CMT key terms

A price area where buying interest has repeatedly halted declines, causing the market to bounce. Traders watch it as a potential floor where demand may again absorb selling pressure.

A price zone where selling has repeatedly stopped rallies, acting as a ceiling. Traders treat it as a place where supply may overwhelm demand and reverse an advance.

A straight line drawn along successive higher lows in an uptrend or lower highs in a downtrend. It visualizes the direction of price movement and flags possible breaks in trend.

The average closing price over a rolling window, recalculated each period. It smooths short-term noise so the underlying direction of prices is easier to see.

A momentum oscillator scaled from 0 to 100 that compares the size of recent gains with recent losses. Readings above 70 are often read as overbought and below 30 as oversold.

A trend-following indicator built from the difference between a fast and a slow exponential moving average, plus a signal line. Line crossings and histogram shifts hint at momentum changes.

Two bands plotted a set number of standard deviations above and below a moving average. Their width reflects volatility, and squeezes often precede larger price moves.

A price move beyond a defined support, resistance, or chart-pattern boundary. Many traders treat a confirmed breakout on expanding volume as a signal that a new trend is starting.

A mismatch between price and an indicator, such as price making a higher high while momentum makes a lower high. It warns that the prevailing move may be losing strength.

A reversal chart pattern with three peaks, the middle one highest, resting on a shared neckline. A decisive close below the neckline is taken as confirmation that an uptrend has ended.

The tendency to fixate on an initial reference value, such as an entry price or a past high, and to adjust too little from it when new information arrives.

The habit of seeking, noticing, and weighting evidence that supports an existing view while discounting information that contradicts it. It makes traders slow to abandon flawed theses.

The tendency for losses to feel roughly twice as painful as equivalent gains feel good. It encourages holding losers too long and selling winners too early.

A descriptive model of choice under risk in which people judge outcomes as gains or losses relative to a reference point, being risk-averse for gains but risk-seeking for losses.

Copying the crowd's buying or selling rather than relying on independent analysis. It amplifies price moves and can inflate bubbles or deepen panics.

Overestimating the accuracy of one's own forecasts and skill. It leads to excessive trading, oversized positions, and too little diversification.

The pattern of selling winners early to lock in gains while clinging to losers in the hope of breaking even. It is a practical consequence of loss aversion and mental accounting.

Judging how likely an event is by how easily examples come to mind. Vivid, recent market crashes feel more probable than they are, distorting risk estimates.

Treating money as belonging to separate mental buckets depending on its source or intended purpose. It can cause inconsistent risk taking that ignores the total portfolio.

An estimate of the loss a portfolio could suffer over a set horizon at a given confidence level, such as a one-day 95% VaR of one million dollars.

The largest peak-to-trough decline in a portfolio's value over a period, usually stated as a percentage. It measures how much pain an investor would have endured.

An instruction to exit a position once price reaches a specified level. It caps the loss on a trade and removes the need to decide in the middle of a selloff.

Deciding how much capital to commit to each trade or asset. Sizing rules, often tied to volatility or a fixed percentage of equity at risk, shape results more than entry signals alone.

The probability that a trading program's capital falls to a level from which recovery is impossible. It rises with oversized bets and with strategies that have negative expectancy.

A measure of how much an asset's returns tend to move with the overall market. A beta of 1.5 suggests it amplifies market swings by about half again.

The average loss in the worst-case tail of outcomes beyond the VaR threshold. Unlike VaR, it describes how severe losses become once that limit is breached.

Re-running a portfolio through hypothetical or historical extreme scenarios to see how it would behave. It complements statistical risk measures that assume ordinary market conditions.

Using borrowed money or derivatives to control a position larger than the capital committed. It magnifies both gains and losses and can trigger forced liquidation.

Applying a trading rule to historical data to estimate how it would have performed. Results are only as trustworthy as the data quality and the assumed trading costs.

Tuning a strategy's many parameters so tightly to past data that it captures noise rather than durable structure. Such models usually fail when applied to new data.

Accidentally using information in a backtest that would not have been available when the decision was made, such as same-day closing prices or later data revisions.

Drawing conclusions from only the firms or funds that still exist, ignoring those that failed or were delisted. It flatters historical returns and understates risk.

Buying assets that have recently outperformed and selling or shorting those that have lagged, betting that the trend persists over the coming months.

The assumption that prices or returns tend to drift back toward a long-run average after stretching far from it. Strategies built on it buy weakness and sell strength.

A market-neutral approach that goes long one security and short a closely related one when their price relationship deviates from its norm, profiting as the spread converges.

A backtesting method that repeatedly optimizes on one past window and tests on the next unseen window, rolling forward through history. It checks whether a strategy survives out of sample.

The gap between the price a trade was expected to get and the price actually filled, caused by spread, order size, or fast markets. It quietly erodes backtested profits.

Excess return divided by the standard deviation of returns, measuring reward per unit of total volatility. Higher values suggest a better risk-adjusted result.