The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask). A narrower spread usually indicates higher liquidity.‘
Stop Loss
An order placed to exit a position when the security reaches a specific price, typically to limit losses.
Take Profit (TP)
An order to exit a position when it reaches a specified price, used to lock in profits once a certain price target is achieved.
Risk-to-Reward Ratio (R:R)
A measure used to assess the potential profit versus potential loss in a trade. For example, a 1:2 risk-to-reward ratio means risking $1 to potentially make $2.
Support and Resistance
Support is the price level where a downtrend can be expected to pause or reverse due to a concentration of demand. Resistance is the price level where a trend may pause or reverse due to selling pressure.
Breakout
When the price of a security moves beyond a key support or resistance level, signalling that the price is likely to continue in the direction of the breakout rather than reversing. Breakouts are often used as entry signals by traders expecting momentum to follow.
Pullback
A temporary reversal in the price of a stock or market that goes against the prevailing trend, before the original trend resumes.
Setup
A trading setup is a predefined set of conditions or criteria that a trader looks for before entering a trade. It’s essentially a blueprint that outlines what must happen in the market to consider a trade “high probability.”
Volume
The number of shares or contracts traded in a security or market during a given period.
Volatility
A statistical measure of the price fluctuations of a security or market over time. High volatility means the price is changing rapidly.
Liquidity
The ease with which an asset can be bought or sold without affecting its price significantly. Higher liquidity means quicker transactions and less price slippage.
Slippage
The difference between the expected price of a trade and the actual price at which the trade is executed, often due to market volatility.
Scalping
A trading strategy that involves making numerous small trades throughout the day to exploit small price movements.
Momentum Trading
A strategy that involves buying securities that are trending up and selling those that are trending down, capitalizing on the strength of their movements.
Swing Trading
A medium-term trading strategy that attempts to capture price swings or movements within a trend.
Overtrading
When a trader takes more positions than they can handle, often due to emotions like greed or impatience, which leads to poor decision-making.
Revenge Trading
Trading with the intent to recover losses, often leading to impulsive decisions and increased risk-taking.
FOMO (Fear of Missing Out)
The anxiety a trader feels when they see a trade move in a direction that they didn’t participate in, leading them to enter positions impulsively.
P&L (Profit and Loss)
The net result of a trader’s activities, showing the profits and losses from their trades.
Drawdown
The peak-to-trough decline in the value of a trader’s account, showing the reduction in capital due to losing trades.
Order Types (Market, Limit, Stop Orders)
- Market Order: An order to buy or sell at the current market price.
- Limit Order: A limit order instructs your broker to buy a stock only if the price is at or below your specified limit, or to sell only if the price is at or above your set limit.
- Stop Order: A stop order instructs your broker to buy a stock only if the price rises to your specified stop price or sell if the price falls to your stop price, triggering a market order once that price is reached.
Position Sizing
Determining the amount of capital to allocate for each trade, usually based on risk tolerance and the specific trade’s stop loss.
Margin
The amount of money a trader borrows from a broker to trade larger positions than their account balance would allow.
Leverage
Using borrowed funds to increase the potential return of an investment. For example, a 10:1 leverage means for every $1 of the trader’s own money, they can trade $10 worth of assets.
High Probability Setup
A trade setup that has a high chance of success based on a trader’s strategy, past performance, and market conditions.
Confirmation
Waiting for an additional signal or indicator to confirm the validity of a trade before entering a position.
Trade Journal
A record of all trades made by a trader, including the strategy used, entry and exit points, and outcomes, used to analyze and improve performance.
Chart Patterns (e.g., Head and Shoulders, Flags)
Patterns formed by the price movements on a chart, used to predict future price action.
- Head and Shoulders: A reversal pattern.
- Flags: A continuation pattern.
Indicators (e.g., RSI, MACD, VWAP)
Mathematical calculations based on price and volume, used to identify trends, momentum, or potential entry/exit points.
- RSI: Relative Strength Index, measures overbought or oversold conditions.
- MACD: Moving Average Convergence Divergence, indicates trend direction and momentum.
- VWAP: Volume Weighted Average Price, the average price of a security based on both volume and price.
Candlestick Patterns (e.g., Doji, Engulfing)
Candlestick formations used to predict future market movements.
- Doji: Indicates market indecision.
- Engulfing: A reversal pattern indicating a change in trend direction.
Psychological Levels (e.g., round numbers like 100, 1000)
Price levels that are psychologically significant to traders, such as round numbers (e.g., $100, $1000), which often act as support or resistance.
Edge
A trader’s statistical or psychological advantage in the market, which helps them make more winning trades than losing ones.
Confirmation Bias
The tendency to seek out or interpret information in a way that confirms one’s pre-existing beliefs or hypotheses, rather than objectively assessing actual market conditions.
Paralysis by Analysis (Analysis paralysis)
When a trader over-analyzes information, making it difficult to make a decision or take action.
Paper Trading
Simulated trading using a demo account or without real money to practice and test strategies.
Backtesting
The process of testing a trading strategy on historical data to evaluate its effectiveness.
Forward Testing
The process of testing a strategy in real-time with live market conditions but without risking real money, often on a demo account.
Trailing Stop
A stop loss order that moves with the market price, locking in profits while allowing for potential additional gains.
Partial Profit Taking
Selling a portion of a position to lock in profits while leaving the remaining portion open for further gains.
Micro Futures
Futures contracts that are smaller in size (10x smaller than mini) and have lower margin requirements, designed for smaller accounts or less experienced traders.
Session Open/Close
Refers to the time when a trading session starts and ends, often marking significant price movements or opportunities for traders.
Market Psychology
The behavior and mood of the market, often driven by the collective emotions of all participants, like fear, greed, and uncertainty.
Trade Management
The process of adjusting or modifying a trade based on market conditions to maximize profit or limit loss.
Emotional Discipline
The ability to manage emotions like fear, greed, and hope during trading to follow a strategy consistently.
Bag Holder
A trader who holds onto a losing position for too long, hoping the price will eventually return to a profitable level.
Chop / Choppy
A market condition characterized by frequent price reversals and minimal trending, making it difficult to trade profitably.
Green Day
A trading day where a trader ends with a profit.
Red Day
A trading day where a trader ends with a loss.
Cutting Losses
To exit a losing trade to prevent further losses.
Let It Ride
Allowing a profitable trade to continue without exiting too early, hoping for more profit.
Fading a Move
A strategy where a trader bets against the current price move, anticipating a reversal.
Getting Stopped Out
When a trade hits the predetermined stop loss level, forcing an automatic exit from the trade.
Blown Account
When a trader loses all of their capital due to poor risk management, overtrading, or taking excessive risks.
Scaling In / Scaling Out
- Scaling In: Gradually entering a position in stages, rather than all at once.
- Scaling Out: Gradually exiting a position to lock in profits at different price levels.
Tight Stop
A stop loss placed close to the entry price to minimize losses in case the trade goes against the trader.
Loose Stop
A stop loss placed further away from the entry price, allowing for more room for the trade to move.
Flush
A rapid drop in price, often driven by a large volume of selling.
Pop
A sharp upward move in price, typically driven by a large volume of buying.
Knife Catching
Attempting to buy a falling asset in hopes of catching the bottom, often a risky strategy.
Lotto Trade
A high-risk trade with a small chance of success but the potential for a large reward, similar to buying a lottery ticket.
Full Size / Half Size
Refers to the size of the position being taken in a trade. “Full Size” is a complete position based on the trader’s risk tolerance, while “Half Size” is a smaller position.
Premarket / Postmarket
Trading activity before (premarket) or after (postmarket) regular market hours.
Market’s Gapping
A situation where a market opens at a significantly higher or lower price than the previous day’s close, creating a gap on the price chart.
Trigger
The event or price level that prompts a trader to enter a trade.
Size Kills
A warning that taking on too large of a position size relative to one’s risk tolerance can lead to significant losses.
Protect Your Capital
The practice of ensuring that one’s capital is safeguarded through proper risk management, avoiding large losses.