Trading glossary
The terms you will meet in the screener, backtests and paper trading, defined without jargon.
Backtest metrics
Win rate
The win rate is the percentage of winning trades out of all trades of a strategy, to be interpreted together with the average win / average loss ratio.
Sharpe ratio
The Sharpe ratio measures a strategy's risk-adjusted return, by dividing its excess performance by the volatility of its returns.
Profit factor
The profit factor is the ratio of a strategy's gross profits to its gross losses: above 1, the strategy is profitable.
Maximum drawdown
The maximum drawdown is the largest decline suffered by the equity curve from a peak to the subsequent trough, expressed as a percentage of capital.
Equity curve
The equity curve plots the evolution of a strategy's capital trade after trade, and its shape often says more than any aggregate metric.
Stop loss
A stop loss is an automatic loss-taking exit level, set before entering a position, which caps each trade's risk at a predetermined amount.
Take profit
A take profit is an automatic profit-taking exit level, set before entering a position, which locks in the gain when price reaches the intended target.
Risk/reward ratio
The risk/reward ratio compares a trade's targeted gain with its accepted loss, and together with the win rate determines whether a strategy has positive expectancy.
PnL (profit and loss)
PnL (profit and loss) is the financial result of a position or portfolio, split into realised PnL on closed positions and unrealised PnL on open ones.
Position sizing
Position sizing is the share of capital committed to a trade, calibrated so that the loss if the stop is hit remains a controlled fraction of the account.
Order types
Market order
A market order is an order executed immediately at the best available price, prioritising certainty of execution over price control.
Limit order
A limit order is an order executed only at the price you set, or better, prioritising price control over certainty of execution.
Trigger order
A trigger order stays dormant until price reaches a defined threshold, then executes, making it the tool of choice for protective stops and breakout entries.
Timeframes
Timeframe
A timeframe is the duration each candle on a chart represents (from one minute to several months) and sets the horizon of the analysis.
Multi-timeframe analysis
Multi-timeframe analysis means studying the same asset across several timeframes, typically a higher one for the trend and a lower one for timing.
Ichimoku
Tenkan-sen
The Tenkan-sen, or Ichimoku conversion line, is the average of the highest high and lowest low over the last 9 periods, used as a short-term trend gauge.
Kijun-sen
The Kijun-sen, or Ichimoku base line, is the average of the highest high and lowest low over the last 26 periods, seen as the market's medium-term equilibrium level.
Senkou Span A
The Senkou Span A is the average of the Tenkan-sen and Kijun-sen, projected 26 periods ahead, and forms the first boundary of the Ichimoku cloud.
Senkou Span B
The Senkou Span B is the midpoint of the last 52 periods' range, projected 26 periods ahead, forming the slow boundary of the Ichimoku cloud.
Chikou Span
The Chikou Span is the current closing price shifted 26 periods back, used in Ichimoku to confirm a trend by comparing today's price with past price action.
Kumo (Ichimoku cloud)
The Kumo, or Ichimoku cloud, is the area between the Senkou Spans A and B, projected forward, which materialises support and resistance and sets the market's bullish or bearish bias.
MACD
Signal line (MACD)
The signal line is the 9-period exponential moving average of the MACD line, whose crossovers with it serve as buy or sell signals.
MACD histogram
The MACD histogram plots the gap between the MACD line and its signal line, thereby measuring whether momentum is accelerating or fading.
Bollinger Bands
Bollinger upper band
The upper Bollinger Band sits two standard deviations above the 20-period simple moving average and marks the upper volatility zone of price.
Bollinger lower band
The lower Bollinger Band sits two standard deviations below the 20-period simple moving average and marks the lower volatility zone of price.
ADX
+DI (positive directional indicator)
The +DI measures the strength of upward directional movement in Welles Wilder's ADX system, by relating bullish price extensions to volatility.
−DI (negative directional indicator)
The −DI measures the strength of downward directional movement in Welles Wilder's ADX system, by relating bearish price extensions to volatility.
Stochastic
%K (stochastic)
The %K is the main line of the stochastic oscillator: it locates the current close, as a percentage, within the range of the last 14 periods.
%D (stochastic)
The %D is the 3-period simple moving average of %K and serves as the stochastic oscillator's signal line, whose crosses with %K are the classic signals.
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