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Trading glossary

Advanced words

53 words, each explained first as you would tell a ten-year-old.

1. at the moneyA price ticket whose set price is about the same as today's price, so it is not yet a winner or a loser.
2. backtestTesting a trading idea on old charts to see how it would have done, before trusting it with anything now.
3. backwardationWhen a deal to buy something later costs less than a deal for sooner, often because the thing is scarce right now.
4. basisThe difference between today's price of something and the price agreed today for a deal that happens later.
5. call optionA ticket that gives you the right, but not the duty, to buy something at a set price before a set date.
6. contangoWhen a deal to buy something later costs more than a deal for sooner, so waiting costs extra.
7. data snoopingTrying so many ideas on the same old charts that one of them looks great just by luck.
8. deltaA number that shows how much a price ticket's value moves when the price of the thing it is based on moves by one.
9. edgeA small advantage that makes a way of trading win a bit more than it loses over many, many trades.
10. entry triggerThe exact small signal that tells you to start a trade once the bigger picture is already right.
11. exerciseUsing the right your buy-or-sell ticket gives you, to actually buy or sell at the set price.
12. expectancyHow much you win or lose on an average trade when you add everything up over many trades.
13. fixed fractional sizingAlways risking the same small slice of your money on each trade, so your bets shrink after losses and grow after wins.
14. forward testTrying your finished trading rules on brand-new charts, without changing them, to see if they still work.
15. higher timeframeA zoomed-out chart, like daily instead of hourly, used to see the big direction first.
16. hypothesisAn idea you want to test, like 'price often bounces here', before you trust it.
17. implied volatilityHow big a move people expect soon, worked out from what buy-or-sell tickets cost. Bigger expected moves make tickets pricier.
18. in the moneyA buy-or-sell ticket that would already be worth something if you used it now.
19. in-sampleThe part of old chart data you use to build and tune your rules.
20. initial marginThe money you must put down to open a buy-it-later deal, like a deposit.
21. intrinsic valueHow much a buy-or-sell ticket would be worth if you used it right now.
22. IV crushWhen buy-or-sell tickets suddenly get cheaper right after big news, because nobody expects a huge move any more.
23. long callBuying a ticket that gains if the price goes up. The most you can lose is what you paid for the ticket.
24. long putBuying a ticket that gains if the price goes down. The most you can lose is what you paid for the ticket.
25. look-ahead biasA testing mistake where your test secretly uses information from the future, so results look far too good.
26. lower timeframeA zoomed-in chart, like hourly instead of daily, used to pick the exact moment to act.
27. mark-to-marketEvery day, gains and losses on buy-it-later deals are counted, and money moves between accounts right away.
28. Monte Carlo simulationShuffling your past trade results thousands of times to see how good or bad the future could be.
29. multi-timeframe analysisLooking at a big zoomed-out chart first for the direction, then a zoomed-in chart to choose the exact moment.
30. optimal-growth formulaA maths formula that finds the bet size that would grow money fastest, if your numbers were exactly right.
31. optionA ticket that gives you the right, but not the duty, to buy or sell something at a set price before a set date.
32. option holderThe person who bought a buy-or-sell ticket and owns its right to use it.
33. option writerThe person who sells a buy-or-sell ticket and must keep its promise if the buyer uses it.
34. out of the moneyA buy-or-sell ticket that would be worth nothing if you used it right now.
35. out-of-sampleChart data you kept hidden while building your rules, used once at the end as a fair test.
36. overfittingTuning your trading rules so closely to old charts that they only fit the past and fail on new charts.
37. payoff diagramA picture that shows how much a buy-or-sell ticket trade wins or loses at every possible final price.
38. premiumThe price you pay for a buy-or-sell ticket. It can also mean paying extra above today's price.
39. profit factorTotal money won divided by total money lost. Above 1 means the wins were bigger than the losses overall.
40. put optionA ticket that gives you the right, but not the duty, to sell something at a set price before a set date.
41. replayPlaying an old chart forward one candle at a time, as if it were live, to practise or test your rules.
42. rule setA group of clear rules that decides exactly which trades you take, so anyone could follow them.
43. short callSelling a price ticket to someone else. You keep the money they pay, but you can lose a lot if the price shoots up.
44. short putSelling a ticket that lets someone sell to you at a set price. You keep their fee but can lose a lot if price falls.
45. spot priceToday's price for buying something and getting it right away, not later.
46. strategyYour complete set of rules for trading: what you trade, when you get in, when you get out and how much you risk.
47. strike priceThe set price on a buy-or-sell ticket at which you are allowed to buy or sell.
48. survivorship biasA testing mistake where you only look at the winners that are still around, forgetting the ones that disappeared.
49. thetaHow much value a buy-or-sell ticket loses every day just because time is passing.
50. time valueThe extra part of a buy-or-sell ticket's price that comes from the time left before it ends.
51. timeframe conflictWhen a zoomed-out chart and a zoomed-in chart point in different directions, so the picture is unclear.
52. value per pointHow much money one whole contract gains or loses when its price moves by one point.
53. walk-forward testingTesting trading rules step by step: tune them on one stretch of old data, check them on the next, then move forward and repeat.