Trading Glossary
Clear definitions of the most important trading terms. From profit factor to trading psychology — with formulas, examples, and context.
Performance Metrics
Profit Factor
Profit factor is the ratio of gross profit to gross loss over a series of trades. A profit factor above 1.0 means the strategy is profitable; above 1.5 is considered solid; above 2.0 is excellent.
Win Rate
Win rate is the percentage of trades that close with a profit. A trader with 60 winning trades out of 100 total trades has a 60% win rate.
R-Multiple
R-multiple (or R-multiples) expresses a trade's outcome as a multiple of the initial risk. If you risk $100 on a trade and make $250, your R-multiple is +2.5R. If you lose $80, it's -0.8R.
Expectancy
Expectancy is the average amount you can expect to win or lose per dollar risked across all your trades. Positive expectancy means your strategy makes money in the long run; negative expectancy means it loses.
Drawdown
Drawdown is the peak-to-trough decline in an account's value over a specific period. If an account grows from $10,000 to $15,000 and then falls to $12,000, the drawdown from the peak is $3,000 or 20%.
Maximum Drawdown (MDD)
Maximum drawdown (MDD) is the largest peak-to-trough decline in an account or portfolio during a specific period. It measures the worst case a trader had to endure and is used by prop firms as a risk limit.
Sharpe Ratio
The Sharpe ratio measures risk-adjusted return — how much return you get per unit of risk taken. Higher is better. It is calculated by dividing excess return (return above risk-free rate) by the standard deviation of returns.
Consistency (Trading)
Consistency in trading refers to the ability to produce similar results repeatedly across different trading days, market conditions, and emotional states. Consistency means following your rules reliably, not necessarily having identical P&L every day.
Commissions and Fees
Commissions are fees paid to a broker for executing trades. For high-frequency traders and scalpers, commissions are a significant cost that must be overcome by the trading edge. Net P&L = Gross P&L − Commissions.
Slippage
Slippage is the difference between the expected price of a trade and the actual fill price. It occurs when markets are moving fast, liquidity is low, or order size is large relative to available supply. Slippage adds to trading costs.
P&L (Profit and Loss)
P&L (Profit and Loss) is the total financial gain or loss from a trade or set of trades. Net P&L subtracts commissions and fees from gross P&L. Realised P&L is from closed trades; unrealised P&L is from open positions.
Average Winner / Average Loser
Average winner is the mean profit of all winning trades; average loser is the mean loss of all losing trades. Their ratio, alongside win rate, determines overall expectancy.
Equity Curve
An equity curve is a graphical representation of the growth or decline of a trading account over time. It plots cumulative P&L against time, giving a visual representation of strategy performance and drawdown periods.
Trading Psychology
Revenge Trading
Revenge trading is the act of entering impulsive trades — often with larger than normal size — immediately after a loss, driven by the desire to 'get the money back'. It is one of the most common and destructive trading behaviors.
FOMO (Fear of Missing Out)
FOMO (Fear of Missing Out) in trading refers to entering a trade impulsively because you fear missing a profitable move, rather than because your setup criteria have been met. FOMO entries are typically late entries into already-extended moves.
Tilt
Tilt in trading (borrowed from poker) refers to a state of emotional frustration or anger that causes a trader to make poor decisions. A tilted trader abandons their process, overtrades, revenge trades, and takes on excessive risk.
Overtrading
Overtrading is the practice of taking too many trades, either by trading low-quality setups, trading when conditions are poor, or placing too many trades in a short time period. It is typically driven by boredom, FOMO, or the pressure to 'make back' losses.
Trading Psychology
Trading psychology refers to the mental and emotional aspects of trading that influence decision-making. It encompasses managing emotions like fear and greed, maintaining discipline, developing resilience after losses, and building consistent habits.
Fear and Greed
Fear and greed are the two primary emotions that drive markets and cause individual trader mistakes. Fear causes premature exits, excessive stop losses, and reluctance to take valid setups. Greed causes position size inflation, holding beyond targets, and FOMO entries.
Strategy & Concepts
Trading Plan
A trading plan is a comprehensive set of rules that govern every aspect of a trader's approach — what to trade, when to enter, when to exit, how much to risk, and how to respond to different market conditions. A trading plan converts a trading strategy into an operational rulebook.
Trading Playbook
A trading playbook is a documented collection of a trader's specific setups and strategies. Each playbook entry defines the exact criteria for a type of trade — entry conditions, stop placement, target levels, and ideal market conditions.
Trading Edge
A trading edge is a statistical advantage that, when consistently applied over many trades, produces positive expectancy. An edge can come from price action patterns, timing, risk management discipline, informational advantages, or execution speed.
Setup (Trade Setup)
A trade setup is a specific configuration of market conditions that a trader has defined as a valid entry opportunity. A setup defines the exact conditions that must be present before a trade is taken — typically including market structure, entry trigger, stop level, and target.
Backtesting
Backtesting is the process of testing a trading strategy against historical market data to evaluate its performance before trading it live. It allows traders to assess profitability, drawdown characteristics, and edge strength without risking real capital.
Trade Replay
Trade replay is the ability to replay past trades on a chart, bar by bar, to review decision-making in real time. It shows exactly how a trade developed and where specific decisions were made — without the benefit of hindsight bias.
Trading Journal
A trading journal is a systematic record of every trade taken, including entry/exit details, setup type, emotional state, and post-trade analysis. It is the primary tool for identifying patterns in trading performance and improving over time.
Trading Diary
A trading diary is a journal focused on the qualitative aspects of trading — thoughts, emotions, market observations, and reflections on decision-making. It complements quantitative trade logs with psychological context.
Scalping
Scalping is a trading style that involves taking many short-duration trades — often lasting seconds to minutes — to capture small, frequent profits. Scalpers typically target high-volume, liquid instruments and rely on tight bid-ask spreads.
Day Trading
Day trading is a trading style where all positions are opened and closed within the same trading day. Day traders typically trade multiple times per day and do not hold positions overnight, eliminating overnight gap risk.
Swing Trading
Swing trading is a trading style that aims to capture multi-day to multi-week price moves. Swing traders typically hold positions overnight and over weekends, aiming for larger individual moves than day traders.
Prop Firm Trading
Proprietary firm (prop firm) trading refers to trading with capital provided by a firm rather than your own money. Traders pass a challenge that tests their risk management skills, then trade the firm's money and earn a percentage of profits (typically 70–90%).
Paper Trading
Paper trading (also called simulated trading or demo trading) is the practice of trading in real market conditions with simulated money rather than real capital. It allows traders to test strategies and build skills without financial risk.
Trading Rules
Trading rules are a set of objective, pre-defined criteria that govern every aspect of a trader's decision-making — what to trade, when to enter, where to place stops and targets, how to manage risk, and when to stop trading.
Market Session
A market session is a defined trading period during which specific markets are most active. For forex and futures, the main sessions are: Asian Session (Tokyo), London Session (European), New York Session, and their overlap periods.
Break-Even (Trade Management)
Moving a stop loss to break-even means adjusting it to the trade entry price after a position moves in your favour. This locks in a 0R result on the trade (no gain, no loss) instead of a full -1R loss if the trade reverses.
Partial Profits (Partial Exit)
Taking partial profits means closing a portion of your position at an intermediate target while leaving the rest to run to a larger target. For example, closing 50% at 1R and running the remaining 50% to 2R or beyond.
Risk Management
Risk-Reward Ratio
Risk-reward ratio compares the potential profit of a trade to its potential loss. A 1:2 risk-reward ratio means you risk $1 to potentially make $2. Most professional traders target minimum 1:2 risk-reward on their setups.
Position Sizing
Position sizing is the process of determining how many shares, contracts, or units to trade based on your account size, risk tolerance, and stop loss distance. Proper position sizing ensures no single trade can cause catastrophic damage to your account.
Stop Loss
A stop loss is a predefined price level at which a trade is automatically closed to prevent further losses. Setting a stop loss before entering a trade is a fundamental risk management discipline.
Take Profit
A take profit is a predefined price level at which a trade is automatically closed to lock in gains. Take profits define the target reward of a trade and are used alongside stop losses to establish risk-reward ratios.
Kelly Criterion
The Kelly Criterion is a mathematical formula that calculates the optimal position size as a percentage of your account to maximise long-term growth. It uses win rate and risk-reward ratio as inputs.
Risk Management
Risk management in trading is the set of rules and practices used to control the potential loss on any trade and across an entire trading account. It includes position sizing, stop loss discipline, daily loss limits, and correlation management.
Leverage
Leverage allows traders to control a larger position than their account balance would normally permit, by borrowing from their broker. 10:1 leverage means $1,000 controls a $10,000 position. Leverage amplifies both gains and losses.
Margin
Margin is the collateral a trader must deposit with their broker to open and maintain a leveraged position. Initial margin is required to open the position; maintenance margin is the minimum required to keep it open.
Technical Analysis
Support and Resistance
Support is a price level where buying pressure is historically strong enough to halt a decline and potentially reverse it. Resistance is a price level where selling pressure is strong enough to halt an advance and potentially reverse it.
Candlestick Patterns
Candlestick patterns are visual representations of price action formed by one or more candlesticks. Common patterns like doji, hammer, engulfing, and pin bar signal potential reversals or continuations and are used by traders as entry or exit triggers.
Moving Averages
A moving average is a calculation that takes the average closing price of an asset over a specified number of periods and updates it continuously. Common moving averages include the 20, 50, 100, and 200-period simple moving average (SMA) and exponential moving average (EMA).
Candlestick Chart
A candlestick chart is a type of financial chart that represents price action as a series of candlesticks. Each candlestick shows the open, high, low, and close price for a given time period. The body represents the open-to-close range; the wicks represent the high and low.
Market Structure
Market structure refers to the pattern of price movement on a chart, typically described as uptrend (higher highs and higher lows), downtrend (lower highs and lower lows), or range-bound (horizontal highs and lows). It defines the broader context for trade setups.
Confluence
Confluence in trading refers to multiple independent technical factors aligning at the same price level or at the same time — for example, a key support level that also coincides with a moving average and a previous high. More confluence generally means a higher-probability setup.