Trading glossary

Testing a trading strategy on historical data to estimate how it would have performed.

A Sharpe ratio corrected for the number of strategy variations you tried.

The peak-to-trough drop in your account equity, usually shown as a percentage.

A repeatable reason your trades make money over a large sample.

The average amount you can expect to win or lose per trade over many trades.

Chasing a move you didn't plan, driven by the fear of being left behind.

Using borrowed capital to control a position larger than your cash balance.

How easily an instrument can be traded without moving its price.

The collateral your broker requires to open and hold a leveraged position.

The largest peak-to-trough equity decline over a period.

Tuning a strategy so tightly to past data that it fails on new data.

Deciding how large a trade to take so a single loss can't hurt you badly.

Gross profit divided by gross loss — how many dollars you make per dollar lost.

A trade's result measured in multiples of the amount you risked.

Trying to win back a loss immediately by taking impulsive, oversized trades.

The ratio of how much you stand to make versus how much you risk on a trade.

Return earned per unit of volatility — a measure of risk-adjusted performance.

The difference between the price you expected and the price you actually got.

A pre-set exit that caps the loss on a trade if price moves against you.

A pre-set order that closes a trade once it reaches your target.

How much and how fast a market's price moves over time.

The percentage of your trades that close in profit.