📖 Technical analysis glossary A to Z

🎯 In 30 seconds: Plain definitions of the words used across this guide, one or two sentences each. Some terms link to the chapter that covers them. A definition describes how traders use a word and makes no claim that it predicts prices.

A and B

• ADX (average directional index). A 0 to 100 reading of how strong a trend is, whichever way it points. See Measuring trend strength.
• ATR (average true range). The average size of recent bars, including gaps. It is a common yardstick for stops and position size.
• Backtest. Running a written rule over past data to see how it would have done.
• Base rate. How often something happens on an ordinary day. A signal only matters if it beats this.
• Bollinger Bands®. Lines a set number of standard deviations above and below a moving average. They widen when price swings more.
• Breakout. A close beyond a level or pattern boundary that had held before.

C and D

• Candlestick. A bar drawn with a thick body between open and close and thin wicks to the high and low.
• Channel. Two roughly parallel lines that contain price as it trends.
• Confluence. Several separate kinds of evidence pointing to the same price area.
• Continuation pattern. A pause shape, such as a flag or triangle, that often resolves in the direction of the prior trend.
• Crossover. The moment one line moves above or below another, such as a fast average crossing a slow one.
• Divergence. Price makes a new high or low while a momentum tool does not. See Divergence.
• Doji. A candle whose open and close are nearly equal, showing a standoff for that bar.
• Double top and double bottom. Two peaks, or two troughs, at about the same price. The pattern completes on a close through the level between them.
• Drawdown. The fall from a peak in price or account value to the following low, usually in percent.

E to G

• EMA (exponential moving average). An average that gives recent bars more weight, so it turns sooner than a simple average.
• Engulfing pattern. A two-candle pattern where the second body completely covers the first body, in the opposite color.
• Expectancy. The average result per trade, combining how often you win with how much you win and lose.
• Failed breakout. A break of a level that quickly reverses back inside.
• Fibonacci retracement. Lines at set fractions, such as 38.2%, 50% and 61.8%, of a prior move, used to mark possible pullback areas.
• Flag. A short, tight drift against a sharp move, shaped like a small slanted rectangle.
• Gap. An empty space between one bar’s range and the next, usually after news outside trading hours.
• Golden cross and death cross. The 50-day average crossing above (golden) or below (death) the 200-day average.

H to L

• Hammer. A candle with a small body near the top and a long lower wick, appearing after a decline.
• Head and shoulders. Three peaks with the middle one highest. It completes on a close below the line joining the two troughs.
• Higher high and higher low. Each swing peak and each swing trough above the one before, the basic shape of an uptrend.
• Indicator. A number or line calculated from price, volume or both, plotted to help read the chart.
• Invalidation level. The price that would show a chart reading is wrong. Stops usually go just beyond it.
• Liquidity. How easily shares trade without moving the price. High volume and tight spreads mean good liquidity.
• Log scale. A price axis where equal distances mean equal percentage changes.

M to O

• MACD. The gap between a fast and a slow exponential average, shown with a signal line and a histogram. See MACD.
• Mean reversion. The idea that a stretched price tends to move back toward an average.
• Measured move. A target set by adding a pattern’s height to its breakout point.
• Momentum. The speed of price change. Rising momentum means moves are getting larger in one direction.
• Moving average. The average closing price over a set number of recent bars, recalculated each bar.
• OBV (on-balance volume). A running total that adds volume on up days and subtracts it on down days.
• Oscillator. An indicator that swings within a band or around a center line, such as RSI.
• Out-of-sample. Data kept aside and not used while building a rule, so it can serve as a fair test later.
• Overbought and oversold. Readings near the top or bottom of an oscillator’s range. Neither one means price must turn.
• Overfitting. Tuning a rule so closely to past data that it captures noise and fails on new data.

P and R

• Paper trading. Following trades with pretend money to test a plan in real time without risk.
• Position size. How many shares to hold, usually set so a stop-out loses a fixed slice of the account.
• Pullback. A move against the trend that does not break the trend’s structure.
• R multiple. A trade’s result divided by the amount risked. A gain of twice the risk is +2R.
• Range. Sideways movement between a fairly clear floor and ceiling. Also, one bar’s high minus its low.
• Relative strength. A stock’s performance compared with an index or another stock. It is different from RSI.
• Resistance. A price area where selling has stopped rises before.
• RSI (relative strength index). A 0 to 100 oscillator comparing the size of recent up closes with recent down closes.

S

• Slippage. The difference between the price you expected and the price you got.
• SMA (simple moving average). An average that weights each bar in the window equally.
• Spread. The gap between the highest bid and the lowest offer. You pay part of it on every trade.
• Squeeze. A period when volatility bands narrow to unusually tight levels.
• Stochastic oscillator. Shows where the close sits within the recent high-low range, from 0 to 100.
• Stop order. An order that becomes a market order once a set price trades. A gap can fill it at a worse price.
• Support. A price area where buying has stopped falls before.
• Swing high and swing low. A peak with lower highs on both sides, or a trough with higher lows on both sides.

T to W

• Time frame. The span of time each bar covers, such as five minutes, one day or one week.
• Trailing stop. A stop that moves with price in your favor and never moves back.
• Trend. A sustained direction shown by the order of swing highs and lows.
• Trendline. A straight line through two or more swing lows in an uptrend, or swing highs in a downtrend.
• True range. The largest of: high minus low, high minus prior close, and prior close minus low. It counts gaps.
• Volatility. How much price typically moves over a period, measured by ATR or standard deviation.
• Volume. The number of shares traded during a bar.
• VWAP (volume-weighted average price). The average price paid, weighted by volume, over a session or from a chosen start.
• Wick. The thin line above or below a candle’s body. Also called a shadow.

Short forms

Sources

• J. Welles Wilder Jr., New Concepts in Technical Trading Systems (1978), RSI, ATR, true range and ADX.
• John Bollinger, Bollinger on Bollinger Bands (2001).
• Steve Nison, Japanese Candlestick Charting Techniques (1991), candle terms.
• Gerald Appel, Technical Analysis: Power Tools for Active Investors (2005), MACD.
• Robert D. Edwards and John Magee, Technical Analysis of Stock Trends (first published 1948), chart pattern terms.
• U.S. Securities and Exchange Commission, Investor.gov, definitions of order types.
• Moneydesks Technical Analysis tool: the Indicator guide tab.