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Trading glossary

About this glossary

Precise, plain-English definitions of the terms used in chart-pattern and momentum trading — each with how it is measured, an example, common mistakes and how PatternX uses it.

A

Average True Range (ATR): Average True Range (ATR) is a volatility indicator that averages true range over a set number of periods, usually 14. True range is the largest of a bar's high-low range and the distances from its high and low to the previous close.

B

Backtesting: Backtesting is running a trading strategy's rules over historical market data to see how they would have performed, under stated assumptions about fills and costs. It measures past behavior; it does not predict future results.
Bid-ask spread: The bid-ask spread is the difference between the highest price a buyer is currently bidding and the lowest price a seller is asking. You pay it, in effect, whenever you buy at the ask or sell at the bid.
Breakout: A breakout is a decisive move of price through a defined level, such as resistance, support, a trendline or a pattern boundary, that traders read as a sign that a new move in that direction may be starting.

C

Chart pattern: A chart pattern is a recurring shape that price traces on a chart, such as a triangle, flag or head and shoulders, which traders use to judge whether a move is more likely to continue or to reverse.
Confidence score: A confidence score is a single number, often on a 0–100 scale, that summarizes how well a trading setup meets a system's criteria. It grades the setup against defined rules; it is not a measured probability that the trade will profit.
Continuation pattern: A continuation pattern is a pause or consolidation inside an existing trend, such as a flag, pennant or rectangle, that is expected to resolve in the same direction as the trend that came before it.

D

Deterministic trading: Deterministic trading is a rule-based approach in which fixed, explicit rules make every decision, so the same market data always produces the same signal and each outcome can be traced to the rule that caused it.

E

Extended-hours trading: Extended-hours trading is trading outside a market's regular session: before the open (premarket) and after the close (after-hours). In US stocks the regular session runs 09:30–16:00 New York time, and the extended sessions usually have thinner liquidity and wider spreads.

F

False breakout: A false breakout, or fakeout, occurs when price moves beyond a key level or pattern boundary but fails to hold there, quickly returning inside and often trapping traders who entered on the break.
Funding rate: The funding rate is a periodic payment between holders of long and short positions in a perpetual futures contract, designed to keep the contract's price close to the spot price. When it is positive, longs pay shorts; when negative, shorts pay longs.

L

Liquidity: Liquidity is how easily an asset can be bought or sold quickly, in size, without moving its price much. Liquid markets show tight bid-ask spreads, deep order books and steady trading volume.

M

Market capitalization: Market capitalization (market cap) is the total market value of a company's outstanding shares: shares outstanding multiplied by the current share price. It is the standard measure of a listed company's size.
Measured move: A measured move is a price target found by projecting a pattern's height, or the length of the move that preceded it, from the breakout point in the direction of the breakout.
Momentum: Momentum is the strength and speed of a price move: how far and how fast price has traveled over a recent period. Momentum trading rests on the idea that a strong move can keep going for a while before it fades.
Moving average: A moving average is the average price over a fixed number of recent periods, recalculated with each new bar. A simple moving average weights every period equally; an exponential moving average weights recent prices more.
Multi-timeframe analysis: Multi-timeframe analysis means checking the same market on two or more chart timeframes, typically a higher one for trend and context and a lower one for timing, before acting on a setup.

N

Neckline: A neckline is the line connecting the reaction lows (or highs) between the peaks (or troughs) of a reversal pattern such as head and shoulders or a double top; a break through it completes the pattern.

O

Order book: An order book is the live list of buy orders (bids) and sell orders (asks) waiting at each price level for an instrument, with the quantity at each level. It shows how much size is ready to trade near the current price.

P

Paper trading: Paper trading is simulated trading with virtual money against live market prices. It lets you test a strategy, a platform or your own discipline without risking capital, but simulated fills are usually kinder than real ones.
Premarket trading: Premarket trading is buying and selling stocks before the regular session opens. In US equities it can start as early as 04:00 New York time and runs until the 09:30 open, typically with fewer participants, wider spreads and sharper swings than later in the day.
Price gap: A price gap occurs when a market opens noticeably above (gap up) or below (gap down) where it last traded, skipping a range of prices with no trades in between. In stocks, gaps most often form between one session's close and the next open.

R

Relative volume (RVOL): Relative volume (RVOL) compares how much a security is trading with how much it normally trades over a comparable period, expressed as a ratio. An RVOL of 3 means volume is running at three times its usual level.
Reversal pattern: A reversal pattern is a chart formation that marks a likely change in trend direction, from up to down or from down to up, such as a head and shoulders, a double top or bottom, or a rounding bottom.
Risk-reward ratio: The risk-reward ratio compares what a trade could lose if its stop is hit with what it could gain if its target is reached. Written as reward:risk, a value of 2 means the target is twice as far from the entry as the stop.

S

Slippage: Slippage is the difference between the price you expected when you placed an order and the price at which it actually filled. It is usually a cost, and it grows when markets are fast, thin or gapping.
Stop-loss order: A stop-loss order closes a position automatically once price moves a set distance against you, to limit the loss on a trade. It fixes the price at which the exit is triggered, not the price at which it fills.
Support and resistance: Support is a price zone where buying has repeatedly stopped declines, and resistance is a zone where selling has repeatedly capped advances. Both are areas on the chart rather than exact prices.
Swing high and swing low: A swing high is a bar whose high is above the highs of the bars on either side of it, and a swing low is a bar whose low is below its neighbors' lows. Together they mark price's turning points.

T

Take-profit order: A take-profit order closes a position automatically when price reaches a preset target in your favor, locking in the gain. It is usually a limit order, so it fills at the target or better, but only if the market trades there.
Technical analysis: Technical analysis is the study of past price and volume, usually on charts, to judge the likely direction, strength and risk of future price moves, rather than to estimate what an asset is fundamentally worth.
Trading volume: Trading volume is the number of shares, contracts or coins that change hands in a given period, such as one candle or one day. It shows how much participation stands behind a price move.
Trailing stop: A trailing stop is an exit level that follows price at a set distance as a trade moves in your favor and never moves back. If price reverses by the trail distance from its most favorable level since entry, the position is closed.
Trendline: A trendline is a straight line drawn through two or more rising swing lows in an uptrend, or falling swing highs in a downtrend, used to show the trend's slope and to mark a moving level of support or resistance.

V

Volatility: Volatility is how much and how quickly an asset's price fluctuates, usually measured as the standard deviation of its returns or as an average trading range. Higher volatility means larger, less predictable swings.
VWAP (Volume-Weighted Average Price): VWAP (volume-weighted average price) is the average price a security has traded at over a period, usually one session, with each price weighted by the volume traded at it. It equals the average price paid per share traded so far.