Trading Glossary P–R

P

P&L (Profit and Loss) — The net financial result of trading activity — the difference between total profits and total losses including all charges (brokerage, STT, exchange fees). Tracking P&L accurately across all trades is essential for evaluating strategy performance. Unrealised P&L is the gain/loss on open positions. Realised P&L is locked in when positions are closed.

Pennant — A short-term continuation pattern forming after a sharp directional move. Similar to a flag but with converging trendlines (a small symmetrical triangle) rather than parallel lines. Pennants on NSE typically last 1–2 weeks and break in the direction of the preceding move. Volume dries up during the pennant and surges on the breakout.

Position Sizing — The calculation of how many shares or lots to trade based on account size, risk tolerance, and stop loss distance. The standard formula: Shares = (Capital × Risk%) ÷ (Entry − Stop). Proper position sizing ensures no single trade can cause catastrophic damage regardless of outcome. The most mechanically learnable risk management skill available to traders.

Premium (Options) — The price paid by the options buyer to the options seller for the contract. Premium has two components: intrinsic value (how far ITM the option is) and time value (premium above intrinsic value, which decays to zero at expiry). Premium is received by the seller (who takes on obligation) and paid by the buyer (who gains the right). NSE option premiums are quoted per unit, multiplied by lot size for total cost.

Price Action — Trading decisions made purely based on price movement and patterns — without indicators. Price action traders study candlestick patterns, support/resistance levels, trend structure, and volume. SMC (Smart Money Concepts) is an advanced form of price action trading. Advantages: no indicator lag, directly reads market sentiment. Disadvantages: subjective, steep learning curve.

Profit Factor — Total gross profit divided by total gross loss over a set of trades. Profit Factor above 1.5 is generally considered healthy. Above 2.0 is excellent. Below 1.0 means the strategy is net losing. Unlike win rate (which ignores trade size), Profit Factor accounts for both how often you win and how much you win/lose — a more complete picture of strategy quality.

Promoter Holding — The percentage of shares held by company founders, their families, and entities controlled by them. High promoter holding (above 60%) suggests founders have confidence in the company. Falling promoter holding (selling shares) is often a negative signal. SEBI requires quarterly disclosure of promoter holdings. A metric used by fundamental analysts as part of due diligence.

Put Option — A derivatives contract giving the buyer the right to SELL the underlying at the strike price before expiry. Put buyers profit when the underlying falls below the strike price minus premium paid. Put sellers collect premium and profit when the underlying stays flat or rises. Buying Puts is the most common hedging strategy — holding stocks while buying Puts limits downside risk similar to insurance.

R

RBI (Reserve Bank of India) — India's central bank responsible for monetary policy, interest rates, and financial system stability. RBI's bi-monthly Monetary Policy Committee (MPC) meetings are major market events — interest rate decisions significantly impact banking stocks, bond yields, and overall NIFTY direction. Surprise rate changes can cause 1–3% NIFTY moves within minutes of announcement.

Rectangle Pattern — A consolidation pattern between parallel horizontal support and resistance, where price oscillates without trending. The rectangle resolves when price breaks either level on high volume. In an uptrend, a rectangle is typically a continuation (bullish breakout). In a downtrend, a rectangle typically breaks down. The width of the rectangle suggests the expected move after the breakout.

Resistance — A price level or zone where selling pressure has historically been strong enough to halt upward moves and push price back down. Resistance levels are created by concentrations of sell orders — often where previous buyers are waiting to exit at breakeven. When price breaks above resistance on high volume, that level often becomes new support (role reversal principle).

Retail Trader — An individual investor trading personal capital, as opposed to institutional traders managing pooled professional capital. On NSE, retail traders make up the largest number of participants but a small fraction of total traded value. SEBI data consistently shows that the majority of retail F&O traders lose money, primarily due to inadequate risk management, leverage misuse, and lack of backtesting.

Risk-Reward Ratio (RR) — The ratio of potential profit to potential loss on a trade. RR = (Target − Entry) ÷ (Entry − Stop). Minimum acceptable: 1:2 (risk ₹1,000 to make ₹2,000). Target: 1:3. A 1:3 RR means the strategy is profitable with a win rate above just 25%. Higher RR setups allow lower win rates while remaining profitable — the mathematical foundation of professional trading.

Rollover — The process of moving a position from the expiring futures/options contract to the next month's contract. On NSE, rollover happens in the last week before expiry Thursday. High rollover percentage in long positions suggests the market expects continued upside. Rollover cost (difference between near-month and next-month futures price) is a real cost that must be accounted for in positional F&O strategies.

RSI (Relative Strength Index) — A momentum oscillator developed by J. Welles Wilder measuring the speed and magnitude of price changes on a scale of 0–100. RSI above 70 = overbought. RSI below 30 = oversold. RSI 50 = momentum neutral. RSI divergence (price makes new high but RSI doesn't) is a powerful early reversal signal. Default period 14 works well on NSE daily charts. One of the most widely used indicators globally.

SEBI (Securities and Exchange Board of India) — India's primary capital markets regulator, equivalent to the SEC in the USA. SEBI regulates stock exchanges, brokers, listed companies, mutual funds, and FIIs. SEBI sets margin requirements, circuit breakers, position limits, and disclosure requirements for NSE. SEBI's 2023 study on F&O losses (88% of retail traders lose money) was a landmark industry report.

Scalping — The fastest trading style — holding positions for seconds to minutes and targeting small price moves repeatedly. Scalpers make 15–50+ trades per day. Requires full-time attention, fast execution, and tight spreads. Only practical on highly liquid NSE instruments (NIFTY/BANK NIFTY futures). Not recommended for beginners — the most psychologically demanding and technically difficult trading style.

Sell-Side Liquidity (SSL) — In Smart Money Concepts, the pool of stop-loss orders and pending sell orders sitting below recent swing lows. Institutions target SSL by pushing price below swing lows to trigger stops — generating the buy orders institutions need to accumulate long positions cheaply. An SSL sweep is often followed by a sharp reversal upward. Recognising SSL sweeps is a core SMC entry technique.

Sharpe Ratio — A risk-adjusted return metric: (Strategy Return − Risk-Free Rate) ÷ Standard Deviation of Returns. Sharpe above 1.0 is good; above 2.0 is excellent. Two strategies with the same CAGR — the one with the higher Sharpe provides better return per unit of risk. The risk-free rate for India is approximately the current FD rate (6–7%). Published by Momentum IQ in all backtest results.

Short Squeeze — A rapid price increase triggered when short sellers are forced to cover (buy back) their positions due to rising prices, creating a self-reinforcing cycle. Short squeezes in NSE stocks occur when fundamentally or technically weak stocks with high short interest receive positive news. The covering buying adds to the upward momentum, causing rapid sharp rallies.

Slippage — The difference between the expected trade price and the actual execution price. Occurs due to market movement between order placement and execution. Slippage is higher in: illiquid stocks, large orders, market orders (vs limit orders), and during high-volatility periods. Always include estimated slippage in backtests — the difference between profitable backtests and losing live trades is often entirely slippage.

SMA (Simple Moving Average) — The arithmetic mean of closing prices over a specified period, giving equal weight to all sessions. The 200-day SMA is the most important long-term trend indicator — price above SMA 200 = long-term uptrend. The 50-day SMA is used for medium-term trend. Slower to respond to price changes than EMA but generates fewer false signals in trending markets.

Sortino Ratio — Similar to Sharpe Ratio but only penalises downside volatility (losing periods), not total volatility. More relevant for traders who can tolerate upside volatility but want to minimise losses. Sortino above 1.5 is good; above 2.5 is excellent. Published alongside Sharpe in Momentum IQ backtest results.

SPAN Margin — Standard Portfolio Analysis of Risk — the initial margin required by NSE for F&O positions. SPAN margin covers the worst-case scenario loss over a defined period, calculated using complex risk scenarios. Total margin required = SPAN + Exposure margin. Changes dynamically with market volatility — increases when India VIX rises.

STT (Securities Transaction Tax) — A tax levied on securities transactions in India. Equity delivery (CNC): 0.1% of transaction value. Equity intraday (MIS): 0.025% on sell side. Futures: 0.02% on sell side. Options buying: 0.05% on premium paid. Options selling (ITM at exercise): 0.125%. STT is a significant cost for high-frequency traders and must be included in all backtesting calculations.

Support — A price level or zone where buying interest has historically been strong enough to prevent further price decline. Support levels are created by concentrations of buy orders — often where previous sellers are looking to buy back cheaper. When price breaks below support on high volume, that support often becomes new resistance (role reversal). Support and resistance are the foundation of all chart pattern analysis.

Swing Trading — Holding positions for 2–10 trading days to capture a single directional price swing. The most practical trading style for working professionals — requires only 20–30 minutes of analysis per day, typically done after market hours. Lower brokerage costs than intraday trading. Entry on pullbacks within a trend or breakout from consolidation. Delivery (CNC) orders eliminate the forced close risk of MIS intraday orders.