Technical Analysis Glossary

A phase in the market cycle where institutional traders buy large quantities of an asset quietly over a period of time, keeping the price relatively range-bound before a markup phase.

A technical indicator used to measure the strength of a trend on a scale of 0 to 100. Values above 25 generally indicate a strong trend.

A volatility indicator that shows how much an asset moves, on average, during a given time frame. It does not indicate trend direction, only volatility.

A volatility indicator that measures the average range of price movement of an asset over a specified period (typically 14 days).

Detailed Explanation

Developed by J. Welles Wilder Jr., the Average True Range (ATR) calculates the average of the True Ranges (TR) of an asset, which accounts for price gaps between sessions. High ATR indicates high volatility (wide price fluctuations), whereas low ATR indicates low volatility. Traders use ATR to set logical stop-loss levels and to size positions based on market volatility.

Practical Trading Example

Using a 2x ATR stop-loss on a stock where the current ATR is $2.00. This places the stop-loss exactly $4.00 below the entry price, protecting the trade from average intraday noise.

Related Concepts

• Volatility
• Position Sizing
• Maximum Drawdown
• Risk Management

The process of testing a trading strategy against historical data to evaluate its performance and expectancy before risking real money.

Detailed Explanation

Backtesting validates whether a strategy's rules have a genuine, repeatable statistical edge or if they are prone to failure.

Practical Trading Example

Manually auditing the last 100 occurrences of a breaker block setup on the Nasdaq to record its historical win rate.

Related Concepts

• Strategy Evaluation
• Trading Edge
• Expectancy

A market condition characterized by a sustained period of falling prices, typically defined by a decline of 20% or more from recent highs, accompanied by widespread pessimism.

A chart formation where price makes a new higher high, but the momentum indicator prints a lower high.

Detailed Explanation

Bearish divergence indicates that despite the rising price highs, buying pressure and momentum are decaying. It is typically found at the peak of mature trends or horizontal resistance levels, warning traders of potential buyers' exhaustion and an impending downward reversal.

Practical Trading Example

Tightening stop-losses or short-selling a stock when price prints a higher high at resistance while the RSI prints a lower high of 60 compared to a previous 75.

Related Concepts

• Bullish Divergence
• Hidden Divergence
• Relative Strength Index (RSI)
• Divergence

A volatility indicator consisting of a simple moving average (typically 20 periods) and two standard deviation bands plotted above and below the SMA.

A failed order block that has been broken by an impulsive market move, undergoing a role reversal to act as support or resistance.

A price movement through an established support or resistance level. A breakout is often accompanied by increased volume, signaling strong momentum.

A bullish continuation pattern featuring a sharp upward price spike (the flagpole) followed by a downward-sloping, tight consolidative range (the flag) before breaking out upward.

A market condition characterized by a sustained period of rising prices, optimistic investor sentiment, and strong economic/fundamental indicators.

A chart formation where price makes a new lower low, but the momentum indicator prints a higher low.

Detailed Explanation

Bullish divergence indicates that despite the lower prices, the downward selling momentum is weakening. It is often observed at the bottom of trends or horizontal support levels, suggesting that sellers are losing control and a bullish reversal or technical bounce is imminent.

Practical Trading Example

Buying a stock when price touches horizontal support with a lower low, but the RSI prints a higher low at 35, followed by a bullish engulfing trigger candle.

Related Concepts

• Bearish Divergence
• Hidden Divergence
• Relative Strength Index (RSI)
• Divergence

A two-candle reversal pattern where a small bearish candle is followed by a larger bullish candle whose body completely overlaps or "engulfs" the previous candle's body.

A method of displaying financial price data that shows the open, high, low, and closing prices of a security for a specific time period.

Detailed Explanation

Originated in Japan, candlesticks consist of a solid body representing the open-to-close range, and thin shadows (wicks) showing the high-to-low extremes.

Practical Trading Example

Using a 1-hour green candlestick to see that buyers drove the price up from the hourly open to close near the high.

Related Concepts

• OHLC
• Bullish Engulfing
• Morning Star

The strategic distribution of trading capital across different assets, sectors, or strategies to optimize risk and returns.

Detailed Explanation

Capital allocation rules prevent you from over-investing in a single asset, protecting your overall portfolio from sector-specific crashes.

Practical Trading Example

Allocating a maximum of 10% of your account capital to any single stock trade, and diversifying the rest across gold and bonds.

Related Concepts

• Position Sizing
• Portfolio Exposure
• Diversification

The earliest structural shift on a chart, occurring when price violates the immediate minor swing high or low.

Detailed Explanation

ChoCH represents a shift in short-term institutional order flow from buying to selling (or vice versa), providing an early warning before the macro MSB occurs.

Practical Trading Example

A minor pullback floor is broken on high volume at the peak of a mature uptrend, signaling a bearish ChoCH.

Related Concepts

• Market Structure Break (MSB)
• Order Block

The overlapping of multiple technical indicators or price action factors at the same price coordinate, increasing trade probability.

Detailed Explanation

Confluence filters out random signals. When an order block, Fibonacci level, and key support align at the same price, the trade setup has higher confidence.

Practical Trading Example

Buying a stock where a Daily bullish order block overlaps with a 61.8% Fibonacci retracement level.

Related Concepts

• Trading Edge
• Confluence Trading

The danger of holding multiple positions in assets that move in tandem, creating hidden leverage and magnifying drawdown risks.

A temporary, short-lived recovery in the price of a declining asset, followed by a continuation of the downtrend.

A bearish chart pattern formed when a short-term moving average (typically the 50-period SMA) crosses below a long-term moving average (typically the 200-period SMA).

Detailed Explanation

The Death Cross is a lagging indicator that confirms long-term cycle shifts from a bull market to a bear market. It indicates that selling pressure is accelerating over the short term relative to the long term. Traders use it to confirm macro bearish bias and implement defensive or short-selling strategies.

Practical Trading Example

Closing out long swing positions or initiating protective hedges when the 50-day simple moving average crosses below the 200-day simple moving average.

Related Concepts

• Golden Cross
• Moving Average (MA)
• Trend Confirmation
• Lagging Indicator

The psychological ability to strictly execute your trading plan and rules consistently, regardless of emotional pressures.

Detailed Explanation

Discipline is the bridge between having a trading edge and achieving consistent results. Without it, even the best strategy will lose money.

Practical Trading Example

Refusing to trade during a consolidation range because your plan explicitly rules out range trading, despite feeling bored.

Related Concepts

• FOMO
• Revenge Trading
• Overtrading

An event where the price of an asset moves in the opposite direction of a technical indicator (such as the RSI, MACD, or volume), often signaling a potential trend reversal or continuation.

Detailed Explanation

Divergence occurs when price makes a higher high or lower low that is not confirmed by momentum or volume oscillators. This disagreement indicates that the strength of the move is decaying, warning traders of trend exhaustion or potential continuation setups.

Practical Trading Example

Spotting a stock printing a new lower low while its RSI prints a higher low indicates a bullish divergence, suggesting a bounce or trend reversal may be near.

Related Concepts

• Relative Strength Index (RSI)
• Volume Divergence
• Momentum Divergence
• MACD (Moving Average Convergence Divergence)

A bullish reversal chart pattern consisting of two consecutive troughs at approximately the same price level, separated by a peak (the neckline).

A market direction characterized by a sequence of lower highs and lower lows.

Detailed Explanation

A downtrend indicates that supply is greater than demand. Bearish sentiment dominates, and sellers aggressively distribute shares on every weak bounce.

Practical Trading Example

Short-selling an index that continues to break below previous support levels, creating lower peaks and troughs.

Related Concepts

• Trend
• Lower High
• Lower Low

A type of moving average that places a greater weight and significance on the most recent data points, making it more responsive to new price information.

A price movement through a support or resistance level that fails to sustain momentum and quickly reverses.

Detailed Explanation

Often engineered by institutions to sweep liquidity, false breakouts trap retail breakout traders on the wrong side of the market.

Practical Trading Example

Buying a stock as it breaks above $50, only for it to fall back to $47 on the next candle, leaving you trapped.

Related Concepts

• Liquidity Sweep
• Breakout
• Resistance

An acronym for Fear Of Missing Out, which drives traders to enter trades impulsively due to anxiety about missing a price move.

Detailed Explanation

FOMO leads to poor execution, such as chasing breakouts at premium prices, right before the market retraces to hit your stop.

Practical Trading Example

Buying a stock after it has already surged 15% in one hour because you are afraid of missing the rest of the rally.

Related Concepts

• Revenge Trading
• Overtrading
• Discipline

An area on a chart where no trading activity took place, visible as an empty space between two consecutive candles.

Detailed Explanation

Gaps occur due to order flow imbalances, usually when high-impact news releases occur overnight or during weekend market closes.

Practical Trading Example

A stock closing at $50 on Monday and opening at $53 on Tuesday morning due to an earnings beat, leaving a $3 gap.

Related Concepts

• Loud Move
• Breakout

A bullish chart pattern formed when a short-term moving average (typically the 50-period SMA) crosses above a long-term moving average (typically the 200-period SMA).

Detailed Explanation

The Golden Cross is a lagging indicator that confirms long-term cycle shifts from a bear market to a bull market. It indicates that buying pressure is accelerating over the short term relative to the long term. Traders use it to confirm macro trend direction and look for buying opportunities on pullbacks.

Practical Trading Example

Confirming a long-term bull market on the S&P 500 daily chart after the 50-day simple moving average crosses above the 200-day simple moving average.

Related Concepts

• Death Cross
• Moving Average (MA)
• Trend Confirmation
• Lagging Indicator

A bearish reversal pattern featuring a peak (shoulder), followed by a higher peak (head), and then another lower peak (shoulder), all resting on a support line called the neckline.

A chart formation where the price makes a higher low (in an uptrend) or a lower high (in a downtrend), while the momentum indicator does the opposite.

Detailed Explanation

Hidden divergence is a continuation pattern that signals that a trend remains healthy.

• Bullish Hidden Divergence occurs when price makes a higher low while the oscillator makes a lower low. It shows momentum has recharged while structure was preserved.
• Bearish Hidden Divergence occurs when price makes a lower high while the oscillator makes a higher high. It shows selling momentum has recharged.

Practical Trading Example

Buying a pullback during a daily uptrend when the price forms a higher low but the RSI drops to a lower low of 30, signaling momentum is reset and ready to resume the rally.

Related Concepts

• Bullish Divergence
• Bearish Divergence
• Relative Strength Index (RSI)
• Divergence

A peak in price that is higher than the preceding peak, indicating a continuation of bullish momentum.

Detailed Explanation

Higher highs are the primary signature of an uptrend. They prove that buyers are willing to pay increasingly expensive prices to acquire the asset.

Practical Trading Example

A stock peaks at $120, pulls back to $110, and then rallies to peak at $130, setting a new Higher High.

Related Concepts

• Uptrend
• Higher Low (HL)

A trough in price that is higher than the preceding trough, indicating that sellers are losing control on pullbacks.

Detailed Explanation

Higher lows show that buyers are stepping in earlier on pullbacks to support the price, confirming strong underlying demand.

Practical Trading Example

A stock pulls back to $100, rallies to $115, and then pulls back to hold support at $105, setting a Higher Low.

Related Concepts

• Uptrend
• Higher High (HH)

The creation of a false support or resistance level to trap retail traders and accumulate liquidity before the real market move begins.

A price level containing a high concentration of stop-loss and breakout pending orders (typically at equal highs or equal lows).

A market maneuver where price spikes beyond a key structural high or low to trigger stops before reversing immediately.

Detailed Explanation

Institutions use sweeps to gather the counterparty volume needed to fill their large orders by triggering clusters of stop-loss orders.

Practical Trading Example

Price spikes above a double top to trigger buy stops, and immediately closes back inside the range, trapping breakout buyers.

Related Concepts

• Liquidity Pool
• Inducement
• False Breakout

A sharp, rapid price expansion accompanied by high volume, indicating strong institutional intent.

Detailed Explanation

Loud moves break ranges and create structural imbalances (like fair value gaps), showing that major market players are actively driving prices.

Practical Trading Example

A sudden 5% surge in a stock's price within 10 minutes on triple average volume following a macro data release.

Related Concepts

• Volume
• Gap
• Market Structure Break (MSB)

A peak in price that is lower than the preceding peak, indicating declining buying momentum.

Detailed Explanation

Lower highs are a classic signal of a downtrend or trend exhaustion. They show that buyers fail to push prices back to previous high levels.

Practical Trading Example

A stock peaks at $150, drops to $130, and then bounces to peak at only $140, setting a Lower High.

Related Concepts

• Downtrend
• Lower Low (LL)

A trough in price that is lower than the preceding trough, indicating a continuation of bearish momentum.

Detailed Explanation

Lower lows confirm that sellers are aggressively driving prices down and breaking through previous support floors.

Practical Trading Example

A stock drops to $90, bounces to $98, and then drops again to close at $85, setting a new Lower Low.

Related Concepts

• Downtrend
• Lower High (LH)

A trend-following momentum indicator that shows the relationship between two moving averages of an asset's price, typically calculated by subtracting the 26-period EMA from the 12-period EMA.

Detailed Explanation

The MACD consists of the MACD Line, the Signal Line (a 9-period EMA of the MACD Line), and a histogram representing the difference between the two. Traders look for crossovers and divergences between the price and MACD histogram to confirm trend direction and exhaustion.

Practical Trading Example

Entering a trade when the MACD Line crosses above the Signal Line following a bullish divergence on the daily chart.

Related Concepts

• Momentum Divergence
• Trend Crossover
• Signal Line
• Divergence

A disagreement between price direction and the MACD line or histogram, signaling momentum deceleration and a potential trend reversal or continuation.

Detailed Explanation

MACD Divergence occurs when price prints a new high/low while the MACD lines or histogram bars print a lower high/higher low. It reveals that the rate of price change is slowing down, suggesting that the prevailing trend is losing steam. It can be divided into Line Divergence (cycle focus) and Histogram Divergence (speed focus).

Practical Trading Example

Buying a stock when price sets a lower low, but the MACD Line sets a higher low, followed by a bullish crossover of the MACD Line over the Signal Line.

Related Concepts

• RSI Divergence
• Momentum Divergence
• MACD (Moving Average Convergence Divergence)
• Divergence

A structural event where price breaks and closes past a major swing high or swing low, signaling a trend change or continuation.

Detailed Explanation

An MSB occurs when the macro trend structure is broken, such as a downtrend making a higher high, confirming that the old trend is officially over.

Practical Trading Example

A currency pair breaking above its last major lower high on the daily chart, confirming a bullish Market Structure Break.

Related Concepts

• Change of Character (ChoCH)
• Trend
• Higher High

The largest peak-to-trough percentage decline in an account's equity curve before a new peak is achieved.

Detailed Explanation

Max Drawdown is the single most important metric for evaluating the historical risk and downside profile of a trading system.

Practical Trading Example

An account peaks at $10,000, drops to $8,000 during a losing streak, and then rallies to $11,000. The maximum drawdown was 20% ($2,000/$10,000).

Related Concepts

• Risk of Ruin
• Portfolio Exposure

A failed order block that did not sweep liquidity before the structural break, acting as a level for institutions to close losing trades at break-even.

A disagreement between price direction and momentum oscillators such as RSI, MACD, or Stochastic.

Detailed Explanation

Momentum divergence shows that the speed and velocity of price action is decelerating relative to the price itself. This signals that the current trend is losing steam and is highly vulnerable to a consolidation phase or a sharp reversal.

Practical Trading Example

Spotting a daily MACD crossover to the downside while price prints a higher high, indicating a bearish momentum divergence.

Related Concepts

• RSI Divergence
• MACD Divergence
• Relative Strength Index (RSI)
• MACD (Moving Average Convergence Divergence)
• Divergence

A statistical tool that randomizes the sequence of past trades to test sequence risk and evaluate the probability of severe account drawdowns.

The process of analyzing the same financial asset across different timeframes (e.g. Daily, 4H, 1H) to align entries with macro trends.

Detailed Explanation

Traders use top-down analysis to identify overall market direction on higher timeframes (bias) and zoom into lower timeframes to execute precise, low-risk entries.

Practical Trading Example

Identifying a bullish Daily trend and dropping to the 15-minute chart to find a Change of Character entry.

Related Concepts

• Trend
• Confluence
• Strategy Evaluation

An acronym standing for Open, High, Low, and Close, representing the key price points of a specific trading period.

Detailed Explanation

OHLC data summarizes the market activity of any candle bar: Open is the starting price, High is the peak, Low is the trough, and Close is the final transaction price.

Practical Trading Example

A stock with OHLC values of [100, 105, 99, 104] opened at $100, hit $105, dipped to $99, and closed at $104.

Related Concepts

• Candlestick
• Volume

A price zone representing institutional accumulation or distribution where large limit orders are placed at key swing points, marked by the last opposing candle before an impulsive move.

The act of trading too frequently or with excessive position sizes, driven by boredom, greed, or emotional distress.

Detailed Explanation

Overtrading degrades execution quality. It results in taking low-probability setups that do not fit your trading edge, leading to fee drag and losses.

Practical Trading Example

Placing 15 intraday trades in a consolidating market because you feel the need to be active, despite having no valid setups.

Related Concepts

• FOMO
• Revenge Trading
• Discipline

Predetermined support and resistance levels calculated mathematically using the previous session's high, low, and close prices.

Detailed Explanation

Pivot Points are leading indicators that floor traders and day traders use to project potential key intraday inflection coordinates. The central Pivot Point (PP) dictates the overall daily bias, while R1, R2, R3 represent potential resistance ceilings, and S1, S2, S3 represent potential support floors.

Practical Trading Example

Setting an intraday profit target exactly at the R1 Pivot level ($105.00) after entering a long bounce trade at the S1 Support line ($95.00).

Related Concepts

• Support
• Resistance
• Intraday Trading
• Trend Bias

The combined total risk or market value of all active positions currently open in a trading account.

The size of a position within a portfolio or the dollar amount that a trader risks on a single trade, typically calculated as a percentage of total trading capital.

A relative pricing grid that divides a swing range into an expensive Premium zone (>50%) and a cheap Discount zone (<50%) relative to the equilibrium midpoint.

A performance metric calculated by dividing total gross profits by total gross losses; values above 1.5 indicate a healthy system.

A temporary price pause or moderate retracement against the primary trend direction.

Detailed Explanation

Pullbacks are healthy market reactions. They offer high-probability entry coordinates for trend-following traders in the discount or premium zones.

Practical Trading Example

Buying a stock at a discount after it pulls back 5% during a strong daily uptrend.

Related Concepts

• Retest
• Trend
• Premium & Discount

A market environment where price trades between a consistent high resistance boundary and a low support boundary.

Detailed Explanation

In a range-bound market, institutions accumulate long positions at the bottom and distribute shorts at the top, waiting for a breakout.

Practical Trading Example

Trading a stock that bounces between $45 support and $50 resistance repeatedly.

Related Concepts

• Sideways Market
• Support
• Resistance

A momentum oscillator that measures the speed and change of price movements on a scale from 0 to 100.

Detailed Explanation

Developed by J. Welles Wilder Jr., the RSI helps traders identify overbought (typically above 70) and oversold (typically below 30) market conditions. It is also a key tool for detecting momentum divergences when price and RSI trends disagree.

Practical Trading Example

An asset rallies to a new high, but the RSI makes a lower high at 62 instead of crossing above 70. This bearish divergence signals momentum exhaustion.

Related Concepts

• Divergence
• Momentum
• Overbought
• Oversold

A price level where selling pressure is strong enough to prevent the price from rising further. It represents a "ceiling" on the chart.

A price movement back to a previously broken support or resistance level to verify it holds as the opposite barrier.

Detailed Explanation

Retests occur because broken levels trigger limit orders and trapped positions. A successful retest confirms a role reversal (broken resistance becomes support).

Practical Trading Example

Price breaks above $100 resistance, pulls back to touch $100, and bounces, confirming a successful retest.

Related Concepts

• Pullback
• Support
• Resistance

The emotional behavior of entering trades impulsively immediately after a loss to try and win back the lost money.

Detailed Explanation

Revenge trading violates all rules of risk management. It is driven by anger and ego, and usually results in even larger drawdowns.

Practical Trading Example

Sizing up to double your risk on a random trade immediately after getting stopped out of your last setup.

Related Concepts

• FOMO
• Overtrading
• Discipline

The mathematical probability that a trading account will suffer a drawdown so severe that recovery becomes statistically impossible.

A measure used to compare the potential profit of a trade against its potential loss. A ratio of 1:2 means the trader is risking $1 to potentially make $2.

A disagreement between price direction and the Relative Strength Index (RSI), signaling momentum deceleration and potential trend reversals or continuations.

Detailed Explanation

RSI Divergence highlights when the velocity of price swings is slowing down. It is classified into Normal Divergences (signaling trend reversals at LL/HL or HH/LH) and Hidden Divergences (signaling trend continuations at HL/LL or LH/HH).

Practical Trading Example

Tightening long stops when a stock rallies to a new high, but the RSI prints a lower high of 65 compared to the previous peak of 78 (bearish normal divergence).

Related Concepts

• MACD Divergence
• Momentum Divergence
• Relative Strength Index (RSI)
• Divergence

A market condition where price fluctuates within a relatively tight horizontal range without establishing a clear upward or downward trend.

Detailed Explanation

Also known as a range-bound or consolidating market, a sideways market occurs when buying and selling forces are in equilibrium, waiting for a breakout catalyst.

Practical Trading Example

A currency pair fluctuating strictly between $1.10 and $1.12 for three weeks.

Related Concepts

• Range Bound Market
• Breakout
• Support
• Resistance

An order placed with a broker to sell an asset when it reaches a specific price, designed to limit a trader's loss on a position.

A price level where buying pressure is strong enough to prevent the price from falling further. It represents a "floor" on the chart.

The average amount of money a trading strategy is expected to win or lose per trade over a large sample size.

The general direction in which a security or market is moving over time.

Detailed Explanation

A trend represents the persistent bias of market momentum and participant sentiment. It is classified into short-term, medium-term, and long-term phases depending on the time scale observed.

Practical Trading Example

If a stock consistently climbs from $100 to $150 over several months, it is in a clear uptrend.

Related Concepts

• Uptrend
• Downtrend
• Sideways Market

A bounding line drawn across a chart to connect swing lows in an uptrend or swing highs in a downtrend, acting as dynamic support or resistance.

Detailed Explanation

Trendlines help visualize the slope and speed of a trend. A break of a trendline often signals a weakening trend or potential reversal.

Practical Trading Example

Drawing a diagonal line connecting three rising higher lows to act as a dynamic buying trigger.

Related Concepts

• Trend
• Support
• Resistance

A market direction characterized by a sequence of higher highs and higher lows.

Detailed Explanation

An uptrend signals that demand consistently exceeds supply. Bullish traders dominate the order flow, buying pullbacks and driving prices to new peaks.

Practical Trading Example

Buying a stock as it bounces from a higher low during a sustained upward move on the daily chart.

Related Concepts

• Trend
• Higher High
• Higher Low

The total number of shares, contracts, or units of a security traded during a specified time period.

Detailed Explanation

Volume measures the strength and liquidity behind price moves. High volume indicates strong institutional participation, while low volume suggests retail interest or consolidation.

Practical Trading Example

A breakout above resistance on double the average volume confirms the validity of the breakout.

Related Concepts

• Volume Divergence
• On-Balance Volume (OBV)
• VWAP
• Breakout

A market condition where price trends in one direction while trading volume moves in the opposite direction, suggesting trend weakness.

Detailed Explanation

Volume Divergence is a powerful measure of institutional participation. When price moves to new highs on declining volume (bearish volume divergence), it warns that buying interest is drying up. Conversely, when price sets new lows on declining volume (bullish volume divergence), it shows selling pressure is evaporating.

Practical Trading Example

Avoiding a bullish breakout of a range because the price surged above resistance on below-average volume, suggesting a false breakout trap.

Related Concepts

• Volume
• On-Balance Volume (OBV)
• Divergence
• Breakout

An intraday calculation that shows the average price an asset has traded at throughout the day, based on both volume and price. Used heavily by institutional traders.

An intraday technical indicator that calculates the average price of an asset weighted by the total volume traded during a single trading session.

Detailed Explanation

VWAP serves as a key benchmark for institutional traders, who seek to execute buy orders below VWAP and sell orders above it to achieve favorable execution prices. Since it incorporates volume, VWAP shows the true average price participants paid. It resets daily and acts as dynamic support/resistance in trending markets, and as a target for mean reversion.

Practical Trading Example

Buying a stock on a pullback to the VWAP line during an intraday uptrend, anticipating institutional buyers will defend the average price level.

Related Concepts

• Volume
• Volume Analysis
• Volume Divergence
• Mean Reversion