AI Trading Glossary
50 essential terms explained in plain English — with examples and related concepts.
Plain English · Real examples
The terminology of AI trading — defined without jargon.
A
- Alpha
- The portion of a strategy’s return that cannot be explained by overall market movement. A strategy with positive alpha is beating its benchmark on a risk-adjusted basis.
Example: A long-only fund returns 12% in a year the market returns 10% with the same volatility — its alpha is 2%.
Related: Sharpe Ratio, Expectancy
- Algorithm
- A defined sequence of rules a computer follows to make trading decisions. Traditional algorithms use hard-coded rules; AI algorithms learn rules from data.
Example: A moving-average crossover algorithm buys when the 50-day MA crosses above the 200-day.
- API
- Application Programming Interface. A set of endpoints that lets external software send orders, fetch quotes or stream data from a broker or exchange.
Example: A bot connects to a broker’s REST API to place a limit order programmatically.
- Arbitrage
- Profiting from a price difference for the same asset on two or more venues, usually closed out within seconds. True arbitrage is risk-free in theory but exposed to execution risk in practice.
Example: Bitcoin trades at $60,000 on Exchange A and $60,050 on Exchange B; an arbitrageur buys on A and sells on B.
B
- Backtest
- Replaying a strategy against historical price data to estimate how it would have performed. Backtests over-promise unless they include realistic costs and out-of-sample validation.
Example: A trend-following backtest from 2010–2020 shows 14% annual return; live performance proves to be 4%.
Related: Drawdown, Sharpe Ratio
- Bid
- The highest price a buyer is currently willing to pay. The bid sits below the ask, and the gap between them is the spread.
Example: If EUR/USD is quoted 1.0801 / 1.0803, the bid is 1.0801.
- Broker
- A regulated firm that gives retail clients access to financial markets in exchange for spreads, commissions or financing fees.
Example: Interactive Brokers and eToro are brokers; Coinbase and Kraken are crypto exchanges that operate similarly.
Related: Regulation, Commission
C
- Candlestick
- A chart element that displays the open, high, low and close of a price interval as a coloured body with wicks. The standard visualisation for technical analysis.
- CFD
- Contract for Difference. A derivative that lets you speculate on price movement without owning the underlying. CFDs are leveraged, and the FCA banned them for crypto for UK retail clients.
D
- Drawdown
- The peak-to-trough decline of an account or strategy, expressed as a percentage. Maximum drawdown is the worst such decline observed.
Example: An account peaks at £10,000, falls to £8,000 — that is a 20% drawdown.
Related: Risk-Reward, Sharpe Ratio
E
- ECN
- Electronic Communications Network. A venue that matches buyers and sellers directly, usually with tight spreads and a small commission.
- Equity
- The current cash value of a trading account, including unrealised P&L on open positions. Equity differs from balance, which excludes unrealised P&L.
- Execution
- The process of converting an order into a completed trade. Execution quality is measured in price improvement, speed and fill rate.
- Expectancy
- The average profit (or loss) a strategy is expected to produce per trade. Calculated as (win rate × average win) − (loss rate × average loss).
Example: Win rate 55%, avg win £80, avg loss £60 → expectancy = 0.55×80 − 0.45×60 = £17 per trade.
Related: Win Rate, Risk-Reward
F
- Fill
- The completed execution of all or part of an order. A partial fill leaves the unfilled remainder open or cancelled.
- Forex
- The global market for trading currencies. The deepest and most liquid market in the world, open 24 hours from Sunday evening to Friday evening UK time.
H
- Hedge
- A position deliberately taken to offset risk in another position. Hedges reduce expected return in exchange for reduced variance.
Example: A UK importer buys USD futures to hedge the cost of dollar-priced inventory.
Related: Risk-Reward, Volatility
I
- Index
- A statistical measure of a basket of assets, such as the FTSE 100 or S&P 500. Index futures and ETFs let traders take a position on the basket as a whole.
Related: Futures, Volatility
K
- KYC
- Know Your Customer. The identity-verification procedures regulated brokers must perform before letting you deposit, trade or withdraw.
Related: Regulation, Broker
L
- Latency
- The delay between sending an order and the venue acknowledging it. High-frequency strategies require sub-millisecond latency; retail strategies usually do not.
- Leverage
- Borrowing capital to control a larger position than your equity would allow. Leverage multiplies both gains and losses; FCA caps retail forex leverage at 30:1 on majors.
Example: 10:1 leverage on £1,000 equity controls a £10,000 position.
- Limit Order
- An order to buy or sell at a specified price or better. Limit orders avoid slippage but are not guaranteed to fill.
Related: Market Order, Execution
- Liquidity
- How easily an asset can be bought or sold without moving its price. Liquid assets have tight spreads and large order books.
- Long
- A position that profits when the price rises. Buying an asset opens a long position; selling it closes the long.
M
- Margin
- The collateral your broker requires to open and maintain a leveraged position. If your equity falls below the maintenance margin, the broker may close the position.
- Market Order
- An order to buy or sell immediately at the best available price. Market orders fill quickly but are exposed to slippage in fast markets.
Related: Limit Order, Slippage
O
P
Q
R
- Regulation
- Oversight by a government body — FCA, SEC, ASIC, CySEC, MAS — that enforces capital, conduct and disclosure rules. Regulation reduces broker risk, not market risk.
- Risk-Reward
- The ratio of expected gain to amount risked on a trade. A 1:3 risk-reward trade risks £100 to potentially make £300.
Related: Expectancy, Stop-Loss
- ROI
- Return on Investment. The net gain or loss on a position expressed as a percentage of capital deployed.
Related: Sharpe Ratio, Drawdown
S
- Scalping
- A high-frequency strategy that captures small price moves, often holding positions for seconds or minutes. Heavily exposed to spread and slippage costs.
- Short
- A position that profits when the price falls. Short selling typically requires borrowing the asset from the broker and paying a financing fee.
- Slippage
- The difference between the price you expected and the price actually filled. Slippage is highest around news releases and in thin markets.
Related: Execution, Market Order
- Spread
- The gap between the best bid and the best ask. The spread is the most direct cost of trading and widens during low-liquidity periods.
- Stop-Loss
- An order that automatically closes a position once price reaches a level chosen to cap losses. Essential for systematic risk management.
Related: Risk-Reward, Position
T
- Take-Profit
- An order that automatically closes a position once price reaches a chosen profit target. Pairs naturally with a stop-loss.
Related: Stop-Loss, Risk-Reward
V
- Volatility
- A statistical measure of how much an asset’s price fluctuates over time. Higher volatility means higher potential reward and higher potential loss.
Related: Sharpe Ratio, Drawdown
- Volume
- The total quantity of an asset traded in a given period. Rising volume on a price move is generally a sign of conviction.
Related: Liquidity, Order Book
W
- Win Rate
- The percentage of trades that close at a profit. A high win rate is meaningless without considering average win versus average loss.
Example: A 70% win rate with 1:0.3 risk-reward is unprofitable; a 40% win rate with 1:3 risk-reward is profitable.
Related: Expectancy, Risk-Reward