Trading concepts library

Trend and momentum

Indicators and ideas that describe the direction and pace of price.

• Simple moving average (SMA)A simple moving average (SMA) is the plain average of the last n closing prices, recalculated on every new bar.
• Exponential moving average (EMA)An exponential moving average (EMA) is a moving average that gives more weight to recent prices, so it reacts faster than a simple average of the same length.
• Moving average crossoverA moving average crossover is a rule that acts when a faster moving average crosses a slower one, treating the cross as a change in trend.
• Golden cross and death crossA golden cross is when the 50-day average rises above the 200-day average.
• MACDMACD (moving average convergence divergence) measures the gap between a fast and a slow exponential moving average, plus a smoothed signal line of that gap.
• Relative Strength Index (RSI)The Relative Strength Index (RSI) is a 0 to 100 oscillator that compares the size of recent up-closes with recent down-closes, usually over 14 bars.
• Stochastic oscillatorThe stochastic oscillator shows where the latest close sits inside the recent high-to-low range, scaled 0 to 100.
• Average Directional Index (ADX)The Average Directional Index (ADX) measures how strong a trend is, on a 0 to 100 scale, without saying whether it is up or down.
• Parabolic SARParabolic SAR (stop and reverse) plots a trailing point below price in an uptrend and above it in a downtrend, and flips sides when price touches it.
• Ichimoku cloudThe Ichimoku cloud is a set of five lines drawn from highs and lows that shows trend direction, a support and resistance band (the cloud) and momentum on one chart.
• MomentumMomentum is the idea that assets that have recently risen tend to keep rising for a while, and those that have fallen tend to keep falling.
• Mean reversionMean reversion is the idea that a price that has moved far from its recent average tends to move back toward it.

Volatility and volume

How far price swings, and how much trading sits behind a move.

• Average True Range (ATR)Average True Range (ATR) is the average size of a bar's range, including gaps, in the asset's own price units.
• Bollinger BandsBollinger Bands draw a band around a moving average that is two standard deviations wide on each side, so the band widens when price swings more.
• Bollinger Band squeezeA Bollinger Band squeeze is a period when the bands are unusually narrow, meaning recent volatility is low.
• VolatilityVolatility measures how much a price moves up and down.
• VWAPVWAP (volume-weighted average price) is the average price of a session weighted by how much traded at each price.
• VolumeVolume is the number of shares, contracts or coins traded in a period.

Chart structure and price action

Levels, ranges, breakouts and named chart shapes.

• Support and resistanceSupport is a price level where falling prices have previously stopped or turned up.
• TrendlinesA trendline is a straight line drawn through two or more swing lows (an uptrend) or swing highs (a downtrend).
• BreakoutA breakout is a move beyond a defined price range, usually a close above a recent high or below a recent low.
• Donchian channelA Donchian channel plots the highest high and lowest low of the last n bars.
• PullbackA pullback is a temporary move against the prevailing trend, such as a dip inside an uptrend.
• Candlestick patternsA candlestick shows a bar's open, high, low and close as a body and two wicks.
• Fibonacci retracementFibonacci retracement marks levels between a swing low and swing high at set fractions of the move, such as 38.2, 50 and 61.8 percent, as places where a pullback might stop.
• Opening rangeThe opening range is the high and low of the first few minutes of a session, often the first 5, 15, 30 or 60.
• Fair value gapA fair value gap (FVG) is a three-candle pattern in which the wicks of the first and third candles do not overlap, leaving a gap in the price range that traded only once.
• Liquidity sweepA liquidity sweep is a move that briefly passes beyond a prior swing high or low, where stop orders are assumed to sit, and then returns.

Risk and position sizing

How much to risk, where to exit, and how losses compound.

• Position sizingPosition sizing is deciding how many shares, contracts or coins to buy so that a loss at your stop costs a chosen amount.
• Stop lossA stop loss is an order that exits a position if price reaches a set level against you.
• Take profitA take profit is an order that closes a trade once it reaches a target gain.
• Risk-reward ratioThe risk-reward ratio compares the amount you stand to gain with the amount you stand to lose on a trade, measured from entry to target and from entry to stop.
• DrawdownDrawdown is the fall from a peak in account value to the next low, shown as a percent.
• LeverageLeverage is trading a position larger than the cash you put up, using borrowed money or margin.
• Risk of ruinRisk of ruin is the chance that a run of losses takes an account down to a level where trading has to stop.
• Kelly criterionThe Kelly criterion is a formula for the fraction of capital to risk on a bet that maximises long-run growth, if the odds are known exactly.
• ExpectancyExpectancy is the average amount a rule makes or loses per trade, after costs.
• Win rateWin rate is the share of trades that closed at a profit.

Testing and evidence

How to tell a real result from a lucky or flawed one.

• BacktestA backtest replays a trading rule on historical data to see what it would have done.
• OverfittingOverfitting is fitting a rule so closely to past data that it captures noise instead of anything repeatable.
• Look-ahead biasLook-ahead bias is using information in a test that was not available at the time of the simulated trade.
• Survivorship biasSurvivorship bias is testing only on assets that still exist today, which leaves out those that were delisted, merged or went to zero.
• Multiple testingMultiple testing is the problem that the more rules you try, the more likely one looks good by chance.
• Walk-forward analysisWalk-forward analysis tunes a rule on one window of history, tests it on the window that follows, then rolls both windows forward and repeats.
• Out-of-sample testingOut-of-sample testing checks a rule on data that was not used to design or tune it.
• Sample sizeSample size is the number of independent trades or observations behind a result.
• BenchmarkA benchmark is the plain alternative a rule is compared with, such as holding the same assets and doing nothing.
• Sharpe ratioThe Sharpe ratio is the average return of a rule above the risk-free rate, divided by the volatility of those returns.
• Random-entry controlA random-entry control runs the same exits and costs as a rule but enters at random times.

Orders, costs and markets

What it costs to trade, and what an order actually does.

• Market orderA market order buys or sells right away at the best available price.
• Limit orderA limit order buys or sells only at a set price or better.
• Bid-ask spreadThe bid-ask spread is the gap between the highest price a buyer will pay (the bid) and the lowest a seller will accept (the ask).
• SlippageSlippage is the difference between the price you expected for a trade and the price you actually got.
• Trading costsTrading costs are everything a trade costs to make: commission, the spread, slippage, exchange or platform fees, funding on leveraged crypto positions, and tax.
• LiquidityLiquidity is how easily an asset can be bought or sold without moving its price.

Sentiment and crypto positioning

Crowd mood and futures-market positioning measures.

• Funding rateThe funding rate is a periodic payment between long and short holders of a perpetual futures contract.
• Open interestOpen interest is the total number of futures or options contracts that are still open, not yet closed or settled.
• Fear and Greed indexA fear and greed index is a single 0 to 100 score that combines several market measures into a mood reading, where low means fear and high means greed.