AI Trading Glossary

34 terms defined — the language of autonomous agents, alternative data, and systematic trading.

AIDataFin45PerformanceRiskSignalsStrategy

AI

Autonomous Trading Agent
An AI system that independently ingests data, evaluates signals, makes position sizing decisions, and executes trades without human intervention for each decision. Distinguished from bots (fixed rules) and algorithms (pre-programmed execution) by its ability to exercise judgment within defined parameters.
NLP (Natural Language Processing)
AI techniques for analyzing human language. In trading, used to score sentiment in earnings call transcripts, detect hedging language, analyze SEC filing text, and process news articles for directional signals.
Overfitting
Building a model that perfectly explains historical data but fails on new data. The #1 killer of AI trading systems. A backtest showing 95% win rate almost certainly means the model memorized the past rather than learning persistent patterns.
Survivorship Bias
The error of studying only things that survived a selection process, ignoring failures. In AI trading: you only see bots that appeared profitable. The thousands that failed were shut down and never marketed. Creates false impression of AI trading success rates.

Data

13D/G Filing
SEC filings required when an investor acquires 5%+ of a company's shares. 13D (activist intent) must be filed within 10 days. 13G (passive) has longer deadlines. Early signal of activist campaigns or large accumulation.
13F Filing
A quarterly SEC filing required of institutional investment managers with $100M+ in assets. Reveals their equity holdings as of quarter-end. Published 45 days after quarter close. Shows what large funds own but with significant delay.
8-K Filing
An SEC filing for material events between quarterly reports: executive departures, acquisitions, bankruptcy, material agreements, delisting notices. Filed within 4 business days of the event. Often first signal of significant corporate changes.
Alternative Data
Non-traditional information sources used for investment decisions — anything beyond financial statements, price/volume data, and analyst research. Includes SEC filings processed at machine speed, dark pool prints, congressional disclosures, options flow, patent filings, and prediction markets.
Dark Pool
A private stock exchange (Alternative Trading System) where institutional orders execute away from public exchanges. About 40-45% of US equity volume trades through dark pools. Trades are reported to FINRA after execution, making the data publicly available.
FINRA ADF
The Alternative Display Facility operated by FINRA (Financial Industry Regulatory Authority). All off-exchange (dark pool) trades must be reported here within 10 seconds of execution. This is the primary source of dark pool data.
Form 4 (SEC)
The SEC filing that company insiders must submit within 2 business days of buying or selling company stock. Includes transaction type, shares traded, price, and remaining holdings. The primary source for insider trading signal data.
OPRA
The Options Price Reporting Authority — the consolidated feed of all US equity options market data. Provides real-time quotes, trades, and open interest across all exchanges. Fin45 uses OPRA data to detect unusual options activity.
Prediction Markets
Markets where participants bet on the probability of future events (Polymarket, Kalshi, Metaculus). Aggregated probabilities often outperform expert forecasts. Fin45 uses prediction market data as one of 11 signal categories.
STOCK Act
The Stop Trading on Congressional Knowledge Act (2012). Requires members of Congress to disclose stock trades over $1,000 within 45 days. Prohibits using non-public information gained through official duties for personal trading.

Fin45

The Gap
Fin45's daily newsletter, published at 5:30 PM ET Monday through Friday. Documents the AI agent's signals, decisions, and portfolio performance. Named for the gap between what AI promises and what it actually delivers — which this experiment measures.
Trade Embargo
Fin45's 10-day delay between closing a position and publishing the trade. Prevents front-running, ensures no one can copy trades in real time. By the time a trade is revealed, the position is already closed.

Performance

Alpha
Returns above a benchmark (typically the S&P 500). A strategy generating 15% when the market returns 10% has 5% alpha. Fin45's experiment measures whether its AI agent can generate consistent alpha over 365 days.

Risk

Drawdown
The peak-to-trough decline in portfolio value during a losing period. A portfolio that goes from $120K to $96K has a 20% drawdown. Fin45's Half-Kelly sizing and hard stops are designed to limit maximum drawdown.
Front-Running
Trading ahead of a known upcoming order to profit from its market impact. Illegal when done with client orders. Fin45's 10-day trade embargo prevents followers from front-running its positions.
Half-Kelly Criterion
A position sizing formula that allocates half the amount suggested by the full Kelly criterion. Provides approximately 75% of full Kelly's long-term growth rate with roughly 50% less drawdown risk. Used because real-world probability estimates are uncertain.
Hard Stop
An unconditional exit price that triggers regardless of other factors. Fin45 uses a -7% hard stop on all positions — if a trade drops 7% from entry, it closes automatically with no exceptions or overrides.
Kelly Criterion
A mathematical formula (f* = (bp - q) / b) that calculates the optimal fraction of capital to risk on a bet with known edge. Maximizes long-term portfolio growth but produces extreme volatility. Most practitioners use fractional Kelly (1/4 to 1/2).
Position Sizing
Determining how much capital to allocate to each trade. Too large = one bad trade destroys the portfolio. Too small = edge doesn't compound. Fin45 uses Half-Kelly criterion with a hard cap of 20% per position.
Sector Cap
Maximum portfolio allocation to any single sector. Fin45 caps sector exposure at 40% to prevent concentration risk — even if every high-conviction signal points to tech stocks, no more than 40% of the portfolio can be in Technology.
Trailing Stop
A stop-loss that moves up with the stock price but never moves down. Fin45 uses +5% trailing by 3% — once a position is up 5%, the stop trails 3% below the high water mark, locking in gains while allowing room for normal volatility.

Signals

Cluster Buy
When 3 or more company insiders purchase stock on the open market within a short window (typically 2 weeks). Signals broad internal confidence and is far more predictive than a single insider purchasing. One of the strongest insider trading signals.
Conviction Score
A 0-to-1 numerical rating of signal strength, where 1.0 represents maximum confidence. Fin45 requires a score of ≥ 0.75 before considering a trade. The score incorporates signal type reliability, recency, magnitude, and confluence with other sources.
Options Flow
Real-time options market activity, particularly unusual volume patterns. Sweep orders (urgently filling across multiple exchanges), large premium bets, and unusual open interest changes can signal informed institutional positioning ahead of stock moves.
Options Sweep
An options order that aggressively fills across multiple exchanges simultaneously rather than waiting for the best single price. Indicates urgency and high conviction — the buyer wants the position NOW, regardless of slight price premium.
Signal Score
See: Conviction Score. The numerical rating (0–1) assigned to each detected signal based on source reliability, magnitude, recency, and historical predictive accuracy.

Strategy

Alpha Decay
The phenomenon where a profitable trading strategy loses its edge over time, typically because more participants discover and use the same approach. Once enough traders exploit a signal, it gets priced in and stops working.
Confluence
When multiple independent data sources point to the same trading conclusion simultaneously. Example: insider buying + dark pool accumulation + bullish options sweep on the same ticker. Fin45 requires multi-source confluence before triggering any trade.
Expected Move
The predicted price change for a stock based on signal analysis. Fin45 requires a minimum expected move of 5% before entering a position — small expected moves don't justify the execution risk and opportunity cost.
Paper Trading
Simulated trading using real market data but no real money. Fin45 uses Alpaca's paper trading API — real prices, real spreads, simulated execution. The $100K starting capital exists only in the simulation.

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