Trading Glossary

Arbitrage is the simultaneous buying and selling of the same asset on different markets to capture price differences with low risk. If an asset quotes at $60,000 on exchange A and $60,180 on exchange B, the gross difference is $180. After fees, transfer time and slippage little often remains – arbitrage today is largely the business of automated systems.

An ATR stop is a stop-loss whose distance is derived from the Average True Range (ATR) – usually as a multiple such as 2×ATR. For a stock at $50 with an ATR(14) of $1.50, a 2×ATR stop sits at $47. The stop thereby adapts to market volatility: further away in turbulent phases, tighter in calm ones – instead of being set arbitrarily.

Backtesting is the testing of a trading strategy on historical price data to estimate its metrics before live use: hit rate, profit factor, expectancy, maximum drawdown. A clean backtest also simulates fees, spread and slippage. The biggest traps are overfitting, look-ahead bias and samples that are too small – historical results are no guarantee for the future.

The bid-ask spread is the difference between the highest buy offer (bid) and the lowest sell offer (ask) of a market. It is the invisible base fee of every trade: buying at market prices and selling again immediately loses exactly the spread. Tight spreads signal high liquidity, wide spreads illiquid assets or nervous market phases.

Bollinger Bands are a volatility indicator made of three lines: a moving average (standard: SMA 20) and two bands at a distance of two standard deviations each. They show whether a price is high or low relative to its recent fluctuation range. Tight bands (squeeze) signal low volatility – historically often the precursor of larger moves.

A break-even stop is a stop-loss that is moved to the entry price after a defined open profit. Buying at $50, setting the stop at $47 and moving it to $50 at $53 (+1R) means the trade can no longer lose money. The price for this: more frequent stop-outs just at entry before the market continues in the original direction.

A breakout is the move of price out of a defined zone – above a resistance, below a support or out of a sideways range. Traders trade breakouts because an impulsive follow-through move frequently follows the break. The central challenge is the false breakout: a break that fails and falls back into the range. Volume and retest serve as confirmation filters.

The business cycle describes the recurring fluctuations of economic output between expansion, boom, downturn and recession. For traders it defines the market regime: rate levels, sector strength and volatility depend on the cycle phase. It is measured via indicators such as GDP, PMI, labour-market data and the yield curve.

A candlestick is the graphical representation of one time period's price movement with four values: open, high, low and close (OHLC). The body shows the span between open and close, the wicks mark the extremes. Candlestick charts make battles between buyers and sellers visible and are the standard display in active trading.

A consistency rule is a prop-firm rule that enforces evenly distributed profits: the best trading day may not exceed a defined share of total profit, historically often 20–40 %. A trader who makes too much profit on a single outlier day must keep trading until the ratio is met again – otherwise the provider delays or denies passing or the payout.

The CPI (Consumer Price Index) is the US consumer price index and the world's most watched inflation measure. It tracks the monthly price development of a representative basket of goods. Because the CPI directly steers rate expectations for the Fed, its release date ranks among the most volatile events in the market calendar – what matters is the deviation from consensus.

The daily loss limit is the maximum loss a trader may reach on a single trading day at a prop firm – typically 4–5 % of the account balance. Touching the limit usually ends the challenge or funded account immediately. Providers calculate it differently: on a balance or equity basis, sometimes including open positions.

A drawdown is the decline of an account balance from a peak to the subsequent trough, measured in percent or currency. If an account falls from $112,000 to $103,600, the drawdown is 7.5%. Drawdowns are the normal state of every strategy – what matters is knowing their depth and duration and aligning position size accordingly.

The equity curve shows a trader's account value over time – after each trade or per trading day. It makes a strategy's quality visible: slope (return), fluctuation (risk) and drawdown valleys. Prop firms effectively assess traders via the equity curve, because daily and overall loss limits operate directly on it.

An evaluation is the paid assessment phase through which a prop firm selects traders: a profit target must be reached in one or two phases without breaching the daily loss limit or the overall loss limit. Passing unlocks a funded account with a profit split; every failed attempt requires a new fee or a paid reset.

Expectancy states how much a strategy's average trade earns. Formula: win rate × average win − loss rate × average loss. With a 55 % win rate, a $1,500 average win and a $1,000 average loss, expectancy is $375 per trade (0.375R at $1,000 risk). Positive expectancy is the minimum condition for long-term profitability.

FOMO (fear of missing out) is the fear of missing an ongoing price move – and one of the most expensive behavioural errors in trading. It drives traders into late buys after extended moves: expensive entry, wide stop, poor risk-reward ratio. Antidotes are a defined trading plan, setup checklists and documenting emotions in the journal.

A funded account is a trading account a prop firm provides to a trader after a passed evaluation. The trader trades the firm's nominal capital instead of personal money and historically keeps 70–90 % of profits through the profit split. The evaluation's risk rules, such as the daily loss limit and overall loss limit, continue to apply in the funded account.

The funding rate is a periodic payment between long and short positions in perpetual futures that anchors the contract price to the spot price. If the rate is positive, longs pay shorts – and vice versa. Payments every eight hours are typical. For holders of leveraged positions the funding rate is an ongoing cost factor, for analysts a sentiment indicator.

Inflation is the sustained rise of an economy's general price level, measured via price indices such as the consumer price index (CPI/HICP). For traders inflation is doubly relevant: it steers central banks' interest-rate policy – and thus the valuation of almost all asset classes – and its release dates are among the most volatile events in the market calendar.

The Kelly criterion calculates the fraction of capital that maximises long-term capital growth given a known win probability and win/loss ratio. Formula: f* = p − q ÷ b. At a 55 % hit rate and a 1.5× win/loss ratio the result is 25 %. In practice fractions like quarter Kelly are the standard, because full Kelly produces extreme drawdowns and would blow through prop-firm limits.

Leverage allows controlling a larger position with deposited margin: at 10x leverage, $10,000 margin moves a $100,000 position. Gains and losses are calculated on the full position size – a 1% price move equals 10% on margin. Leverage magnifies nothing except position size; risk is controlled by stop distance and position size.

A limit order is a trading order with a price ceiling (buy) or floor (sell): it executes only at the limit price or better. The trader thereby controls the price but gives up the execution guarantee – if price runs away, the order remains unfilled. Limit orders are the standard tool for planned entries at defined levels.

Liquidation is the forced closure of a leveraged position by the exchange or broker when the deposited margin falls below the minimum requirement (maintenance margin). In crypto trading this happens automatically at the pre-calculated liquidation price. Mass liquidations can trigger cascades in which forced sales cause further liquidations and accelerate moves extremely.

Long and short denote the two basic directions of a position: long profits from rising, short from falling prices. Shorting means selling a borrowed or synthetic asset to buy it back cheaper later. The risk profile is asymmetric: a long can lose at most 100%, an unhedged short theoretically unlimited – stop management is mandatory when shorting.

Loss aversion is the cognitive bias that losses weigh psychologically about twice as much as equal-sized gains – a core finding of Kahneman and Tversky's prospect theory. In trading it leads to holding losers too long and selling winners too early – the so-called disposition effect.

The MACD (moving average convergence/divergence) is a trend-following and momentum indicator made of three components: the MACD line (EMA 12 minus EMA 26), the signal line (EMA 9 of the MACD line) and the histogram (difference of both). It shows whether two moving averages converge or diverge – and thus whether momentum is building or fading. As a lagging indicator it confirms trends rather than predicting them.

A margin call is the broker's demand to deposit additional capital or reduce positions because the deposited margin has fallen below the minimum requirement (maintenance margin). It is the last warning stage before forced closure (liquidation). Anyone receiving margin calls regularly has already violated their risk management beforehand – professional traders size positions so it never gets that far.

A market maker is a market participant that continuously quotes firm buy and sell prices and thereby provides liquidity. It earns primarily from the bid-ask spread, not from price direction. For traders this means tighter spreads and faster fills in liquid markets – but also potential conflicts of interest when brokers execute client orders internally against their own book (B-book).

A market order buys or sells immediately at the best available price – it guarantees execution but not the price. That makes it the tool for situations where speed matters more than the last cent: fast breakouts, emergency exits, highly liquid markets. In thin order books or during news it can become expensive because it “eats through” the book and creates slippage.

The maximum drawdown is the largest percentage decline of an equity curve from a peak to the subsequent trough before a new high is reached. If an account falls from $112,000 to $103,600, the maximum drawdown is 7.5 %. The metric measures a strategy's historically worst loss scenario – central for prop-firm traders because loss limits enforce a maximum permitted drawdown.

A moving average (MA) smooths price data by continuously averaging the last n periods. The most important variants are the simple SMA and the exponential EMA, which weights recent prices more heavily. Moving averages define trend direction and dynamic zones for entries and exits – as lagging indicators they confirm trends rather than predicting them.

NFP (Nonfarm Payrolls) is the monthly US labour-market report: the number of newly created jobs outside agriculture, complemented by the unemployment rate and wage growth. It appears on the first Friday of the month and, due to its direct effect on rate expectations, ranks among the most volatile dates in forex and index trading.

An OCO order (one-cancels-the-other) links two orders so that the execution of one automatically cancels the other. The classic is the bracket protection of a position: take-profit limit at $56 and stop-loss at $47 – when one level is reached, the counter-order disappears. The position is thus managed in both directions without the trader having to sit at the screen.

A one-step challenge is a prop-firm evaluation model with only one assessment phase: a profit target of historically 9–10% must be reached without breaching the loss limits. The faster path to a funded account usually comes at the price of stricter rules – typically a trailing drawdown instead of a static overall limit.

In market-structure analysis, an order block is the last opposing candle (or candle group) before an impulsive move – for instance the last bearish candle before a strong rally. The zone is interpreted as an area where large market participants built positions and serves as an observed reaction zone on later pullbacks. The concept is a heuristic, not a confirmed causality.

The order book is the price-sorted list of all open buy and sell orders for an instrument. It shows how much volume rests at which prices and thus determines spread, fill price and slippage. Traders read book depth and imbalances from it – for example whether far more volume sits on the buy side than on the sell side.

The overall loss limit is the maximum total loss cap of a prop-firm account, typically 8–10 % of the starting capital. Unlike the daily loss limit, it applies cumulatively over the entire duration of the challenge or funded account. Depending on the provider, the cap is static or moves up with new equity highs as a trailing drawdown.

Overtrading is taking significantly more trades than one's trading plan provides for – out of boredom, FOMO, frustration or the feeling of having to be in the market constantly. The consequences: declining setup quality, rising costs from spreads and commissions and a diluted expectancy. Fewer but planned trades are statistically almost always the better choice.

A partial fill exists when an order is only partially executed because there is not enough counter-volume at the desired price. Placing a limit buy for 1,000 shares at $50 but receiving only 400 is a partial fill. Consequences: a deviating position size, multiple commissions and stops that must be adjusted to the real share count.

A payout is the disbursement of the trader's share of the profits from a funded account. It follows fixed cycles of usually 14 or 30 days, is distributed via the profit split and is tied to conditions such as high-water mark, minimum amounts and rule-compliant trading. Denied payouts are a real risk factor in the prop-firm industry.

A pip is the standardized smallest price unit in forex trading – the fourth decimal place (0.0001) for most pairs, the second (0.01) for yen pairs. Pips make moves comparable across pairs and are the basis of every position sizing and risk calculation: only the pip value translates a stop distance into real money.

The policy rate is the interest rate set by a central bank at which commercial banks refinance themselves. It is the most important instrument of monetary policy: changes affect credit costs, bond yields, currencies and equity valuations. Fed and ECB rate decisions rank among the most market-moving dates in the calendar – what matters is the deviation from market expectations.

Position sizing determines how many units of an instrument a trader buys or sells – derived from account risk and stop distance, not gut feeling. The core formula: position size = account risk ÷ stop distance per unit. It makes losses plannable and comparable (1R logic) and is the lever through which risk management is practically implemented – more important than any entry signal.

The profit factor is the ratio of gross profit to gross loss of a strategy. If 55 winning trades earn $82,500 combined and 45 losing trades lose $45,000, the profit factor is 1.83. Values above 1 mean profitability; historically values between 1.5 and 2 are considered robust, while much higher values often point to small samples or overfitting.

The profit split is the distribution key by which a prop firm shares the profits from a funded account with the trader – historically 70–90 % in the trader's favour. With an 80/20 split and $4,000 in profit, the trader receives $3,200. Payouts follow fixed cycles; many providers improve the split step by step through a scaling plan.

A prop firm (proprietary trading firm) is a company that gives traders access to firm capital after a paid evaluation. Trading follows fixed risk rules such as a daily loss limit and a maximum drawdown; profits are shared through a profit split of typically 70–90 %. Rules, models, and payout conditions vary substantially between providers.

An R-multiple expresses a trade's result as a multiple of the amount originally risked (1R). Risking $1,000 and winning $2,300 books +2.3R; a full stop-out is −1R. The normalisation makes trades of different sizes and accounts comparable and is the basis for expectancy and distribution analyses in the trading journal.

Range trading is a trading style built on sideways markets: buy near the support of the range, sell near its resistance – until the range breaks. The style lives on a high win rate with limited profit per trade and demands hard rules for when a range counts as finished.

Revenge trading is the attempt to immediately win back a loss just suffered through new, usually larger and unplanned trades. The focus shifts from the setup to the account balance: instead of the next planned trade, the loss is being “fought”. The typical consequence is a loss spiral – in prop-firm accounts frequently until the daily loss limit is breached.

The risk-reward ratio (RRR) relates a trade's possible profit to the amount risked: target distance divided by stop distance. An RRR of 3:1 means the planned profit is three times the planned loss (3R). It is only half the truth: only together with the hit rate does expectancy emerge – a high RRR with too low a hit rate loses just like the reverse.

The RSI (Relative Strength Index) is a momentum oscillator measuring the strength of up moves against down moves over the last n periods (standard: 14) on a scale from 0 to 100. Values above 70 count as overbought, below 30 as oversold – but in strong trends the RSI can stay extreme for a long time. It works most reliably as a timing tool in the context of the higher-level regime, not as a standalone reversal signal.

A scaling plan is a tiered model by which a prop firm gradually increases the nominal capital of a funded account – for example from $100,000 to $125,000 when the trader stays profitable over several payout cycles without breaching rules. Loss limits grow with the capital; some providers also improve the profit split. Conditions vary substantially between providers.

Scalping is the shortest-term trading style: many trades held for seconds to minutes, each targeting only a few points or pips. Because targets are tiny, spread, slippage and fees decide profitability – and many prop firms and brokers restrict scalping through minimum hold times or consistency rules.

The Sharpe ratio measures a strategy's risk-adjusted return: excess return over the risk-free rate divided by the volatility of returns. If a strategy earns 12 % per year with a 2 % risk-free rate and 8 % volatility, the Sharpe ratio is 1.25. Higher values mean more return per unit of risk; values above 1 are historically considered solid.

Slippage is the difference between the expected and the actual execution price of an order. It occurs when price moves between order placement and execution or when liquidity at the desired price is insufficient. In calm, liquid markets it is minimal – during news, gaps and thin order books it can fill stops well beyond the planned level and noticeably distort trade statistics.

A static drawdown is a fixed loss limit used by prop firms: it sits unchanged below the starting capital, no matter how high equity climbs in between. On a $100,000 account with a 10 % static drawdown, equity may never fall below $90,000. Profits enlarge the usable buffer because the floor stays put – the milder alternative to a trailing drawdown.

A stop-limit order combines two price levels: when the stop price is reached, not a market order but a limit order with a defined limit price is activated. Example: stop $47, limit $46.80 – the sale only executes at $46.80 or better. This protects against slippage but carries the risk that the order is not filled at all in fast markets.

A stop-loss is an order that automatically closes a position when price reaches a predefined level – the technical implementation of loss limitation. It defines a trade's risk in advance (1R) and is the basis of every position size calculation. Classic stop orders become market orders when triggered and can be filled with slippage in fast markets.

Support and resistance are price zones where the market has repeatedly turned: support catches falling prices (buying interest), resistance caps rising ones (selling interest). They are zones of elevated reaction probability, not exact lines – and a broken level often switches roles (support becomes resistance and vice versa). They structure entries, stops and targets of almost all technical setups.

Swing trading is a trading style with holding periods from days to weeks that trades individual price swings within higher-level trends. It sits between day trading (intraday) and position trading (months) and requires considerably less screen time. In return the swing trader carries overnight and gap risk – positions can open against them overnight or over the weekend.

A take-profit order closes a position automatically when price reaches a defined profit target – the counterpart to the stop-loss. Together both define a trade's risk-reward ratio in advance. Sensible targets sit at objective market structures (resistance zones, prior highs, measured moves), not at wished-for amounts – and the choice between a fixed target and trailing decides whether you optimise consistency or trend capture.

Tilt is an emotional state of exception in which a trader loses control over the decision process – triggered by losses, missed opportunities or frustration. On tilt, rules are ignored, positions enlarged and trades forced. The term comes from poker; in trading the rule is: recognising tilt and pausing protects the account more than any setup.

A trading plan is a trader's written rulebook: it defines tradable setups, risk per trade, entry and exit rules, daily limits and routines. Its purpose is to make decisions before the emotion – during the trade itself there is only execution. Without a written plan it cannot be checked whether a loss was due to the market or to discipline.

A trailing drawdown is a dynamic loss limit used by prop firms: it sits at a fixed distance below the highest account balance ever reached and moves up with every new equity high – but never comes back down. If a $100,000 account with a 10 % trailing drawdown rises to $105,000, the floor sits at $95,000. Falling below it ends the challenge or funded account immediately.

A trailing stop is a stop-loss order that automatically follows price at a set distance – upward in a long trade, never backward. It protects accumulated profits without hard-capping the upside. The trade-off: in sideways phases it gets triggered more often than a static stop.

A two-step challenge is the most common evaluation model used by prop firms. Traders must reach defined profit targets in two consecutive phases – typically 8 % in phase 1 and 5 % in phase 2 – without breaching the daily loss limit or the overall loss limit. Passing both phases unlocks a funded account with a profit split.

Volatility measures a market's fluctuation intensity – how much prices move in a period, regardless of direction. Traders measure it historically (standard deviation, ATR) or implicitly via option prices (e.g. VIX). It is not risk per se but the raw material of trading: no movement, no profits – but position sizes and stop distances must be adapted to the current volatility regime.

Volume is the number of units of an instrument traded in a period – shares, contracts or coins. It shows how much activity stands behind a price move: breakouts on high volume are considered more reliable than those on thin turnover. In forex CFD trading only tick volume is visible, not real traded volume.

The VWAP (volume weighted average price) is the volume-weighted average price of a trading day: the sum of price × volume of all transactions divided by total volume. It shows at which price the “average dollar” traded. Institutions use it as an execution benchmark, intraday traders as a dynamic reference line for prices rich or cheap relative to the day's business.

The win rate is the share of winning trades among all trades of a strategy. 55 winners out of 100 trades yield a 55 % win rate. Alone the metric says little: only combined with the risk-reward ratio does a picture emerge – a strategy with a 40 % win rate can be more profitable than one with 70 % if the wins are large enough.

The yield curve shows the yields of government bonds across different maturities. Its shape reflects rate and growth expectations: normally it rises with maturity; an inverted curve – short yields above long ones – has historically preceded most US recessions, with a lead time of sometimes six to 24 months.