Algorithmic Trading Glossary
Key terms and concepts in algorithmic trading, explained simply. 81 terms and growing.
Abnormal Return
The return a security delivered in excess of what a benchmark or return model expected over the same window, isolating what is attributable to an event rather than to the market.
Algorithmic Trading
The use of computer programs and predefined rules to automatically execute trading decisions (what to buy, when to buy, how much to buy) without manual intervention.
Alpha
The annualised return a strategy delivers beyond what its benchmark exposure alone would explain, separating genuine skill from simply carrying more market risk.
ASM and GSM Surveillance
Two staged exchange surveillance frameworks that impose escalating margin, price band and settlement restrictions on securities flagged for unusual trading activity or for prices out of line with fundamentals.
Average Directional Index (ADX)
An indicator that measures how strongly a security is trending without indicating which way, on a scale that conventionally runs from 0 to 100.
Average True Range (ATR)
The average size of a security's daily trading range over a lookback window, including gaps, expressed in the same currency units as price.
Backtesting
The process of testing a trading strategy against historical market data to evaluate how it would have performed in the past, before risking real capital.
Base Rate
The unconditional frequency of an outcome across all observations, the reference point against which any conditional result has to be compared before it means anything.
Benchmark
The index or fund a strategy is measured against, the choice that silently determines every relative metric on the analytics screen.
Beta
A measure of how strongly a strategy's returns move with a stated benchmark, where 1.0 means it tracks the benchmark's swings one for one.
Block Deal
A single large trade executed in a separate exchange window at a price tied to a defined reference, subject to a minimum order size and mandatory delivery.
Bollinger Bands
A moving average with an upper and lower band placed a multiple of the rolling standard deviation away from it, so the envelope widens and narrows with volatility.
Bulk Deal
A disclosed transaction in the normal market segment where a single client's total buy or sell quantity in a scrip on one day exceeds 0.5 percent of the company's equity shares listed on that exchange.
CAGR
Compound Annual Growth Rate. The annualised rate of return that an investment would need to grow from its beginning value to its ending value, assuming profits are reinvested.
Calmar Ratio
Annualised return divided by maximum drawdown, expressing how much compounding a strategy delivered for each unit of worst-case pain.
Commodity Channel Index (CCI)
An unbounded oscillator measuring how far the current typical price sits from its moving average, scaled by that period's mean absolute deviation.
Concentration Limit
A constraint that caps how much of a portfolio any single position, or any group such as a sector, is allowed to occupy after weighting.
Corporate Action
A company-initiated event that changes a security's share count, price or identity, requiring historical prices to be adjusted before a backtest reads them.
Delivery Percentage
The share of a day's traded quantity in a stock that settled as delivery into a demat account rather than being squared off intraday.
Drawdown Duration
How long a portfolio stays below a previous equity peak, measuring the width of a drawdown rather than its depth.
Equal Weight
A portfolio weighting scheme that gives every holding the same target allocation, so a 25-stock portfolio holds 4 percent in each name regardless of company size.
Event Study
A method that aligns many occurrences of a defined event on a common date and measures the distribution of returns around them, compared against what normally happens.
Excess Return
A strategy's annualised return minus its benchmark's annualised return over the same period, the raw margin by which it beat or lagged the index.
Exponential Moving Average (EMA)
A moving average that weights recent bars more heavily than older ones, so it tracks price turns faster than a simple average of the same length.
Factor
A measurable, persistent stock characteristic such as momentum, value, quality or low volatility that explains differences in returns across a cross-section of securities.
FII, FPI and DII
Three labels for institutional participation in Indian markets, of which FPI is the current regulatory registration category, FII is its retired predecessor, and DII is a reporting bucket rather than a registration at all.
Hit Rate
The share of observations in a study that produced a positive outcome, a figure that carries no information until you pair it with the size of the wins and losses.
Impact Cost
The percentage markup against the ideal mid price when executing a given order size, and the liquidity measure NSE uses for index eligibility.
Information Coefficient (IC)
The rank correlation between a factor's value today and the forward return that follows, measuring how well a signal orders a universe rather than how much it predicts.
Information Ratio
A strategy's annualised active return divided by its tracking error, measuring how efficiently it beats a benchmark rather than by how much.
Inverse Volatility Weighting
A weighting scheme that allocates capital in inverse proportion to each holding's volatility, so calmer stocks receive larger positions than volatile ones.
Investable Universe
The defined set of securities a strategy is allowed to consider before any ranking or selection rule runs, and the first choice that shapes every result downstream.
Lead-Lag Relationship
A correlation measured between two series at a time offset, indicating that one moves before the other without establishing that one causes the other.
Look-Ahead Bias
Using information in a backtest that was not actually available at the moment the decision was made, which produces a result no live system could have earned.
MACD
Moving Average Convergence Divergence, an indicator built from the gap between a fast and a slow exponential moving average, plus a signal line drawn on that gap.
Market Breadth
A family of measures describing how widely a market move is shared across an index's constituents, computed either as advance-decline counts or as the share of constituents above a moving average.
Market Order
An instruction to trade immediately at the best price currently available, choosing certainty of execution over certainty of price.
Market-Cap Weight
A weighting scheme that allocates capital in proportion to each holding's market capitalisation, so larger companies receive proportionally more of the portfolio.
Max Drawdown
The maximum observed loss from a portfolio's peak value to its lowest point before a new peak is reached. Measures the worst-case decline an investor would have experienced.
Max Pain
The strike price at which the total intrinsic value payable by option writers across all outstanding contracts would be smallest if the underlying expired there.
Minimum Variance
A weighting scheme that solves for the portfolio with the lowest possible forecast volatility, given a covariance matrix of the candidate holdings.
Momentum
A trading strategy that buys securities showing upward price trends and sells those showing downward trends, based on the empirical observation that recent winners tend to continue winning.
Money Flow Index (MFI)
A bounded 0 to 100 oscillator that weights each bar's price move by the rupee value traded, so it reflects both direction and participation.
Multiple Testing
The problem that arises when many hypotheses are tested and the best result is reported, since the strongest of many random outcomes looks strong even when nothing real is present.
On Balance Volume (OBV)
A running cumulative total that adds the day's volume when price closes up and subtracts it when price closes down.
Open Interest
The number of derivative contracts in a series that remain outstanding at the end of a session, having been neither closed out, exercised nor expired.
Out-of-Sample Testing
Reserving a segment of history, selecting the strategy on the rest, and then checking the winner once against the segment it never saw.
Overfitting
Tuning a strategy until it fits the quirks of one historical sample so closely that it describes noise rather than a repeatable effect.
P-Value
The probability of observing a result at least as extreme as the one you got if the true effect were zero, which is not the same as the probability that your strategy works.
Paper Trading
Running a strategy against live market data with simulated money, so the signals, timing and monitoring are exercised without capital at risk.
Point-in-Time Data
Data stored with the date it actually became public, so a backtest can be restricted to what was genuinely knowable on each decision date.
Position Sizing
The decision of how much capital to allocate to each holding in a portfolio, which determines realised risk and return as much as the choice of which stocks to hold.
Profit Factor
Gross profit from winning trades divided by gross loss from losing trades, where anything at or below 1.0 means the strategy lost money.
Promoter Pledge
Promoter shareholding in a listed company that has been pledged as collateral for a loan, disclosed to the exchanges under SEBI's takeover regulations.
Put-Call Ratio
The ratio of put activity to call activity in an option chain, computed either on open interest or on traded volume, used as a summary of options positioning.
Quantile Sort
A test that ranks a universe by a signal, splits it into equal-sized buckets, and compares the forward returns of each bucket to see whether the signal orders outcomes consistently.
Quantitative Trading
An approach to trading that uses mathematical and statistical models to identify profitable opportunities, relying on data analysis rather than subjective judgment.
Rank Correlation
A correlation computed on the ranks of two variables rather than their values, which makes it tolerant of outliers and of relationships that are consistent but not linear.
Rate of Change (ROC)
The percentage change in a field over a fixed number of past bars, the most direct way to express price momentum as a single number.
Rebalancing
The process of realigning a portfolio's holdings to match a target allocation, by buying securities that have become underweight and selling those that have become overweight.
Relative Strength Index (RSI)
A bounded oscillator that compares the size of a security's recent gains to the size of its recent losses, scaled to a 0 to 100 range.
Risk Parity
A weighting scheme that sets position sizes so every holding contributes an equal share of total portfolio risk, using the full covariance matrix rather than volatility alone.
SAST Disclosure
A filing required under SEBI's Substantial Acquisition of Shares and Takeovers Regulations when an acquirer crosses a shareholding threshold in a listed company or changes an existing large holding.
Sector Neutral
A construction method that scores or weights stocks within their own sector rather than across the whole universe, so the strategy takes stock-level bets without an unintended sector bet.
Securities Lending and Borrowing (SLB)
The exchange-operated mechanism through which Indian market participants borrow shares to deliver against a short sale, and lend idle holdings for a fee.
Securities Transaction Tax (STT)
A tax on the value of securities transactions executed on a recognised Indian exchange, charged on the trade itself regardless of whether you made money.
Sharpe Ratio
A risk-adjusted return metric that measures the excess return per unit of volatility. Higher values indicate better risk-adjusted performance.
Simple Moving Average (SMA)
The unweighted mean of a security's price over a fixed number of past bars, used to smooth short-term noise and describe the direction of a trend.
Slippage
The gap between the price a strategy assumed when it made a decision and the price actually received when the order filled.
Sortino Ratio
A variation of the Sharpe Ratio that only penalises downside volatility, making it more relevant for strategies that have asymmetric return distributions.
Spurious Correlation
A statistical association between two series that arises from shared trends, overlapping data or small samples rather than from any relationship between them.
Square-Off
Closing an open position by placing the opposite trade, most commonly used in India for exiting an intraday position before the session ends.
Stochastic Oscillator
An oscillator that reports where the current close sits within the high-low range of the recent lookback window, scaled from 0 to 100.
Survivorship Bias
The error of backtesting only on companies that still exist today, which deletes every failure from history and inflates the result.
T-Statistic
A measure of how many standard errors an estimate sits away from zero, used to judge whether a backtested edge is large enough to be distinguished from noise.
Tracking Error
The annualised standard deviation of a strategy's returns minus its benchmark's returns, measuring how differently it behaves from the index.
Turnover
The share of a portfolio that is traded at each rebalance, the single input that converts a strategy's paper returns into real ones after costs.
Volatility
The annualised standard deviation of a portfolio's returns, measuring how widely results swing around their own average in a typical year.
Win Rate
The percentage of closed round-trip trades that finished in profit, a figure that means nothing until you pair it with the average size of a win and a loss.
Winsorization
Clipping extreme values in a dataset to a chosen percentile boundary rather than deleting them, so outliers stop distorting means, standard deviations and factor scores.
Z-Score
A standardisation that expresses a value as the number of standard deviations it sits from the mean, making factors measured on different scales directly comparable.