Glossary of Systems Trading Terms

Back testing The process of testing and optimizing a trading strategy using relevant historical data to guage its predictive validity and effectiveness.

Breakout A price movement that pierces the upper or lower boundaries of a trading range.

Counter-trend A trading strategy that aims to make small gains through a series of trades against the current trend.

Futures A financial contract that obligates the buyer (seller) to purchase (sell and deliver) financial instruments or physical commodities at a future date, unless the holder's position is closed prior to expiration.

Limit Order An order in which the customer specifies a minimum sale price or maximum purchase price, as contrasted with a market order, which implies that the order should be filled as soon as possible at the market price.

Liquidity Describes the level to which a security can be traded without significantly affecting price.

Margin The amount of money or collateral deposited by a customer with his broker.

Paper trading Simulated trading that investors use to practice trading without risking any money.

Slippage The difference between estimated transaction costs and the amount actually paid.

Stop Order This is an order that becomes a market order when a particular price level is reached. A sell stop is placed below the market, a buy stop is placed above the market. Sometimes referred to as Stop Loss Order.

Technical analysis An approach to forecasting commodity prices that examines patterns of price change, rates of change, and changes in volume of trading and open interest, without regard to underlying fundamental market factors.

Trend-following A trading strategy that attempts to capture gains through the analysis of an asset's momentum in a particular direction. The trend trader enters into a long position when a stock is trending upward (successively higher highs). Conversely, a short position is taken when the stock is in a down trend (successively lower highs).

Volatility A statistical measure of the tendency of a market or security to rise or fall sharply within a period of time.