Glossary: Technical Indicator Terms
This glossary defines 30 technical indicator and chart analysis terms with concise, one-sentence definitions focused on practical application. Updated quarterly to reflect evolving market terminology.
Terms
Average True Range (ATR): A volatility indicator measuring the average range between high and low prices over a specified period (typically 14 days), used to set stop-loss distances that account for normal price fluctuation.
Backtesting: The process of applying trading rules to historical price data to measure how a strategy would have performed, subject to limitations including overfitting, survivorship bias, and underestimated transaction costs.
Bollinger Bands: A volatility indicator consisting of a moving average with upper and lower bands set at standard deviations (typically 2) from the average, where prices touching bands may indicate overbought or oversold conditions.
Breakout: Price movement above a resistance level or below a support level, often accompanied by increased volume, signaling potential continuation in the direction of the break.
Candlestick Chart: A price chart format showing open, high, low, and close prices for each period as a "body" (open to close) with "wicks" (high and low extensions), providing more information than simple line charts.
Confirmation: Additional evidence supporting a technical signal, such as increased volume on a breakout or multiple indicators aligning in the same direction.
Convergence: When two or more indicators or price measures move toward each other, often interpreted as strengthening the current trend direction.
Divergence: When price moves in one direction while an indicator moves in the opposite direction, potentially signaling trend weakness or impending reversal.
Double Bottom: A chart pattern showing two price lows at approximately the same level with a peak between them, potentially indicating trend reversal from bearish to bullish when price breaks above the intermediate peak.
Downtrend: A price pattern characterized by lower highs and lower lows, indicating that sellers are controlling price direction.
Exponential Moving Average (EMA): A moving average that gives greater weight to recent prices, making it more responsive to current price changes than a simple moving average of the same period.
Head and Shoulders: A reversal pattern showing three peaks with the middle peak (head) higher than the two surrounding peaks (shoulders), potentially signaling trend change when price breaks below the neckline.
MACD (Moving Average Convergence Divergence): A momentum indicator showing the relationship between two exponential moving averages (typically 12-day and 26-day), with buy/sell signals generated when the MACD line crosses above/below its signal line.
Mean Reversion: The tendency for prices to return toward an average value after moving to extremes, forming the basis for strategies that buy oversold conditions and sell overbought conditions.
Momentum: The rate of price change over a specified period, with strong momentum indicating trend continuation and weakening momentum potentially signaling trend exhaustion.
Moving Average: A smoothed price line calculated by averaging prices over a specified number of periods, used to identify trend direction and potential support/resistance levels.
On-Balance Volume (OBV): A cumulative volume indicator that adds volume on up days and subtracts volume on down days, with divergences between OBV and price potentially signaling trend weakness.
Overbought: A condition where an indicator (typically RSI above 70 or stochastics above 80) suggests price may have risen too far too fast, increasing probability of pullback or consolidation.
Oversold: A condition where an indicator (typically RSI below 30 or stochastics below 20) suggests price may have fallen too far too fast, increasing probability of bounce or stabilization.
Relative Strength Index (RSI): A momentum oscillator measuring speed and magnitude of price changes on a 0-100 scale, with readings above 70 considered overbought and below 30 considered oversold.
Resistance: A price level where selling pressure has historically prevented further price increases, often becoming support once decisively broken.
Simple Moving Average (SMA): A moving average calculated by summing closing prices over a period and dividing by the number of periods, giving equal weight to all prices in the calculation.
Stochastics: A momentum indicator comparing closing price to the price range over a specified period (typically 14 days), oscillating between 0 and 100 with readings above 80 considered overbought.
Stop Loss: A predetermined price level at which a position is closed to limit losses, typically placed below support (for long positions) or above resistance (for short positions).
Support: A price level where buying pressure has historically prevented further price declines, often becoming resistance once decisively broken.
Trend: The overall direction of price movement over a specified timeframe, classified as uptrend (higher highs/lows), downtrend (lower highs/lows), or sideways (range-bound).
Trendline: A line connecting successive higher lows (uptrend) or lower highs (downtrend), used to visualize trend direction and identify potential support/resistance.
Volume: The number of shares or contracts traded during a specified period, with above-average volume often confirming price moves and below-average volume suggesting weaker conviction.
Whipsaw: A false signal that reverses quickly, resulting in a loss when price moves through a breakout level or stop loss only to immediately reverse direction.
VIX (Volatility Index): The CBOE Volatility Index measuring expected 30-day S&P 500 volatility derived from options prices, with readings above 25-30 indicating elevated market fear and below 15 indicating complacency.
Cross-References
For detailed explanations of how to apply these concepts, see:
- Moving Averages: SMA, EMA, and WMA Use Cases
- Momentum Oscillators: RSI, Stochastics, and MACD
- Support, Resistance, and Trendline Construction
- Average True Range and Volatility Stops
- Backtesting Basics for Retail Traders
Updates
This glossary is updated quarterly to incorporate new terminology and refine definitions based on reader feedback. Additional terms will be added as technical analysis methodology evolves.