Trading Glossary: Key Terms for Traders

Short, plain-English definitions of the terms you will meet in trading journals, prop firm rules and performance reports. Each entry links to a full explanation and, where useful, a free calculator.

Performance metrics

• Expectancy: the average amount a strategy makes or loses per trade.
• Profit factor: gross profit divided by gross loss.
• R-multiple: a trade's result as a multiple of its initial risk.
• Win rate: the percentage of trades that close in profit.
• Risk-to-reward ratio: potential profit compared with potential loss.
• Equity curve: a chart of your account balance over time.
• Sharpe ratio: return per unit of volatility.

Risk and drawdown

• Drawdown: the decline from a peak to a later low.
• Trailing drawdown: a loss limit that moves up with your highest balance.
• Daily loss limit: the most you can lose in one trading day.
• Risk of ruin: the chance losses reach an unacceptable level.
• Position sizing: choosing trade size so a stop-out costs a fixed amount.
• Kelly criterion: a formula for growth-maximizing risk size.

Prop firm terms

• Consistency rule: a limit on how much profit can come from your best day.
• See also our guides to FTMO, FundedNext, The5ers, Topstep and Apex Trader Funding.

Market mechanics

• Pip: the standard unit of price movement in forex.
• Lot size: the number of units in a forex trade.
• Tick value: the dollar value of a one-tick move in a futures contract.
• Slippage: the gap between expected and actual fill price.

Free tools

Put these terms to work with our free trading calculators and the trading journal template.