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Trading Terminology Distinctions

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Trading, like any specialized craft, requires a precise and shared language. To navigate the complexities of the market, manage risk effectively, and understand one's own psychology under pressure, traders need clear definitions and a consistent framework for thinking and communicating.

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At the Owl Group, our educational approach is built upon a unique philosophy that sees trading mastery emerging from the dynamic interaction between Markets, Systems, and Self. We have developed specific concepts, frameworks, and terminology to articulate this approach and provide traders with the tools they need to evolve. This trading language is articulated on this web site in the many articles, in our educational courses and on the Glossary page of this site. 

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This page is about the  distinctions in terminology.  Ideas such as "State," "Condition," "Rule," and "Signal," have important distinctions, as do terms like "Setup," "Entry," and "Exit," or the terms that delve into the deeper cognitive structures of "Belief," "Frameworks," and "Mental Models."

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Market, System and Self

We teach trading as a craft built on the dynamic relationship between the domains of  Markets, Systems, and Self.

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  • Market is the ever-changing environment. It is the independent variable. It presents opportunity and danger, but never certainty. We train traders to recognize critical states, adapt to different conditions, and trade what is—without prediction or attachment.

  • System are the tools and methods we use to engage with the market. These include rule-based setups like SSC, RLCO, and Z3P, as well as risk management protocols and trade framing techniques. System provide structure, consistency, and an edge—removing guesswork from execution.

  • Self is the operator. Without emotional clarity, discipline, and self-awareness, traders can fail to trade even the best system. We help traders develop resilience, manage cognitive biases, and cultivate the Zero State—a mindset of calm, focused presence under pressure.
     

Through iterative learning, real-time feedback, and structured journaling, traders at Owl Group learn not only how to trade—but how to evolve. Mastery comes when these three domains are no longer separate, but fully integrated into one seamless process.

State, Condition, Rule, Signal

State: A state is a snapshot of being - a defined status of the Markets, Systems or Self at a given movement that influences decision-making. In Owl Speak, a state is the current condition of a system, environment or individual. It reflects “how things are right now” - and it’s often what changes over time, causing you to act, adapt or hold steady. 

 

Why “State” Matters in Trading:

  • Describes the present moment: You trade what is, not what should be.

  • State transitions create opportunity: Breakouts, reversals, system triggers.

  • Internal state influences behavior: Fatigue, frustration, focus level affect execution.

  • Helps build dynamic systems: Systems that adapt to changing market states are more resilient.

 

Condition: A condition is a measurable or identifiable state of the Markets, Systems, or Self that either permits or inhibits a trading action. “Bear Volatile” is a market condition state, distinct from “Bullish Quiet”. “Price is above VWAP” means Market trend is bullish. “RL10 Slope > 0” means System momentum is positive. “Three consecutive losses today” means the trader Self is emotionally compromised. Conditions are foundations to building systems and rules. They allow for contextual awareness, enabling both objective and subjective rule creation. This allows traders to make situational decisions without randomness. 

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Good condition has four qualities. 

  • It is observable in that you can see it in a chart or a stat or in yourself. 

  • It is measurable, in that it can be described in number or state. 

  • It is contextual, meaning it relates to a time, location or state or readiness. 

  • It is relevant, in that it affects the edge or risk of the trade. 

 

Rule: A condition paired with an action. “If this condition is met, then enter a long position”.

 

Signal: A change in the state that suggests opportunity or risk.

 

What is the relationship of State, Condition, Rule and Signal in a system?

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  • State is currently what is true in a system

  • Condition is a test of whether a state matches a pattern

  • Rule is an action triggered when a condition is met

  • Signal is a change in state that suggests an opportunity or risk

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Critical State: A Critical State is a statistically or visually defined inflection point of the Market  where the market is compressed, extended, or imbalanced—suggesting that a larger move than normal  is likely, taking less than normal time to complete, even if the direction is unclear. Critical state is not a signal to enter - it’s a signal to prepare. Critical states represent an edge-rich environment for traders who are alert, disciplined and ready. They often precede trend changes, breakouts or reversals. The actual trade is executed with standard trade execution patterns such as CD, SSC etc.


Compound Critical State: When multiple Critical State conditions are true.

Setup, Entry, Exit, Re-entry

Setup: A setup is a predefined pattern or condition in the Markets – i.e., a state of the Market, often confirmed by System indicators, that places the trader on alert for a trade—pending further confirmation. Setups give you focus without commitment. They help you prepare mentally and structurally. They prevent over-trading by defining when not to act. 

 

Entry: The act of entering into a trade at a specific time when predetermined conditions have been met  in a specific tradeable.

 

What is the difference between Setups vs. Signal vs. Entry?

  • Setup is when conditions are coming into alignment. “This might be tradeable”. 

  • Signal is when trigger conditions are met. “This is tradable now.”

  • Entry is taking the trade. ‘I’m in.”

 

Exit: An exit is the act of closing a trade, either at a profit target, a stop-loss, or a discretionary point, in alignment with your system, risk frame, or psychological discipline. There are many types of exits.

 

Re-Entry: A re-entry is a deliberate, rule-based second chance to participate in the trade in the same direction as a prior setup after a prior exit, usually because the original pattern is still in play or the market has presented a new, qualified opportunity within the same thesis. Re-entries matter because markets often move in waves, not straight lines. Many high-R trades require multiple frames. Re-entries allow you to stay aligned with your system and the trend, without emotional chasing. They help you build confidence after a scratch or 1R loss when the conditions are still valid. 

Price, Indicator, Measure, Value

Price: The collection of four primary data streams for equity tradeable, Open, High, Low, Close,  representing the price at a specified time frame. For example, the price at the time the exchange Opens, the Highest and Lowest price during the day, the price at the Close.

 

Indicator: A transformation of price and/or volume data of a tradeable to make it suitable for analysis or generate a signal. The average of 200 days of price data is the well known 200 day moving average indicator. 

 

Measure: The actual value of something quantitative such as the closing price is $32.25, or the value of ATR(14) indicator is 3.9 and so on. Synonymous with Value.

 

Value: The actual value of something quantitative such as the closing price is $32.25, or the value of ATR(14) indicator is 3.9 and so on. Synonymous with Measure.

Pattern

Pattern: A pattern is a structured configuration of price movement that has been observed to produce reliable outcomes when traded with discipline, risk control, and contextual awareness. In the Owl Group framework, patterns are repeatable, recognizable structures in price behavior that emerge within specific market conditions and can be traded with an edge when paired with proper systems and risk framing. They are the bridges between randomness and order—signals that suggest a potentially favorable imbalance between risk and reward. “Patterns don’t predict - they prepare. It’s not about what the market might do, but about what you will do if it does.”

 

What are the characteristics of Owl Group Patterns

  • Repeatable - appear across tradeables

  • Fractal - appear across time frames

  • Rule-based - defined by system criteria e.g., SSC

  • Frameable - Can be planned with MMRB, R-math and target zones

  • Context-sensitive - More effective in certain conditions (e.g., critical state)

  • Edge-based - Backed by expectancy, not just appearance.

  • Examples of common Owl Group Patterns - SSC (reversal from support with risking RL10), RCLO (momentum shift when short RL crosses long), Z3P (compression breakout from statistical pinch) etc.

 

What is the difference between Patterns vs. Setups vs Signals?

  • Patterns are the shape or structure of price movement.

  • Setup is a pattern + supporting conditions + risk framing

  • Signal is a specific moment when entry/exit  criteria is met

Belief, Concept, Frameworks, Mental Models, Philosophy

Belief: A belief is a mental model or expectation that governs how a trader thinks about market, system, or self—and it directly influences decision-making, risk tolerance, and emotional response. Beliefs act as your internal operating system. Even with a great setup and sound risk management, your beliefs will filter what you notice (or ignore), color your emotional reactions, drive your rules or expectation, shape how you handle loss, success, boredom, fear, determine your trading identity (e.g., Am I a sniper? A gambler? A student?). Van Tharp is credited with stating “You don’t trade the markets. You trade your beliefs about the markets.”

 

Concept: A concept is a core idea that provides structure and meaning to trading actions, helping traders make sense of Markets, Systems, and Self. Concepts are the building blocks of your trading belief system. They help bridge the gap between technical details and strategic decisions. They are often portable - they apply across setups, systems and market regimes. They form the basis for coaching language, journaling and reflection.

 

Framework: A framework is a coherent structure that organizes key elements of trading—concepts, processes, decisions, or behaviors—into a usable system that supports understanding, execution, learning, or mastery.In the Owl Group context, a framework is a structured way of thinking, observing, and acting in the trading environment. It provides a mental scaffold that helps traders consistently make sense of complex inputs from Markets, Systems, and Self, and translate them into effective action.“Frameworks make thinking visible. They’re not rules—they’re scaffolding for better judgment.”

 

What are some examples of Owl Frameworks?

  • “RLCO framework” helps you use regression lines to interpret momentum when lines crossover.

  • “Z3 Pinch framework” helps you identify volatility compression and energy release potential.

“Critical state model” helps you highlight moments of maximum readiness and potential

 

Mental Models: Mental models are practical thinking frameworks—internal structures that help traders interpret market behavior, system performance, and personal reactions. They are “How you think about what’s happening.” The role of mental models in trading is to simplify complex decisions under uncertainty, to provide lenses through which you assess situations and translate abstract patterns into actionable meaning. 

What are some examples of mental models in the Owl Group and their implications?

  • “Markets are complex adaptive systems” →  implies don’t expect linear cause-effect.

  • “Critical states precede critical moves” →  implies be alert before action

  • “Trade framing is risk rehearsal” → Frame trade to reduce fear.


 

Philosophy: Philosophy is your core belief system—the guiding values, intentions, and worldview that shape your identity and purpose as a trader. “Why you trade and how you orient yourself.” The role of philosophy in trading is to anchor your psychological resilience, align your action with meaning, help you define success beyond outcome, shape your ethics, goals and role in the world.

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What are some examples of philosophies in the Owl Group and their implications?

  • “Process over outcome” → make you value a losing trade carried out with good process over a winning trade executed haphazardly.

  • “Small losses are tuition, not failure” → makes you accept a loss as a learning process and not as a failure to be avoided.

 

What is the difference between Mental Models and Philosophy?

In practice, mental models help you make better decisions in the moment. Philosophy helps you make better decisions over a lifetime.

Systems, Strategies, Techniques, Tips

Systems: Well defined rule based systems that can be traded mechanically according to an objective set of rules which have been back tested and forward traded based on evidence. System includes tradeables, entry & exit signals, position size rules and trade management techniques. Index Over Reaction system is an example of a system that trades specific liquid indexes like SPY, has rules that objectively fire when conditions are met, has rules for position sizing the initial position and adding additional position while in the trade. (Note the plural Systems, distinct from the singular System in the System, Self, Market domain)

 

Strategies: A strategy is a cohesive, repeatable method for engaging the market, built on one or more setups, governed by clear rules, framed with risk parameters, and aligned with the trader’s time frame, personality, and edge. They are Logically consistent frameworks of beliefs and indicators that support a variety of systems from a common frame of reference and which allow a trader to apply a measured amount of discretion to sound systems. Taken together, Systems and Strategies are a robust portfolio of ideas.Logic chain is an example of one strategy. During a day determine which sector is out performing SPY. Find the best stock in the sector that is outperforming to buy and the worst stock in the worst performing sector to short.

 

Techniques: A technique is a practical, step-by-step method for executing a task or applying a concept within a system—whether that’s managing a trade, regulating your mindset, or analyzing price behavior. Common actions such as Universal Entries, position sizing, risk management and market conditions that apply like building blocks to different systems and strategies. Good techniques help us improve and refine our routine trading actions.They create consistency from chaos, allow precision under pressure. enable deliberate practice and refinement, bridge the gap between abstract concepts and real-time execution and help build automaticity—which is the ability to perform trading tasks effortlessly because they have achieved unconscious competence

 

Tips: A tip is a bite-sized piece of wisdom or technique—often based on experience or pattern recognition—that improves how a trader thinks, acts, or reacts under real conditions. Things that we have learned along the way while doing research that act as good rules of thumb and help support our risk management and opportunity finding strategies. “I’d rather be outside wishing I was in, rather than being  inside wishing I was out” is attributed to a successful trader. This is his lesson learned that entering a trade without the correct preparation can cause angst and stress so this tip reminds him to keep his FOMO in check. 

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