The trading glossary

ATR measures average volatility as the mean of the true range over N periods, used to size stops and targets to current conditions rather than fixed amounts.

Backtesting is testing a trading strategy against historical price data to estimate how it would have performed — before risking real money on it.

Bar replay is a charting mode that plays historical candles forward one bar at a time, letting traders practice on past markets as if they were live.

Bollinger Bands plot a moving average with two bands at a set number of standard deviations above and below, expanding and contracting with volatility.

A break of structure (BOS) is a close beyond a prior swing high or low in the direction of the prevailing trend, read as confirmation of continuation.

A breaker block is a failed order block that price broke through, then retests from the other side — its role flipping between support and resistance.

A change of character (CHoCH) is the first structural break against the trend — a close beyond the last counter-swing — read as an early reversal warning.

Commission is the fee a broker or exchange charges to execute a trade. Small per trade, decisive in aggregate — frequent strategies live or die by it.

Confluence is the alignment of multiple independent signals — structure, level, time, indicator — supporting the same trade, raising conviction in the setup.

Displacement is a fast, one-sided price move with unusually large candle bodies, typically leaving fair value gaps behind — read as a sign of conviction.

A doji is a candlestick whose open and close are at or near the same price, leaving a tiny body. It signals indecision — buyers and sellers in balance.

A Donchian channel plots the highest high and lowest low over the last N periods as bands; a break of either band is the classic breakout signal.

Drawdown is the decline in account equity from a peak to a subsequent low, usually quoted as a percentage of the peak. Every strategy spends time in drawdown.

An EMA is a moving average that weights recent prices more heavily, so it reacts to new moves faster than a simple moving average of the same length.

An engulfing candle is a two-bar reversal where the second candle’s body fully covers the prior body in the opposite direction — a momentum shift.

An equity curve is a chart of account value over time, plotted trade by trade or day by day. Its shape reveals drawdowns, streaks, and how stable an edge is.

Expectancy is the average amount a strategy wins or loses per trade: (win rate × avg win) − (loss rate × avg loss). Positive expectancy means an edge.

A fair value gap (FVG) is a three-candle imbalance: in a bullish FVG the first candle’s high sits below the third candle’s low, leaving an unfilled gap.

Fibonacci retracement marks pullback levels — 23.6%, 38.2%, 50%, 61.8%, 78.6% — across a prior swing to anticipate where a counter-move may stall.

Forward testing is running a strategy in real time on live markets — on a demo account or at small size — to confirm backtested results hold up going forward.

The golden pocket is the Fibonacci retracement zone between the 61.8% and 65% (or 78.6%) levels, watched as a high-interest area for a pullback to reverse.

A hammer is a candlestick with a small body near the top and a long lower wick, appearing after a decline — read as a bullish rejection of lower prices.

An imbalance is a zone of inefficient, one-sided price delivery — most often a fair value gap — that the market is expected to revisit and rebalance later.

An inside bar is a candle whose entire range sits within the previous candle’s high–low range, marking a pause in volatility that often precedes a breakout.

A killzone is one of the ICT time-of-day windows — around the London and New York opens — when volatility and institutional activity are said to concentrate.

A liquidity sweep is a move that trades through a prior swing high or low — where stop orders cluster — then closes back inside the range, hinting reversal.

MACD is a momentum indicator built from the difference between two EMAs and a signal line, used for crossovers, zero-line crosses, and momentum divergence.

A market structure shift (MSS) is a close beyond the most recent confirmed swing point against the prevailing direction, signaling a possible trend change.

Maximum drawdown is the largest peak-to-trough equity decline a strategy or account has suffered, expressed as a percentage of the peak. A core risk metric.

A mitigation block is an order block revisited so trapped traders can “mitigate” losing positions near breakeven — read as a reaction zone on the retest.

A morning star is a three-candle bullish reversal: a long down candle, a small-bodied indecision candle, then a strong up candle closing well into the first.

A moving average smooths price into a single line by averaging the last N closes, filtering noise to show trend direction. The simplest, most-used indicator.

The opening range is the high–low band set in the first minutes of a trading session — commonly 5, 15, or 30 — used as breakout or reversal reference levels.

Optimal trade entry (OTE) is the ICT Fibonacci zone — roughly the 62%–79% retracement of an impulse — where traders look to join the trend at a favorable price.

An order block is the last opposite-direction candle before a strong impulsive move, treated as a zone where price may react when it returns to retest it.

Order flow is the real-time stream of buy and sell orders hitting the market — the transactions and resting liquidity that move price beneath the candles.

Paper trading is simulated trading with live market prices and no real money, used to practice execution and test strategies without financial risk.

A pin bar is a candle with a small body and one long wick (the “tail”), showing price was driven to an extreme and rejected back — a price-action reversal cue.

Position sizing is choosing how many shares, contracts, or units to trade so that a stop-out loses a fixed, planned fraction of the account — commonly 1–2%.

Premium and discount split a price range at its 50% midpoint: above is premium (expensive), below is discount (cheap) — used to time entries within a leg.

Profit factor is gross profit divided by gross loss across a set of trades. Above 1.0 the strategy made money; below 1.0 it lost money overall.

A prop firm challenge is a paid evaluation where traders must hit a profit target without breaching daily or total loss limits to earn a funded account.

An R-multiple expresses a trade’s result as a multiple of the amount initially risked: a +2R trade made twice the risk, a −1R trade was a full stop-out.

Risk-reward ratio compares what a trade risks to what it targets: risking $100 for a $300 target is 1:3. It sets the win rate needed to break even.

RSI is a momentum oscillator from 0 to 100 measuring the speed of recent gains versus losses, conventionally flagging overbought above 70 and oversold below 30.

Sample size is the number of trades a performance statistic is computed from. Small samples make win rate and expectancy unreliable; more trades, more signal.

The Sharpe ratio measures risk-adjusted return: excess return over the risk-free rate divided by return volatility. Higher means more return per unit of risk.

A shooting star is a candlestick with a small body near the low and a long upper wick, appearing after a rally — read as a bearish rejection of higher prices.

Slippage is the difference between the price a trader expects for an order and the price actually filled, caused by fast markets, gaps, or thin liquidity.

Smart money concepts (SMC) is a price-action framework built on liquidity, market structure, order blocks, and fair value gaps, to trade with institutions.

The stochastic oscillator measures where price closed within its recent high–low range on a 0–100 scale, flagging overbought above 80 and oversold below 20.

A stop-loss is an order that closes a position automatically once price reaches a predefined level, capping the loss on a trade at a planned amount.

A supply or demand zone is a price area from which a strong move originated, marked as a band where unfilled orders may cause price to react when it returns.

Support and resistance are price levels where buying or selling has repeatedly halted moves — support floors declines, resistance caps advances.

A take-profit is an order that closes a position automatically once price reaches a predefined target, locking in gains without manual intervention.

Three white soldiers is a bullish pattern of three long up candles, each opening within the prior body and closing near its high — a sign of strong momentum.

A trading journal is a structured record of every trade — entry, exit, size, reasoning, and emotional state — used to find and fix patterns in performance.

Volume profile is a histogram of traded volume by price level instead of by time, showing where the most trading occurred and where price passed through fast.

VWAP is the average price over a period weighted by volume at each price — a benchmark for trades done better or worse than the day’s average.

Win rate is the percentage of trades that close profitably — winning trades divided by total trades. On its own it says nothing about profitability.