Glossary

Trading terms, explained the way traders use them.

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30 terms that come up on this site and in every trading group. Each has a worked example with Indian-market numbers.

Orders and risk

Drawdown: Drawdown is the fall in a trading account from a peak to the following low, usually expressed as a percentage of the peak.
Entry price: The entry price is the price at which a trade is opened; the stop-loss distance, the targets and the risk are all measured from it.
Position sizing: Position sizing is deciding how much quantity to trade so that a stop-loss hit costs only a fixed, small part of your capital.
Risk-reward ratio: The risk-reward ratio compares what you can lose on a trade, entry to stop-loss, with what you aim to gain, entry to target.
Slippage: Slippage is the difference between the price you expected for an order and the price at which it was actually filled.
Stop-loss: A stop-loss is a pre-decided price at which you exit a losing trade, so that one wrong call costs a known, limited amount.
Target: A target is a pre-decided price at which you book profit; a trade can have one target or several, with part of the position exited at each.
Trailing stop-loss: A trailing stop-loss is a stop-loss that moves in the direction of a profitable trade, protecting open gains while the position stays open.

Breakout: A breakout is a price move beyond a defined support, resistance or range boundary, often taken as the start of a new directional move.
Candle-close confirmation: Candle-close confirmation means a signal counts only after the candle that produced it has closed, not while that candle is still forming.
False breakout: A false breakout is a move beyond support or resistance that fails to continue and returns inside the earlier range, trapping traders.
Moving average: A moving average is the average price of the last N candles, recalculated every candle, used to smooth price and show trend direction.
Repainting: Repainting is when an indicator changes, moves or removes a signal it has already shown, so its past chart looks better than it traded live.
Support and resistance: Support is a price area where buying has tended to halt declines; resistance is an area where selling has tended to halt advances.
Trend: A trend is the general direction of price over a period: up with higher highs and lows, down with lower highs and lows, or sideways.
Whipsaw: A whipsaw is a quick reversal that stops out a trade soon after entry, often followed by an opposite signal that fails as well.

Average True Range (ATR): Average True Range (ATR) is J. Welles Wilder's indicator that averages the true range of recent candles to measure volatility.
Gap up and gap down: A gap up is an open above the previous close and a gap down is an open below it, leaving a price zone where no trades took place.
Intraday trading: Intraday trading means opening and closing a position within the same trading session, so nothing is carried overnight.
Swing trading: Swing trading means holding a position for a few days to a few weeks to capture one leg of a price move.
Timeframe: A timeframe is the period each candle on a chart covers, such as 5 minutes, 15 minutes, one hour or one day.
Volatility: Volatility is how much and how fast a price moves over a period: high volatility means wide swings, low volatility means narrow ones.

Futures contract: A futures contract is an exchange-traded agreement to buy or sell an asset at an agreed price on a set future date, settled daily via margin.
Lot size: Lot size is the fixed number of units in one derivatives contract; futures and options can be traded only in whole multiples of it.
Open interest: Open interest (OI) is the total number of futures or options contracts outstanding, meaning opened and not yet closed or settled.
Option premium: Option premium is the price of an option, paid by the buyer to the seller, made up of intrinsic value plus time value.
Options contract: An options contract gives its buyer the right, not the obligation, to buy (call) or sell (put) an underlying at a fixed strike price.
Time decay (theta): Time decay, measured by theta, is the loss in an option's time value as expiry approaches, with all else unchanged.

Backtesting: Backtesting is running a set of trading rules on historical price data to see how those rules would have performed in the past.
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