Trading Glossary

Use this page as a reference. Terms are categorized by concept for easier learning.

1. Market Structure & Price Action

Accumulation

A phase of the market where Smart Money (institutions) are buying positions over time to avoid spiking the price. Usually happens in a range after a downtrend. Precedes a markup (uptrend).

BOS (Break of Structure)

When price closes beyond a previous significant High or Low, confirming the continuation of the trend. A BOS signals strength.

CHoCH (Change of Character)

The first sign of a potential reversal. In an uptrend, it is the first time a Lower Low is created. It signals that the trend might be changing from Bullish to Bearish.

Distribution

The opposite of Accumulation. Institutions are selling their positions slowly in a range after an uptrend. Precedes a markdown (crash).

Fair Value Gap (FVG)

Also known as Imbalance. An area where price moved so fast that only one side (buyers or sellers) participated. Price often returns to these gaps to "fill" them.

Liquidity

The availability of orders to buy or sell. On a chart, "Liquidity" refers to areas where Stop Losses are clustered (e.g., above double tops). The market often moves to these areas to facilitate large institutional orders.

Order Block

A specific candle (usually the last opposing candle before a strong move) where institutions are believed to have placed large orders. Price often returns to mitigate these blocks.

Mitigation

When price returns to a previously untested Order Block or demand/supply zone. The theory is that institutions need to "close out" or manage positions at these price levels before continuing the move.

Premium / Discount

A concept from ICT methodology. In an uptrend, price above the 50% level of a range is considered "premium" (expensive), and below 50% is "discount" (cheap). Smart traders buy in discount and sell in premium.

Swing High / Swing Low

A swing high is a candle with a higher high than the candles immediately before and after it. A swing low is the opposite. These are the building blocks of market structure and trend identification.

2. Risk & Mathematics

Drawdown

The reduction in equity from a peak to a trough. If you start with $10k, go up to $15k, and drop to $12k, your drawdown is $3k (20%). It measures the risk/pain of a strategy.

Edge

A statistical advantage. An edge exists when a setup has a higher probability of one outcome than another over a large sample size. Without an edge, you are gambling.

Expectancy

The average amount you can expect to win (or lose) per trade over the long run. Formula: (Win % * Avg Win) - (Loss % * Avg Loss).

R-Multiple (R:R)

Risk to Reward Ratio. "1R" is your risk unit. If you risk $100 to make $300, you made 3R. Thinking in R allows you to detach from money.

Stop Loss

An exit order placed to limit loss. It is the "invalidation point" of your trade idea. Trading without one is financial suicide.

Leverage

Using borrowed capital to increase trade size. Leverage amplifies both gains and losses. It does not increase your edge; it only increases your speed (towards riches or ruin).

Win Rate

The percentage of trades that are profitable. A 40% win rate means 4 out of every 10 trades are winners. High win rate does not guarantee profitability if the average loss is larger than the average win.

Profit Factor

Total gross profit divided by total gross loss. A profit factor above 1.0 means the system is profitable. Above 1.5 is considered good; above 2.0 is excellent. It measures how many dollars you make for every dollar you lose.

Sharpe Ratio

A measure of risk-adjusted return. It calculates the excess return per unit of volatility. A higher Sharpe Ratio indicates better risk-adjusted performance. Generally, a ratio above 1.0 is acceptable, above 2.0 is very good.

3. Psychology & Behavior

FOMO

Fear Of Missing Out. Entering a trade late because you see a big green candle and are afraid the train is leaving without you. Usually leads to buying the top.

Revenge Trading

Entering a trade immediately after a loss out of anger, trying to "make back" the money. This is the fastest way to blow an account.

Tilt

A state of emotional confusion and frustration where a trader abandons their rules and trades irrationally. Often caused by a series of losses or a missed opportunity.

Confirmation Bias

The tendency to search for, interpret, and remember information that confirms your pre-existing beliefs. In trading, this means only seeing bullish signals when you want to buy, ignoring the bearish evidence right in front of you.

Overconfidence

A cognitive bias where a trader overestimates their ability to predict or control market outcomes. Often appears after a winning streak. The antidote is humility and respect for the randomness of markets.

Analysis Paralysis

The state of overthinking a trade to the point where no action is taken. Usually caused by having too many indicators or conflicting signals. Simplicity is the cure.

4. Execution & Tools

Bid / Ask

The Bid is the highest price a buyer will pay. The Ask is the lowest price a seller will accept. The difference is the Spread.

Limit Order

An order to buy or sell at a specific price (or better). Guaranteed price, but not guaranteed execution (price might not reach it).

Market Order

An order to buy or sell immediately at the current best price. Guaranteed execution, but not guaranteed price (slippage).

Slippage

The difference between the price you expected and the price you actually got filled at. Happens often during high volatility or low liquidity.

Spread

The difference between the Bid and Ask price. This is the cost of entering a trade immediately. Tight spreads are better for traders. Spreads widen during low liquidity periods like market open or major news events.

Take Profit (TP)

An exit order placed to lock in profits when price reaches a target level. It is the opposite of a Stop Loss. Using a TP ensures you do not give back profits due to greed or hesitation.

Breakeven (BE)

Moving your Stop Loss to your entry price after a trade moves in your favor. This removes risk from the trade, making it a "free trade." However, moving to breakeven too early can result in getting stopped out by normal price fluctuations.

Partial Profit

Closing a portion of your position at a certain profit level while letting the remainder run. This locks in some gains while maintaining exposure to further upside. Common approach: take 50% at 1R, let 50% run to 2R or 3R.