Van Tharp Institute Glossary
The Van Tharp Institute Glossary is a comprehensive resource designed to help traders and investors understand the essential terminology and concepts related to trading psychology, systems development, and market analysis. Whether you’re a beginner or an experienced trader, this glossary offers clear definitions and insights into the principles that Dr. Van Tharp championed. By providing a deeper understanding of key terms, the glossary aims to enhance your knowledge and support your journey toward consistent and profitable trading. Explore the glossary to unlock the language of trading success.
Adaptive Moving Average
A moving average that is either quick, or slow, to signal a market entry depending...
Algorithm
A rule or set of rules for computing, that is, a procedure for calculating a...
Anti-martingale Strategy
A position-sizing strategy in which position size is increased when one wins and decreased when...
Arbitrage
The taking advantage of discrepancies in price or loopholes in the system to make consistent...
Asset Allocation
The procedure by which many professional traders decide how to allocate their capital. Due to...
Average Directional Movement (ADX)
An indicator that measures how much a market is trending. Both bullish and bearish trends...
Average True Range (ATR)
The average over the last X days of the true range, which is the largest...
Backtesting
The process of testing a trading strategy on prior time periods, usually with just one...
Band Trading
A style of trading in which the instrument being traded is thought to move in...
Bearish
Of the opinion that the market will be going down in the future.
Best-case Example
A situation that represents the best of possible outcomes. Many books show you illustrations of...
Bias
The tendency to move in a particular direction. This could be a market bias, but...
Bid-ask Spread
The spread market makers offer to potential investors who want to open a position with...
Blue-chip
Companies Top-rated companies.
Breakout
A move up from a consolidation or band of sideways movement.
Bullish
Of the opinion that the market will be going up in the future.
Call
An option that gives you the right to buy the underlying instrument at a particular...
Candlestick
A type of bar chart, developed by the Japanese, in which the price range between...
Capitalization
The amount of money in the underlying stock of a company.
Channel Breakout
See "Breakout" definition.
Chaos Theory
A theory that physical systems generally move from stability to chaos. This theory has recently...
Climax Reversal
A sharp price decline following a sharp price increase. When a position is moving up,...
Commissions
Fees that you pay a broker to trade in the market.
Commodities
Physical products that are traded at a futures exchange. Examples of such products are grains,...
Congestive
Range See consolidation.
Consolidation
A pause in the market during which prices move in a limited range and do...
Contract
A single unit of a commodity or future. For example, a single unit or contract...
Core Equity
One of the three ways of measuring your equity. In this particular case, you subtract...
Credit Spread
An options trading strategy by which an investor buys one instrument and sells another related...
Dampening Factor
A term developed by Ryan Jones for describing how to lower your position sizing after...
Debit Spread
An options trading strategy by which an investor buys one instrument and sells another related...
Degree of Freedom
A statistical term used to describe the quantity that equals the number of independent observations...
Delta
In fixed ratio position sizing, delta refers to the factor by which you determine how...
Delta Down
Delta can be used to both increase and decrease position sizing with fixed ratio position...
Delta Phenomenon
A theory developed and trademarked by Jimmy Sloman and marketed by Welles Wilder that purports...
Delta Up
Delta can be used to both increase and decrease position sizing with fixed ratio position...
Dev-Stop
A stop-loss criterion developed and copyrighted by Cynthia Kase that depends on the standard deviation...
Directional Movement
An indicator attributed to J. Welles Wilder using the largest part of today’s range that...
Disaster Stop
A stop-loss order to determine your worst-case loss in a position. See stop-loss order.
Discretionary Trading
Trading that depends on the instincts of the trader as opposed to a systematic approach....
Divergence
A term used to describe two or more indicators failing to show confirming signals.
Diversification
Investing in independent markets to reduce the overall risk.
Down-Quiet
One of the six types of markets in which the price is going down, and...
Down-Volatile
One of the six types of markets in which the price is going down, but...
Drawdown
A decrease in the value of your account because of losing trades or because of...
EA
Mathematical abbreviation for the exponent of 10 used to help shorten the expression of large...
Elliott Wave
A theory developed by R. N. Elliott that holds that the market moves in a...
Entry
That part of your system that signals how or when you should enter the market.
Equal Units Model
A position-sizing model in which you purchase an equal dollar amount of each position.
Equities
Stocks secured by ownership in the company.
Equity
The value of your account.
Equity Crossover
A form of position sizing in which the position sizing changes based upon your equity...
Equity Curve
The value of your account over time, illustrated in a graph.
Equity Model
The method you use to determine your equity in anti-martingale position sizing. Three such methods...
Exit
That part of your trading system that tells you how or when to exit the...
Expectancy
How much you can expect to make on the average over many trades. Expectancy is...
Expectunity
A term used to express expectancy multiplied by opportunity. For example, a trading system that...
False Positive
Something that gives a prediction that then fails to happen.
Fibonacci Retracements
The most common levels used in retracement analysis, which are 61.8 percent, 38 percent, and...
Filter
An indicator that selects only data that meets specific criteria. Too many filters tend to...
Financial Freedom
A financial state that occurs, according to Van Tharp, when your passive income (income that...
Fixed Ratio Position Sizing
A method in which position sizing is altered to some ratio of your account, called...
Floor Trader
A person who trades on the floor of a commodities exchange. Locals tend to trade...
Forex
The foreign exchange. A huge market in foreign currencies made by large banks worldwide. Today...
Fundamental Analysis
Analysis of the market to determine its supply-and-demand characteristics. In equities markets, fundamental analysis determines...
Futures
A contract obligating its holder to buy a specified asset at a particular time and...
Gambler’s Fallacy
The belief that a loss is due to occur after a string of winners and/or...
Gann Concepts
Various concepts for predicting market movements. These concepts were developed by the famous stock market...
Gap
An area on a price chart in which there are no trades. Normally this occurs...
Gap Climax
A climax move that begins with a gap at the opening.
Generalized Ratio Position Sizing
In this method you simply adjust the speed at which position sizing increases with FRPS.
Group Heat
Each group, be it a sector of stocks or a grouping of commodities, will tend...
Gunslinger
Someone who makes high-risk trades or investments.
Histogram
A graphical representation of a distribution of data.
Hit Rate
The percentage of winners you have in your trading or investing. Also known as the...
Holy Grail System
A mythical trading system that perfectly follows the market and is always right, producing large...
Indicator
A summary of data presented in a supposedly meaningful way to help traders and investors...
Initial Risk
The difference between your stop level and your entry price when you open a position...
Inside Day
A day in which the total range of prices falls between the range of prices...
Intermarket Analysis
The use of the price moves of one market to predict what will happen to...
Investing
A buy-and-hold strategy that most people follow. If you are in and out frequently or...
Judgmental Heuristics
Shortcuts that the human mind uses to make decisions. These shortcuts make decision making quite...
Largest Expected Equity Drop (LEED)
Used by Gallacher to describe a person’s risk limits. It refers to the largest drop...
Leverage
Describes the relationship between the amount of money one needs to put up to own...
Limit Move
A change in price that reaches the limit set by the exchange in which the...
Limit Order
An order to your broker in which you specify a limit as to how much...
Liquidity
The ease and availability of trading in an underlying stock or futures contract. When the...
Long
Owning a tradable item in anticipation of a future price increase. Also, see short.
Low-risk Idea
An idea that has a positive expectancy and is traded at a risk level that...
MACD
See moving average convergence divergence.
Margin
The percentage of the total price of something that an exchange requires you to have...
Marked to Market
A term used to describe the fact that open positions are credited or debited funds...
Market Maker
A broker, bank, firm, or individual trader that makes a two-way price to either buy...
Market Order
An order to buy or sell at the current market price. Market orders are usually...
Market SQN
A measure of a market’s movement through an application of the System Quality Number calculation....
Market Type
A categorization of market conditions that helps describe various price behaviors. Combining trend measurements of...
Market’s Money
A form of position sizing in which your core equity is sized at a conservative...
Martingale Strategy
A position-sizing strategy in which the position size increases after you lose money. The classic...
Maximum Adverse Excursion (MAE)
The maximum loss attributable to price movement against the position during the life of a...
Maximum Mean Return
When you do a number of simulations, you want to know the mean (average) return...
Maximum Median Return
When you do a number of simulations, you want to know the median (half are...
Maximum/Minimum Ending Equity
When you simulate a position sizing strategy, two of the data points that you probably...
Mean
The average or the sum of all of the numbers divided by the total number...
Mechanical Trading
A form of trading in which all actions are determined by a computer with no...
Median
The middle point of a sequence of numbers arranged in sequence. In other words, half...
Mental Rehearsal
The psychological process of preplanning an event or strategy in one’s mind before actually doing...
Mental Scenario Trading
A trading concept in which the trader uses his or her macro assessment of what...
Modeling
The process of determining how some form of peak performance (such as top trading) is...
Momentum
An indicator that represents the change in price now from some fixed time period in...
Money Management
A term that has been frequently used to describe position sizing but that has so...
Monte Carlo Simulation
A simulation that determines the probability of trading results based on multiple trials.
Moving Average
A method of representing a number of price bars (that is, showing the high, low,...
Moving Average Convergence Divergence (MACD)
A technical indicator developed by Gerald Appel that follows the difference between a series of...
Multiple-tier Position Sizing
Changing the value of your position sizing variable multiple times when some performance criterion is...
Negative Expectancy System
A system in which you will never make money over the long term. For example,...
Neuro-Linguistic Programming (NLP)
A form of psychological training developed by systems analyst Richard Bandler and linguist John Grinder....
Objectives
What you wish to accomplish as a trader with your account or your system. Objectives...
Ongoing Risk
A term referring to the monitoring and management (through position sizing strategies) of open risk...
Open Position Value
The price of an open position multiplied by the current number of units that you...
Open Risk
The difference between the current price and the value of the stop for all positions...
Open Volatility
The amount of risk exposure for an open position or all open positions based on...
Opportunity
See trade opportunity.
Optimal F
A method for determining position sizing developed by Ralph Vince that depends upon the worst-case...
Optimal Position Size
The best position sizing method to achieve your objectives.
Optimal Retire
The position sizing percentage that gives you the largest probability of reaching your stated goal.
Optimal Target Risk Percentage
The optimal portfolio heat divided by the number of trades you’re a likely to have...
Optimize
To find those parameters and indicators that best predict price changes in historical data. A...
Option
The right to buy or sell an underlying asset at a fixed price up to...
Options Spread
A trading strategy by which one opens two options positions at the same time and...
Oscillator
An indicator that detrends (normalizes) price. Most oscillators tend to go from 0 to 100....
Parabolic
An indicator that has a U-shaped function, based on the function y = ax2+ bx...
Paradigm Shift
A change from one way of thinking to another. It's a revolution, a transformation, a...
Passive Income
Income that occurs because your money is working for you.
Peak-to-Trough Drawdown
A term that is used to describe one’s maximum drawdown from the highest equity peak...
Percent Margin Model
A position sizing strategy that is based upon the margin set by the exchange in...
Percent Risk Model
A position-sizing model in which position sizing is determined by limiting the risk on the...
Percent Volatility Model
A position-sizing model in which position sizing is determined by limiting the amount of volatility...
Portfolio Heat
The total open risk in your portfolio at any given time. This generally should not...
Position Sizing Strategy
The most important of the six key elements of successful trading. This term, invented in...
Positive Expectancy
A system (or game) that will make money over the long term if played at...
Postdictive Error
An error that is made when you take into account future data that you should...
Prediction
A guess about the future. Most people want to make money through guessing future outcomes,...
Price Shock
A sudden and very large price movement.
Price-to-Sales Ratio
The ratio of the price of a stock to its sale. For example, if a...
Price/Earnings (P/E) Ratio
The ratio of the price of a stock to its earnings. For example, if a...
Proprietary Methodology
A methodology that a trader keeps to himself because (1) he doesn’t want to share...
Psychological Loss
A loss as a result of your natural biases and psychology (usually larger than 1R).
Put Option
An option that gives someone the right to sell the underlying instrument at a predetermined...
R Multiple
A term used to express trading results in terms of the initial risk. All profits...
R value
A term used to express the initial risk taken in a given position, as defined...
R-Multiple Distribution
The set of trade results expressed in R-multiple terms generated by a trading system. The...
Random
An event determined by chance. In mathematics, a number that cannot be predicted.
Random Entry System
A trading system that enters positions randomly.
Reduced Total Equity
One of the three equity models. In this case, you subtract out any allocation that...
Relative Strength Index (RSI)
A futures market indicator described by J. Welles Wilder, Jr., that is used to ascertain...
Reliability
How accurate something is or how often it wins. Thus, “60 percent reliability” means that...
Resistance
An area on a chart up to which a stock can trade but cannot seem...
Retire
Determines the trading goal (i.e., the retire amount).
Retire-Less-Ruin
The probability of reaching our goal less the probability of having our worse case drawdown.
Retracement
A price movement in the opposite direction of the previous trend. A retracement is usually...
Reward-to-Risk Ratio
The average return on an account (on a yearly basis) divided by the maximum peak-to-trough...
Risk
The difference in price between the entry point in a position and the worst-case loss...
Rollovers
Moving a futures contract into the next most liquid trading month when the contract expires.
Round Trip/ Turn
A term that refers to the process of both getting into and exiting a futures...
Ruin
The amount of drawdown in your account at which you would stop trading.
Scaling-In
A form of position sizing in which you keep adding to the position size based...
Scaling-Out
A form of position sizing in which you reduce your size when the open risk...
Scalping
A term that refers to the actions, usually of floor traders, who buy and sell...
Seasonal Trading
Trading based on consistent, predictable changes in price during the year due to production cycles...
Secular (bull or bear) Market
A term that refers to long-term tendencies in the market to increase valuations (bull) or...
Setup
A term that refers to a part of your trading system in which certain criteria...
Sharpe Ratio
A ratio developed by Nobel Laureate William F. Sharpe to measure risk-adjusted performance. It is...
Short
Not actually owning an item that you are selling. If you were using this strategy,...
Sideways Market
A market that moves neither up nor down.
Sideways-Quiet
One of the six types of markets in which the price moves very little over...
Sideways-Volatile
One of the six types of markets in which the price moves very little over...
Signal to Noise Ratio
A measure of signal strength compared with the background noise used commonly in engineering and...
Slippage
The difference in price between what you expect to pay when you enter the market...
Specialist
A floor trader assigned to fill orders in a specific stock when the order has...
Speculating
Investing in markets that are considered to be very volatile and thus quite “risky” in...
Spreading
The process of trading two related markets to exploit a new relationship. Thus, you might...
Stalking
A term that refers to the process of getting ready to get into a position....
Standard deviation
The positive square root of the expected value of the square of the difference between...
Statistical Significance
A set of results has a cause and therefore is not random. The term is...
Step up/Step Down Function
A mathematical function that has a fixed way to move up or move down in...
Stochastic
An overbought-oversold indicator, popularized by George Lane, that is based on the observation that prices...
Stop (Stop Loss, Stop Order)
An order you put with your broker that turns into a market order if the...
Support
The price level that historically a stock has had difficulty falling below. It is the...
Swing Trading
A term that refers to short-term trading designed to capture quick moves in the market.
System
A set of rules for trading. A complete system will typically have (1) some setup...
System Quality Number (SQN)
A method used in this book to determine the quality of a system. It is...
System Quality Number 100 Score (SQN 100)
The SQN score normalized to 100 trades. For systems with few trades, assuming 100 trades...
T-Score
The value derived from the statistical t-test which has several uses including testing whether a...
Tick
A minimum fluctuation in the price of a tradable item.
Timing Technique
A trading technique that attempts to assist people in entering the market just before an...
Total Equity
One of the three equity models that determines the value of your account by your...
Trade Distribution
A term that refers to the manner in which winning and losing trades are achieved...
Trade Opportunity
One of the six keys to profitable trading. It refers to how often a system...
Trading
Opening a position in the market, either long or short, with the expectation of either...
Trading Cost
The cost of trading, which typically includes brokerage commissions and slippage, plus the market maker’s...
Trading System
A set of rules for trading. A complete system will typically have (1) some setup...
Trailing Stop
A stop-loss order that moves with the prevailing trend of the market. This is typically...
Trend Following
The systematic process of capturing extreme moves in the market with the idea of staying...
Trending Day
A day that generally continues in one direction, either up or down, from the open...
Trendline
A line connecting the tops (or bottoms) of rising or falling markets. This line is...
Turtle Soup
A trademarked entry technique that is based on the assumption that markets typically reverse after...
Two-Tier Position Sizing
Position sizing that starts at some level and then moves to another level when some...
Units Per Fixed Amount of Money Model
A position-sizing model in which you typically buy one unit of everything per so much...
Up-Quiet
One of the six kinds of markets in which the price is moving up, but...
Up-Volatile
One of the six kinds of markets in which the price is moving up, and...
Validity
A term that indicates how “real” something is. Does it measure what it is supposed...
Valuation
An exercise in giving some value on the price of a stock or commodity based...
Value Trading
A term that refers to a concept in which positions are opened in the market...
Variability
The possible range of outcomes for a given event.
Volatility
A term that refers to the range of prices in a given time period. A...
Volatility Breakout
An entry technique that calls for entering the market when it moves a specific amount...
Win Rate
The percentage of closed trades in which you make money.
Worst-Case Scenario
A situation that represents the least desirable of possible outcomes. Typically, you need to plan...