Term Definition
Absorption Occurs when a large order is executed in the market, and the price remains relatively stable. It suggests that there is enough liquidity in the market to absorb the order without causing a significant price movement.
Alpha Alpha is a measure of the excess return generated by an investment or trading strategy above a benchmark or a risk-free rate. It represents the skill or ability of a trader to outperform the market. Algorithmic traders strive to generate positive alpha by developing strategies that can consistently deliver superior returns, taking into account transaction costs and market conditions.
Backtesting Backtesting is the process of evaluating a trading strategy using historical market data to assess its performance. Algorithmic traders use backtesting to simulate the execution of their strategies over past market conditions and determine their profitability and risk metrics. It helps traders identify potential weaknesses or areas for improvement in their strategies before deploying them in live trading.
Bear Raid A market manipulation technique where traders collude to sell a security short to drive down its price, then cover their positions at a profit.
Bid-Ask Spread The difference between the highest price a buyer is willing to pay for an asset (bid) and the lowest price a seller is willing to accept (ask). It indicates the level of liquidity and transaction costs in the market.
Breakeven Point The price at which a trader’s position neither gains nor loses money, often used as a reference point to manage fear of loss.
Chasing the Market The act of entering a trade after it has already moved significantly in one direction, driven by fear of missing out on potential profits or fear of loss.
Churning A market manipulation technique where a broker excessively trades a client’s account to generate commissions for themselves, without regard for the client’s best interests.
Circuit Breakers Pre-determined thresholds set by exchanges to temporarily halt trading in the event of significant market declines to prevent further panic selling or excessive volatility.
Cognitive Biases The tendency to make irrational decisions based on emotions and cognitive shortcuts, such as loss aversion, which can lead to fear of loss.
Co-location Co-location refers to the practice of placing trading servers and infrastructure in close proximity to exchange data centers. By reducing network latency, co-location can enable algorithmic traders to execute trades faster and gain a competitive advantage. It is particularly important for high-frequency trading strategies that rely on ultra-fast execution speeds.
Cornering the Market A market manipulation technique where a trader or group of traders accumulate a significant position in a security to gain control over its supply, allowing them to manipulate the price for their own benefit.
Correlation The degree to which two assets or securities move in relation to each other. Understanding correlation is important in risk management as it can help diversify a portfolio and reduce overall risk.
Crossing Network A crossing network is a type of trading venue or platform that allows institutional investors to trade large blocks of securities directly with each other. It provides an alternative to public exchanges and aims to minimize market impact and reduce transaction costs for participants. Crossing networks typically match buy and sell orders anonymously, facilitating the execution of large trades without disrupting the market.
Cumulative Delta A measure that shows the net difference between buying and selling pressure in the market over a specified period. It helps traders spot divergences and confirm trend reversals.
Dark Pool A private electronic trading platform where institutional investors can buy and sell large blocks of assets without revealing their order to the public market. It helps to minimize market impact and information leakage.
Dark Pool Trading Dark pool trading refers to the practice of executing large trades away from public exchanges, typically in private venues or alternative trading systems. It allows institutional investors to minimize market impact and maintain confidentiality by matching buy and sell orders anonymously.
Dark pools Private, off-exchange trading venues where institutional investors can trade large blocks of securities anonymously, away from the public market.
Delta A measure of the change in the price of an asset for every change in the underlying asset’s order flow. It helps traders identify the strength of buying or selling pressure in the market.
Detachment Detachment refers to the ability to separate oneself emotionally from the outcome of individual trades. It involves understanding that losses are a part of trading and not letting them affect future decision-making or overall trading performance. Detachment allows traders to stay focused on the process rather than getting emotionally attached to the outcome of each trade.
Discipline Discipline refers to the ability to stick to a predetermined trading plan and follow the established rules, regardless of emotional impulses or external market conditions. It involves controlling emotions such as fear, greed, and impulsivity that can lead to poor decision-making.
Drawdown The peak-to-trough decline in the value of an account or portfolio, typically measured as a percentage. It is used to assess the risk of a trading strategy.
Equity Curve A graphical representation of the change in the value of a trading account over time. It provides a visual representation of the performance and risk management of a trading strategy.
Flash Crash A sudden and extreme drop in the prices of securities or markets, often caused by automated trading systems or market disruptions.
Footprint Chart A type of chart that displays the individual trades made at each price level in the market. It helps traders visualize the order flow and identify areas of support and resistance.
Front-month manipulation A market manipulation technique where traders exert influence on the price of a futures contract by actively trading the front-month contract, creating artificial price movements.
Front-running A market manipulation technique where traders use insider information or knowledge of large pending orders to buy or sell securities ahead of the market, profiting from the resulting price movement.
Futures Derivative financial contracts that obligate parties to buy or sell an asset at a predetermined future date and price.
Hidden Order A hidden order is an order that is not displayed on the order book and is not visible to other market participants. It allows traders to execute large orders without revealing their full size, helping to minimize market impact and maintain anonymity.
High-Frequency Trading (HFT) High-frequency trading (HFT) is a trading strategy that utilizes advanced technology and algorithms to execute a large number of trades at high speeds. HFT aims to capitalize on small price differentials and market inefficiencies, often relying on order flow analysis and co-location to gain a competitive advantage.
Iceberg Order A large order that is split into smaller orders and executed over time to avoid revealing the full size of the order to the market. This helps to prevent price manipulation and slippage.
Imbalance An imbalance occurs when there is a disparity between the number of buy orders and sell orders, leading to a shift in price in the direction of the dominant side.
Initial Balance The initial balance refers to the price range established during the first few minutes or hours of trading. It is used to gauge the market’s initial sentiment and can provide insights into potential trading opportunities as the market develops.
Initial Balance (IB) The range of price levels within which the majority of trading activity occurred during the first hour of a trading session, providing insight into the initial market sentiment and potential market direction for the day.
Layering A market manipulation technique where a trader places multiple orders at different price levels with the intention of canceling them before execution, creating false market depth and misleading other traders.
Leverage The use of borrowed capital, such as margin, to increase the potential return of an investment. While leverage can amplify profits, it also increases the potential losses.
Limit Order A limit order is an order to buy or sell an asset at a specific price or better. It is executed only if the market reaches the specified price. A buy limit order is placed below the current market price, while a sell limit order is placed above it.
Limit Order Book The electronic record of all buy and sell limit orders placed in a market, displaying the quantities and prices at which traders are willing to buy or sell a particular asset.
Liquidity Liquidity refers to the ease with which an asset can be bought or sold without affecting its price. A liquid market has a high volume of trades and a low bid-ask spread.
Liquidity Pool A liquidity pool refers to a collection of orders, both buy and sell, for a particular financial instrument within a specific market. These orders contribute to the overall liquidity available in the market, allowing for efficient buying and selling of the asset.
Liquidity provider A market participant, often a financial institution, that adds liquidity to the market by consistently quoting both bid and ask prices, allowing for efficient execution of trades.
Margin Call A notification from a broker to a trader that additional funds must be deposited into the trading account to meet margin requirements, usually because the account has experienced significant losses.
Market Data Market data refers to the real-time information about the current state of the financial markets, including prices, volumes, and order book data. Algorithmic traders rely on accurate and timely market data to make informed trading decisions and develop trading strategies. Market data is often obtained from data providers or directly from exchanges.
Market Depth Refers to the quantity of buy and sell orders placed at different price levels in the market. It provides information on the level of liquidity and demand for an asset.
Market Impact Market impact refers to the effect that a large buy or sell order has on the price of a financial instrument. When a large order is executed, it can cause the price to move in the direction of the order due to the increased demand or supply. Understanding market impact is important for managing risk and optimizing trade execution.
Market Impact Cost Market impact cost refers to the additional cost incurred when executing a large order that moves the market price. It is a measure of the price impact caused by the order and is influenced by factors such as order size, market liquidity, and trading volume.
Market Maker A market maker is an individual or entity that provides liquidity to a market by offering to buy and sell a particular financial instrument. Market makers typically quote both bid and ask prices, facilitating smooth trading and ensuring continuous liquidity for market participants.
Market Making Market making is a strategy employed by trading firms or individuals to provide liquidity to financial markets. Market makers continuously display bid and ask prices for a particular security, facilitating smooth trading by being ready to buy or sell at any given moment.
Market Manipulation Market manipulation refers to the illegal or unethical practices that distort the supply and demand dynamics of a market to create artificial price movements. This can involve spreading false information, manipulating order flow, or engaging in fraudulent trading activity. Market manipulation undermines market integrity and fairness.
Market Microstructure Market microstructure refers to the study of the process and mechanisms that underlie the trading of financial instruments in a particular market. It involves analyzing the structure, organization, and dynamics of the market, including order flow, market participants, and trading rules.
Market Order A market order is an order to buy or sell a financial instrument at the prevailing market price. Unlike a limit order, which sets a specific price, a market order prioritizes execution speed over price, aiming to fill the order as quickly as possible.
Market Participant A market participant refers to any individual or entity actively involved in buying or selling financial instruments in the market. Market participants include individual traders, institutional investors, market makers, and other entities contributing to the liquidity and overall trading activity.
Market Profile A visual representation of the market data that shows the distribution of trading volume and price levels over a specified period. It helps traders analyze the market structure and identify key levels of support and resistance.
Market Surveillance Market surveillance refers to the monitoring and oversight of trading activities to detect and prevent market abuse, manipulation, and other illegal or unethical practices. It involves the use of technology and algorithms to analyze order flow, detect irregularities, and ensure market integrity.
Marking the Close A market manipulation technique where traders manipulate the closing price of a security by executing large orders at the end of the trading day to influence the final settlement price.
Maximum Drawdown The largest peak-to-trough decline in the value of a trading account or portfolio. It measures the maximum loss experienced during a specific period and is used to assess the risk tolerance and effectiveness of a trading strategy.
Mindfulness The practice of being fully present and aware of one’s thoughts, emotions, and actions while trading, which can help manage fear of loss by reducing impulsive and reactive behavior.
Order Book An order book is a list of all buy and sell orders for a particular asset. It shows the number of shares or contracts on offer at each price level.
Order book imbalance A market condition where there is a significant difference in the number of buy and sell orders in the order book, potentially indicating a potential shift in supply and demand dynamics.
Order Execution Order execution refers to the process of filling a buy or sell order in the market. When an order is executed, it means that a trade has taken place and the buyer and seller have agreed on a price. Algorithmic traders aim to execute orders efficiently and at the best available prices to achieve their desired trading outcomes.
Order Flow Order flow refers to the ongoing stream of buy and sell orders in the market. It represents the actual trading activity and provides insights into the supply and demand dynamics. Analyzing order flow can help traders identify potential turning points or areas of support and resistance.
Order Flow Analysis Order flow analysis is a method of analyzing the individual buy and sell orders to gain insights into market dynamics and potential future price movements. It involves examining the size, timing, and aggressiveness of orders to determine the strength and direction of the market.
Order Imbalance An order imbalance occurs when there is an excess of buy or sell orders for a particular asset at a given price level. Order imbalances can indicate potential shifts in supply and demand, leading to price movements. Traders often monitor order imbalances to identify possible trading opportunities.
Order Matching Algorithm An order matching algorithm is a computerized system used by exchanges and trading platforms to match buy and sell orders. The algorithm matches orders based on predefined rules, such as price and time priority, ensuring fair and efficient execution of trades. The order matching algorithm plays a crucial role in determining the market price and order execution.
Order Routing Order routing is the process of directing an order to the appropriate market or liquidity source for execution. It involves analyzing market conditions, available liquidity, and trading rules to determine the most favorable route for order execution. Effective order routing helps to maximize liquidity and improve trade execution.
Order Types Order types refer to the different ways in which traders can submit their buy or sell orders to the market. Common order types include market orders, limit orders, stop orders, and iceberg orders. Each order type has its own characteristics and execution rules, and algorithmic traders often use specific order types depending on their trading strategies and objectives.
Overtrading The tendency to trade excessively, driven by fear of missing out on potential profits or fear of loss.
Painting the Tape A market manipulation technique where traders trade among themselves to create an artificial increase in trading volume and price movements.
Paralysis Analysis The inability to make a trading decision due to fear of loss or making a wrong decision.
Parking A market manipulation technique where a trader temporarily transfers securities or other assets to another party to hide their ownership, artificially inflating or deflating supply and demand in the market.
Patience Patience is the ability to wait for high-probability trading setups and avoid impulsive trades based on emotions or market noise. It involves understanding that not every market condition is suitable for trading and waiting for the right opportunities to arise.
POC (Point of Control) The POC is the price level at which the highest volume of trading activity has occurred within a specific time period. It is a key reference point in market profile analysis and is often seen as an area of high liquidity and potential support or resistance.
Ponzi scheme A market manipulation scheme where an individual or organization attracts investors by promising high returns but uses funds from new investors to pay off earlier investors, creating the illusion of profitability and sustainability.
Poor High/Low A poor high or low refers to a price level within the market profile that has been tested but quickly rejected by the market, resulting in a sharp reversal. These levels are considered weak and can indicate a potential shift in market sentiment as traders look to exit or enter positions.
Position Risk The amount of potential loss that a trader is willing to accept on a single trade. It is determined by factors such as the trader’s risk appetite, account size, and the specific trade setup.
Position Sizing The process of determining the appropriate amount of capital to allocate to a trade based on risk appetite and account size.
Price Discovery Price discovery is the process by which the market determines the fair value or equilibrium price of a financial instrument. It involves the interaction of supply and demand, as reflected in the buy and sell orders, and leads to the establishment of market prices.
Pump and Dump A market manipulation technique where traders spread false information about a company to artificially drive up the stock price before selling their shares at a profit.
Range Extension Range extension refers to a price movement that extends beyond the initial balance or the range established at the beginning of a trading session. It is used in market profile analysis to identify potential breakout or trend continuation opportunities.
Resilience Resilience in trading refers to the ability to bounce back from losses or setbacks without allowing emotions to negatively impact future decision-making. It involves maintaining a positive mindset, learning from mistakes, and staying committed to the trading plan even during challenging periods.
Revenge trading The act of taking on excessive risk to make up for losses incurred in previous trades.
Risk Appetite The level of risk that an individual or entity is comfortable with taking on in their trading activities. It determines the types of trades and strategies that are suitable.
Risk management The process of identifying, assessing, and prioritizing risks in order to minimize potential losses and protect capital.
Risk of Ruin A statistical measure that calculates the probability of a trader depleting their trading account to a certain level, resulting in an inability to continue trading. It helps traders assess and manage the risk of financial ruin in their trading activities.
Risk Reward Ratio A measure used in risk management to assess the potential profitability of a trade relative to the potential loss. It is calculated by dividing the potential reward by the potential risk.
Risk-Reward Ratio A ratio used to determine the potential profit of a trade relative to the potential loss. It is calculated by dividing the potential profit by the potential loss.
Self-awareness Self-awareness involves understanding one’s own emotional tendencies and being able to recognize and manage them during trading. It involves being conscious of emotional triggers, biases, and patterns that can affect decision-making. By developing self-awareness, traders can proactively address emotional reactions and make more rational and objective trading decisions.
Single Print A single print refers to a price level within the market profile that has only been traded at once. These areas often act as magnets for price and can be significant support or resistance levels, as they represent areas where there was limited trading activity.
Slippage The difference between the expected price of a trade and the actual price at which the trade is executed. Slippage can occur during fast market conditions or when there is low liquidity, impacting the risk management of a trade.
Smart Order Router (SOR) A smart order router (SOR) is a component of algorithmic trading systems that automatically routes orders to different trading venues based on predefined rules and parameters. The SOR aims to achieve the best possible execution by considering factors such as price, liquidity, and transaction costs. It dynamically assesses market conditions and redirects orders to the most suitable venue to optimize execution outcomes.
Smart Order Routing Smart order routing (SOR) is a technology used by brokers and trading platforms to route orders to different liquidity sources, such as exchanges and dark pools, in order to achieve the best possible execution. SOR algorithms analyze market conditions, order book data, and liquidity availability to determine the optimal route for each order.
Smart Order Routing (SOR) Smart order routing is a technology used by algorithmic trading systems to automatically route orders to different trading venues based on predefined rules and parameters. It aims to achieve the best possible execution by considering factors such as price, liquidity, and transaction costs.
Spoofing A market manipulation technique where a trader places a large order but cancels it before it gets executed, creating a false impression of market demand or supply.
Stacking the Bid/Ask A market manipulation technique where a trader places a series of large orders on one side of the order book to create the perception of significant demand or supply, influencing the market price.
Statistical Arbitrage Statistical arbitrage is a trading strategy that seeks to profit from pricing discrepancies between related financial instruments. It involves using statistical models to identify patterns and exploit temporary deviations from their expected relationship, typically resulting in simultaneous buying and selling of multiple securities.
Stop hunting A market manipulation technique where traders intentionally trigger stop-loss orders by pushing the price of a security to a level where a large number of these orders are placed.
Stop Loss Order A type of order that is placed to limit potential losses in a trade by automatically closing the position if the price reaches a predetermined level.
Stop Order A stop order is a type of order that becomes a market order once a specified price level is reached. It is used to limit potential losses or protect profits by triggering an order to buy or sell at the prevailing market price. Stop orders are commonly used in risk management strategies.
Sweep Order An order that is executed at the best available price across multiple exchanges or trading venues, rather than being filled at a single venue.
Tape Reading The practice of analyzing the time and sales data (also known as the tape) to gain insights into the buying and selling activity of market participants. It involves closely monitoring the order flow and interpreting the patterns and trends to make trading decisions.
Tick Data Tick data refers to the detailed record of each individual trade and quote that occurs in a financial market. It includes information such as the time of the trade, price, volume, and the bid/ask spread. Tick data is commonly used by algorithmic traders for backtesting, analysis, and developing trading strategies.
Time and Sales A record of all trades made for a particular asset in real-time. It shows the price, size, and time of each trade and helps traders identify patterns and anomalies in the order flow.
Time Price Opportunity (TPO) A TPO represents a specific price level at which trading activity has occurred during a given time period. It is used in market profile analysis to visualize the distribution of trading activity and identify areas of high and low interest.
Timeframe Timeframe refers to the duration or length of a specific time period used in market profile analysis. Different timeframes can be used to analyze different levels of detail and capture different patterns and trends in trading activity.
Trade Execution Trade execution refers to the process of completing a trade by matching a buy order with a corresponding sell order. It involves the actual transfer of ownership of the financial instrument and the determination of the trade price. Efficient trade execution is important for achieving optimal results and minimizing slippage.
Trading psychology The study of the emotional and psychological factors that influence trading decisions, including fear of loss.
Value Area The range of price levels where a specified percentage of total volume was traded within a given timeframe. Typically, the value area represents the area between the upper and lower boundaries where approximately 70% of the trading activity occurred.
Value Area (VA) The range of price levels within which a specified percentage (usually 70-80%) of the traded volume occurred, providing insight into the market’s perception of fair value.
Value Area High (VAH) The Value Area High represents the upper boundary of the value area, which is the price range where a significant portion of trading activity has occurred. It is used in market profile analysis to identify potential resistance levels and areas of interest.
Value Area Low (VAL) The Value Area Low represents the lower boundary of the value area. It is used in market profile analysis to identify potential support levels and areas of interest.
Volatility A statistical measure of the dispersion of returns for a given security or market index. High volatility indicates larger price fluctuations, which can increase the risk of trading.
Volume Accumulation The process of tracking the accumulation or distribution of trading volume over time. By analyzing volume accumulation patterns, traders can identify whether buying or selling pressure is increasing or decreasing, providing insights into potential market trends.
Volume At Price (VAP) A graphical representation of the volume traded at each price level, enabling traders to identify areas of high and low liquidity.
Volume Clusters Concentrations of trading volume at specific price levels that suggest strong support or resistance. Volume clusters indicate that a large number of market participants have shown interest or activity at those levels, making them important reference points for future price movements.
Volume Delta The difference between the volume of buying and selling activity at each price level within a specified timeframe. Positive volume delta indicates a higher volume of buying pressure, while negative volume delta suggests more selling pressure. Volume delta can help identify imbalances in supply and demand.
Volume Exhaustion A condition in which volume decreases significantly after a prolonged period of high trading activity. Volume exhaustion can indicate that the market’s buying or selling power is waning, potentially leading to a reversal or consolidation phase.
Volume Histogram A graphical representation of volume at each price level within a specified period of time. The volume histogram visually displays the distribution of trading activity across different price levels, providing insights into areas of high and low liquidity.
Volume Nodes Price levels on a volume profile chart where significant trading activity took place. These nodes represent areas of consolidation or support/resistance where traders are actively participating.
Volume Profile A graphical representation of the volume traded at different price levels over a specified period of time. Volume profile charts provide insights into the distribution of trading activity and can help identify areas of support and resistance in the market. Allowing traders to visually identify areas of high or low activity.
Volume Profile POC Shift A phenomenon where the Point of Control (POC) of the volume profile shifts from one price level to another. POC shifts can indicate a change in market sentiment and potential shifts in supply and demand dynamics, offering trading opportunities for those who can identify them.
Volume Reversals Reversal patterns that occur when there is a significant shift in trading volume at a specific price level. Volume reversals can indicate a potential change in market direction or the exhaustion of a prevailing trend.
Volume Weighted Average Price (VWAP) A measure of the average price at which a security has traded throughout the day, calculated by factoring in the volume of each trade.
Wash trading A market manipulation technique where a trader simultaneously buys and sells the same security to create the illusion of trading activity, artificially increasing volume and liquidity.
Window dressing A market manipulation technique where a company manipulates its financial statements or portfolio holdings at the end of a reporting period to create a more favorable impression of its financial health or performance.
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