The trading glossary
Know what the number means.
Plain-English definitions, consistent denominators, and small worked examples. Follow a term into a calculator when you want to apply it.
- Initial risk (1R)
The planned loss budget recorded before entry. It becomes the denominator for realized R. State whether it includes planned fees and keep that convention consistent.
Example: With $100 of initial risk, a $150 net outcome is +1.5R, even if the stop moved during the trade.
Apply this in the calculator- Risk reward ratio
A comparison of planned loss and planned profit. Risk-first notation of 1:2 means one unit at risk for two units of potential reward. Reward divided by risk is the equivalent 2R multiple.
Example: Entry $100, stop $95, and target $110 give 1:2 risk-to-reward before costs.
Apply this in the calculator- Position size
The quantity of an instrument held in a trade. Risk-based sizing divides a chosen loss budget by the estimated loss per unit at the stop.
Example: $100 risk divided by $5 risk per unit gives 20 units before fees and quantity-step rounding.
Apply this in the calculator- Notional value
The face value of a linear position: quantity multiplied by price. It is distinct from the margin posted to hold that position.
Example: 0.1 BTC at $50,000 has $5,000 notional value.
Apply this in the calculator- Leverage
The relationship between position exposure and margin. For a simplified initial-margin estimate, margin equals notional divided by leverage. A fixed quantity has the same price P&L regardless of leverage.
Example: $5,000 notional at 5x needs about $1,000 initial margin before fees and venue rules.
Apply this in the calculator- Maker and taker fees
Trading fees associated with adding liquidity to an order book or taking liquidity from it. Execution role, venue, product, and account tier determine the applicable rate; a limit order is not automatically a maker fill.
Example: A hypothetical 0.05% fee on a $5,000 fill is $2.50. Exit fees use the exit fill's notional.
Apply this in the calculator- Funding
Periodic payments associated with perpetual contracts. Depending on the funding rate and position direction, a position may pay or receive funding. It is separate from entry and exit trading fees.
Example: $100 of gross price profit less $5 in trading fees and $2 funding paid leaves $93 net P&L.
Apply this in the calculator- Slippage
The difference between an expected execution price and the actual fill. It can increase or reduce the outcome, and a stop trigger does not guarantee a fill at the trigger price.
Example: A long with a $95 stop that fills at $94.50 loses an extra $0.50 per unit relative to the planned stop price.
Apply this in the calculator- Net P&L
Profit or loss after the costs included in your accounting convention. For a complete trade review, reconcile price P&L, commissions, funding, and other applicable charges.
Example: $100 gross profit minus $7 total costs gives $93 net profit.
Apply this in the calculator- Realized R-multiple
The final trade outcome divided by its initial planned risk. It normalizes results by the risk budget so trades of different cash sizes can be compared more consistently.
Example: A $120 net loss with $100 initial risk is −1.2R.
Apply this in the calculator- Win rate
The share of trades classified as winners in a defined sample. Always specify how breakeven trades enter the denominator and whether classification happens before or after costs.
Example: 40 wins in 100 closed trades is 40% when all 100 trades are included.
Apply this in the calculator- Expectancy (expected value)
The average outcome per trade under a specified distribution. In a full historical R sample, it is the sum of net R divided by trade count. A simplified win/loss model weights average wins and losses by their probabilities.
Example: 40% × 2R − 60% × 1R = 0.20R before additional costs.
Apply this in the calculator- Breakeven win rate
The win probability at which the modeled average result is zero. With no additional costs, it is average loss divided by the sum of average win and average loss.
Example: 2R wins and 1R losses require 33.33% wins before fees.
Apply this in the calculator- Profit factor
The total of positive trade outcomes divided by the absolute total of negative trade outcomes. Use one consistent gross or net convention. A zero loss total leaves the ratio undefined.
Example: $1,500 of winning outcomes divided by $1,000 of losing outcomes gives 1.50.
Apply this in the calculator- Drawdown
A decline from a preceding equity peak. Percentage drawdown uses the peak as its denominator. Maximum drawdown is the largest such decline across an ordered equity series.
Example: A decline from $10,000 to $8,000 is a 20% drawdown.
Apply this in the calculator- Recovery gain
The percentage gain needed from current equity to return to a previous peak, assuming no cash flows. Its denominator is the reduced current equity, so it exceeds the percentage drawdown.
Example: Returning from $8,000 to $10,000 requires a 25% gain.
Apply this in the calculator
For market mechanics, see CME Group’s position sizing explanation and Bybit’s linear contract P&L documentation. Examples use hypothetical values and do not recommend trades.