Trading Glossary

The essential dictionary of trading terms, metrics, and strategies. Find definitions, examples, and cross-references to build your market vocabulary.

Alpha

Alpha represents the active return on an investment, measuring the performance of an investment against a market index or benchmark that is considered to represent the market's movement as a whole. A positive alpha of 1.0 means the investment outperformed its benchmark index by 1%. It is often used in conjunction with Beta, which measures broad market risk.

Ask Price

The ask price is the lowest price a prospective seller is willing to accept for a share of stock or other security. The difference between the ask price and the Bid Price is known as the Spread. When buying a stock with a Market Order, you will typically pay the ask price.

Averaging Down

Averaging down is an investing strategy that involves purchasing additional shares of a previously initiated investment after the price has dropped. This lowers the average cost of all shares held. While it can reduce the breakeven point, it is often considered a dangerous practice for day traders as it can lead to massive Drawdown if the asset continues to decline, sometimes triggering a Margin Call.

Bear Market

A bear market occurs when a market experiences prolonged price declines. It typically describes a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment. Traders often use Short Selling to profit during these periods.

Beta

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. A beta of 1 indicates that the security's price moves with the market. A beta of less than 1 means that the security is theoretically less volatile than the market, while a beta greater than 1 indicates greater volatility.

Bid Price

The bid price is the highest price a prospective buyer is willing to pay for a security. When you are selling a security using a Market Order, you will typically receive the bid price. The gap between the bid price and the Ask Price is the Spread.

Breakout

A breakout refers to when the price of an asset moves above a resistance area, or moves below a support area. Breakouts indicate the potential for the price to start trending in the breakout direction. For example, a breakout to the upside from a chart pattern could indicate the price will start trending higher. High Volume is usually sought to confirm a valid breakout.

Bull Market

A bull market is the condition of a financial market in which prices are rising or are expected to rise. The term is typically reserved for extended periods in which a large portion of stock prices are rising. In a bull market, buying on dips and holding Long Positions is the generally preferred strategy.

Call Option

A call option is a financial contract that gives the option buyer the right, but not the obligation, to buy a stock, bond, commodity or other asset or instrument at a specified price within a specific time period. The stock, bond, or commodity is called the underlying asset. A call buyer profits when the underlying asset increases in price. Understanding Options Greeks is crucial when trading calls.

Day Trading

Day trading is the act of buying and selling a financial instrument within the same day or even multiple times over the course of a day. Taking advantage of small price moves can be a lucrative game—if it is played correctly. But it can be a dangerous game for newbies or anyone who doesn't adhere to a well-thought-out strategy. Day traders heavily rely on high Liquidity and Volatility.

Drawdown

A drawdown is a peak-to-trough decline during a specific period for an investment, trading account, or fund. A drawdown is usually quoted as the percentage between the peak and the subsequent trough. Managing drawdown is one of the most critical aspects of Risk Management. Excessive Averaging Down is a common cause of severe drawdown.

Fundamental Analysis

Fundamental analysis is a method of determining a stock's real or 'fair market' value. Fundamental analysts search for stocks that are currently trading at prices that are higher or lower than their real value. If the fair market value is higher than the market price, the stock is deemed to be undervalued and a buy recommendation is given. This contrasts with Technical Analysis.

Gap

A gap is a discontinuity in a security's price chart. Gaps occur when the price of a stock, or another asset, opens significantly higher or lower than the previous day's close with no trading activity occurring in between. Gaps are often caused by earnings reports or major news events.

Limit Order

A limit order is an order to buy or sell a stock at a specific price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. This guarantees the execution price, but does not guarantee the order will fill, unlike a Market Order.

Liquidity

Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price. The most liquid asset of all is cash itself. High liquidity typically results in a tighter Spread, making it easier for traders to enter and exit positions without experiencing Slippage.

Long Position

A long position is the buying of a security such as a stock, commodity or currency with the expectation that the asset will rise in value. When a trader holds a long position, they profit if the market price of the asset increases. The opposite is a Short Position.

Margin Call

A margin call occurs when the value of an investor's margin account falls below the broker's required amount. An investor's margin account contains securities bought with borrowed money (typically a combination of the investor's own money and money borrowed from the investor's broker). A margin call forces the trader to deposit more funds or face forced liquidation of their positions.

Market Order

A market order is a request by an investor – usually made through a broker or brokerage service – to buy or sell a security at the best available price in the current market. It is widely considered the fastest and most reliable way to enter or exit a trade, but it guarantees execution, not price, which can lead to Slippage. In contrast, a Limit Order guarantees price, but not execution.

Moving Average

A moving average is a widely used indicator in Technical Analysis that helps smooth out price action by filtering out the 'noise' from random short-term price fluctuations. It is a trend-following, or lagging, indicator because it is based on past prices. Two basic and commonly used moving averages are the simple moving average (SMA) and the exponential moving average (EMA).

Options Greeks

Options Greeks are financial measures of the sensitivity of an option's price to its underlying determining parameters. They are used in the pricing of options. The most common Greeks are Delta, Gamma, Theta, Vega, and Rho. Understanding these is essential for anyone trading a Call Option or a Put Option.

Put Option

A put option is a contract giving the owner the right, but not the obligation, to sell–or sell short–a specified amount of an underlying security at a pre-determined price within a specified time frame. The pre-determined price the put option buyer can sell at is called the strike price. A put option becomes more valuable as the price of the underlying stock depreciates.

Resistance

Resistance, or a resistance level, is the price at which the price of an asset meets pressure on its way up by the emergence of a growing number of sellers who wish to sell at that price. When price breaches resistance, it is known as a Breakout. Resistance is the counterpart to Support.

Risk Management

Risk management in trading is the process of identifying, analyzing and accepting or mitigating uncertainty in investment decisions. Essential risk management techniques include establishing a Stop Loss, proper position sizing, and managing overall portfolio Drawdown. Without strict risk management, long-term profitability is nearly impossible.

Short Position

A short position is an investment or trading strategy that speculates on the decline in a stock or other security's price. Short Selling involves borrowing an asset and selling it on the open market, planning to buy it back later for less money. This is the opposite of a Long Position.

Short Selling

Short selling is an investment or trading strategy that speculates on the decline in a stock or other security's price. It is an advanced strategy that should only be undertaken by experienced traders and investors. You are essentially borrowing shares to establish a Short Position.

Slippage

Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed. Slippage often occurs during periods of higher volatility when Market Orders are used, and also when large orders are executed when there may not be enough interest at the desired price level to maintain the expected price of trade.

Spread

A spread is the difference between the Bid Price and the Ask Price of a security or asset. The spread is a key indicator of Liquidity; highly liquid assets typically have a very tight spread, whereas illiquid assets have a wide spread.

Stop Loss

A stop loss order is an order placed with a broker to buy or sell a specific stock once the stock reaches a certain price. A stop-loss is designed to limit an investor's loss on a security position. It is a fundamental tool for effective Risk Management. Setting a stop-loss for 10% below the price at which you bought the stock will limit your loss to 10%.

Support

Support, or a support level, refers to the price level that an asset does not fall below for a period of time. An asset's support level is created by buyers entering the market whenever the asset dips to a lower price. It is the opposite of Resistance.

Technical Analysis

Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume. Technical analysts believe that past trading activity and price changes of a security can be valuable indicators of the security's future price movements. This contrasts with Fundamental Analysis.

Volatility

Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security. High volatility provides opportunities for Day Trading but also increases the likelihood of Slippage and rapid Drawdown.

Volume

Volume is the number of shares or contracts traded in a security or an entire market during a given period. It is simply the amount of shares that trade hands from sellers to buyers as a measure of activity. High volume confirms trends and validates a Breakout.