of initial risk.

Range — Difference between high and low over a period.

Rebalancing — Adjusting portfolio weights back to target allocation.

Resistance — Price level where selling pressure exceeds buying pressure.

Risk-Reward Ratio — Potential profit relative to potential loss.

RSI — Relative Strength Index momentum oscillator.

S

Scalping — Strategy of taking many small profits from tiny price changes.

Sector — Group of related stocks within an industry.

Sharpe Ratio — Risk-adjusted return measure: (Return - Risk Free Rate) / Volatility.

Short — Selling borrowed securities expecting to buy back lower.

Short Squeeze — Rapid price rise forcing short sellers to cover.

Signal — Information suggesting a trade opportunity.

Slippage — Difference between expected and actual execution price.

Sortino Ratio — Sharpe-like ratio using only downside deviation.

Spread — Difference between bid and ask prices.

Stop-Loss — Order to exit when price reaches a predetermined level.

Support — Price level where buying pressure exceeds selling pressure.

Swing Trading — Strategy holding positions for days to weeks.

T

Taker — Order that removes liquidity from the book (executing against resting orders).

Theta — Rate of option time decay.

Tick — Minimum price movement of a security.

Time Decay — Loss of option value as expiration approaches.

Time-in-Force — How long an order remains active.

Trade — Executed buy or sell.

Trend — Sustained directional price movement.

True Range — Greatest of: high-low, |high-prev close|, |low-prev close|.

V

VaR (Value at Risk) — Maximum expected loss at a given confidence level.

Vega — Sensitivity of option price to volatility changes.

Volatility — Measure of price variation over time.

Volume — Number of shares/contracts traded.

VWAP — Volume Weighted Average Price.

W

Wash Sale — Selling and repurchasing a security within 30 days (tax rule).

Whipsaw — False signal causing entry, then quick reversal causing loss.

Win Rate — Percentage of trades that are profitable.

Y

Yield — Income return on an investment (dividends, interest).

Yield Curve — Plot of interest rates across different maturities.