Trading Glossary

A non-directional measure of trend strength. High ADX values indicate a strong trend in either direction; low values indicate a ranging or choppy market. Used in regime classification.

A volatility measure that averages the daily range over a lookback window, including overnight gaps. Commonly used to size stops and targets in proportion to recent volatility.

Simulating a strategy on historical price data to estimate its profitability and risk profile. Vulnerable to overfitting; out-of-sample and walk-forward validation are essential to avoid misleading in-sample results.

A bullish or bearish swing high or swing low taken out by price, signaling continuation of the prevailing trend. The complement of CHoCH (which signals a trend reversal).

The first counter-trend break of structure that suggests a possible trend reversal. A bullish CHoCH is the first higher high after a downtrend's lower lows; a bearish CHoCH is the first lower low after an uptrend's higher highs.

When multiple independent signals point to the same trade thesis at the same price level. Higher confluence generally implies higher-probability setups: e.g. an order block touch coinciding with a higher-timeframe trend and a momentum trigger.

When price and an indicator disagree on direction. Regular divergence (price makes a new high, indicator does not) signals potential reversal. Hidden divergence signals trend continuation.

The peak-to-trough decline of an account or strategy. Maximum drawdown is the worst peak-to-trough loss observed; it is the relevant risk measure for surviving estimation error in backtested strategies.

A three-bar pattern where the high of one bar and the low of the bar two periods later do not overlap, leaving an unfilled price imbalance. Often acts as a magnet for retracement and as a continuation marker once mitigated.

A timeframe larger than the one being traded. HTF context (trend direction, structure, key levels) is generally used to filter LTF (lower timeframe) entries.

A price area passed through quickly without two-sided trading, often resulting in a Fair Value Gap. Imbalances tend to attract price back to fill them, particularly on lower timeframes.

A formula for optimal bet sizing given a known edge: K = W − (1 − W) / R, where W is win rate and R is payoff ratio. Maximizes long-run geometric growth. In practice, professional traders size at a fraction (1/4 to 1/2) of full Kelly to absorb estimation error.

Resting orders sitting at obvious price levels — typically just above swing highs (buy stops) or below swing lows (sell stops). Price often sweeps these levels before reversing.

A move that briefly takes out a swing high or low, triggers the resting stops, and then reverses. Often used as evidence of institutional intent before a directional move.

A timeframe smaller than the one used for context. Common pairing: HTF 4H or daily for bias, LTF 5m or 15m for entries.

A class of strategies that profits from price returning to a moving average or statistical mean after extending away from it. Performs well in ranging conditions, poorly in strong trends.

Price returning to a previous order block or fair value gap and trading through it. A mitigated zone is no longer considered active and should not be used for fresh entries.

Analysis that combines context from two or more timeframes. The standard professional approach pairs an HTF for bias with an LTF for execution timing.

A non-parametric kernel regression that smooths price into a continuous trend line and projects upper and lower envelopes around it. Used to identify probabilistic mean-reversion zones.

The last opposing candle before an impulsive move that breaks structure. Bullish order blocks are the last bearish candle before a strong rally; bearish order blocks are the last bullish candle before a sharp decline. Often act as institutional supply/demand zones on retest.

A local extremum in price — a swing high (higher than N bars on each side) or swing low (lower than N bars on each side). Pivots define market structure and serve as anchor points for many indicators.

The decision of how much capital to risk on each trade. Most trading failures are sizing failures, not strategy failures. Common frameworks include fixed fractional, fixed dollar, ATR-based, and Kelly-derived sizing.

Within a defined range, premium is the upper half (selling area) and discount is the lower half (buying area). Used to bias entries toward the half that aligns with HTF direction.

A trade's outcome expressed as multiples of initial risk. A trade risking $100 that profits $300 is +3R. R-multiples normalize across position sizes and let win rate and payoff ratio be analyzed independently of dollar amounts.

A market state where price oscillates between defined upper and lower boundaries without sustained directional progress. Ranges typically favor mean-reversion strategies and disadvantage trend-following.

A risk-adjusted return metric: (return − risk-free rate) / standard deviation of returns. Higher is better. Sharpe above 1 is acceptable; above 2 is good; above 3 is exceptional in liquid markets.

The difference between the expected execution price and the actual fill price. Slippage erodes backtested edge and is often underestimated; it is especially severe on illiquid instruments and around news events.

A volatility-compression state where price-action range narrows and indicators converge. Squeezes often precede expansive directional moves; the direction of the breakout typically resolves only after the compression releases.

A momentum indicator comparing the closing price to its high-low range over a lookback window. Values above 80 conventionally indicate overbought conditions; below 20 indicate oversold. Best used as a timing layer on top of structural analysis.

Local price extrema with at least N bars showing lower highs (for a swing high) or higher lows (for a swing low) on either side. Sequences of swings define market structure and trend direction.

A class of strategies that profits from sustained directional moves by entering with the trend and holding through pullbacks. Performs well in trending conditions, poorly in choppy or ranging markets.

An index measuring the implied volatility of S&P 500 options over the next 30 days. Often called the 'fear gauge': spikes in VIX typically coincide with equity sell-offs (risk-off); low VIX correlates with calm, trending equity markets (risk-on).

A backtesting technique that trains a strategy on one window of historical data, tests on the next out-of-sample window, and slides forward. The honest substitute for in-sample backtesting; out-of-sample metrics are the relevant measure of edge.