Reference
Glossary
Defined once, used consistently across every page on this site. Most of these terms are ordinary; several of them are relied upon to sound impressive to someone who has not met them before.
The mechanism
How an order comes to exist
Algorithmic trading
Placing orders according to a rule written in advance. The rule may be trivial or elaborate; the word says nothing about its quality.
Signal
The output of the rule: enter, exit or do nothing. Usually the only part of a system that gets demonstrated.
Order book
The live list of resting buy and sell orders at each price. Its depth determines how far a large order moves the price against itself.
Market order
An instruction to trade immediately at whatever price is available. Certain to fill, uncertain in price.
Limit order
An instruction to trade only at a stated price or better. Certain in price, uncertain to fill — and it misses disproportionately when the market is moving.
Latency
The delay between a price existing and the system acting on it. Small numbers matter here because prices move within them.
Fill
The execution of an order, in whole or in part. What you actually own, as opposed to what you asked for.
API key
The credential a bot uses to trade an account it does not own. Handing one to a third party grants trading rights over the funds.
What it costs
Where the money goes before the strategy sees it
Spread
The gap between the best buy and best sell price. Paid on entry and again on exit, and widest exactly when volatility triggers a system to act.
Slippage
The difference between the price the signal saw and the price actually obtained. Grows with order size and with speed of movement.
Maker and taker
An order that adds liquidity to the book is a maker order; one that removes it is a taker order. Venues usually charge them differently.
Notional value
The full value of the position, as opposed to the margin posted to hold it. Fees are typically charged on the former.
Funding rate
A periodic payment between long and short holders of a perpetual futures contract. Set by the imbalance between them, so the crowded side normally pays.
Leverage
Controlling a position larger than the money posted. Multiplies gains and losses equally, but only losses can reach the point where the position is closed for you.
Liquidation
The forced closure of a leveraged position when the margin is exhausted. Not a bad trade within the strategy; the end of the strategy.
Margin
The money posted as collateral against a leveraged position. The distance between it and zero is what leverage compresses.
Evidence and risk
The words used to describe how well something worked
Backtest
Running a rule against historical prices. Evidence about the past, and weaker evidence about the future than its smoothness suggests.
Overfitting
Choosing settings that match the noise of the tested period rather than a repeatable pattern. The expected result of searching enough combinations.
Look-ahead bias
A test that used information unavailable at the moment the decision was made. Produces excellent results and no live equivalent.
Survivorship bias
Testing only on instruments that still exist, which quietly removes the failures from the sample.
Out-of-sample
A period held back from fitting and used to check the rule. Stops being out of sample once it has been checked and the rule adjusted more than once.
Drawdown
The fall from a peak in account value to the subsequent trough. Its duration matters as much as its depth.
Risk of ruin
The probability of losing the account before any long-run edge can express itself. Rises much faster than the fraction risked per trade.
Win rate
The share of trades that were profitable. Says nothing on its own: it has to be read together with the average size of a win and a loss.
Paper trading
Running a system on simulated money in live conditions. Better evidence than a backtest, much weaker than a traded account.
The terms above are the whole vocabulary
If a page uses a word that is not on this list to explain why its returns are inevitable, that is worth noticing.