Trading Glossary

Your average loss is how much you lose on a typical losing trade. To find it, add up all your losses and divide by the number of losing trades. If four losing trades cost $600 in total, your average loss is $150 ($600 ÷ 4). Keeping it small, and smaller than your average win, is what gives a strategy a lasting edge.

Your average win is how much you make on a typical winning trade. To find it, add up all your profits and divide by the number of winning trades. If five winning trades made $1,500 in total, your average win is $300 ($1,500 ÷ 5). Together with your average loss and win rate, it decides your expectancy.

Drawdown is the drop in your account equity from a peak to the following trough, usually shown as a percentage. If your account falls from $10,000 to $8,000 before recovering, that is a 20% drawdown. Maximum drawdown is the largest peak-to-trough fall on record, measuring the worst losing stretch a strategy has put you through.

An equity curve is a line chart of your account balance over time, plotted trade by trade or day by day. A smooth curve rising from the bottom left to the top right points to a steady edge, while a jagged or falling curve flags inconsistency or a strategy that has stopped working.

Expectancy is the average profit or loss you can expect from each trade over a large sample. It blends your win rate with the size of your average winner and average loser into one number. A positive expectancy means a strategy makes money on average; a negative one loses, no matter how you size it.

Profit factor is gross profit divided by gross loss across all your trades. It tells you how many dollars you make for every dollar you lose. A profit factor above 1.0 means a strategy is net profitable, 1.5 to 2.0 is generally considered strong, and below 1.0 means it loses money.

An R-multiple expresses a trade's result as a multiple of the amount you risked. Your initial risk, the distance from entry to stop, equals 1R. Risk $100 and make $300, and the trade is +3R; lose the full $100, and it is −1R. R-multiples let you compare trades of any size on one scale.

The risk-reward ratio compares how much you stand to lose on a trade to how much you aim to gain. Risk $100 to make $300 and your ratio is 1:3. You set it before you enter, from your stop and target, and it decides how often you need to be right just to break even.

Win rate is the percentage of your trades that close with a profit, calculated as winning trades divided by total trades. A 55% win rate means 55 of every 100 trades were winners. On its own it says nothing about whether you make money, because it ignores the size of your wins and losses.

The win/loss ratio is the number of winning trades divided by the number of losing trades. Win 60 trades and lose 40, and your win/loss ratio is 1.5. It is not the same as your win rate, and on its own it says nothing about how big your wins and losses are.