Trading glossary: the terms every trader meets

Short, plain definitions of the terms you meet most often when you trade and when you read a trading journal. They are listed in the order you usually run into them.

Pip

The standard unit of price movement in forex. For most pairs it is the fourth decimal place (0.0001); for yen pairs it is the second (0.01). A move from 1.0850 to 1.0851 is one pip.

Lot

The size of a trade. One standard lot is 100,000 units of the base currency, a mini lot is 10,000 and a micro lot is 1,000 (0.01 lot).

Spread

The difference between the buy (ask) and the sell (bid) price. It is a cost you pay on entry, so every trade starts slightly in the red.

Leverage

Borrowed exposure that lets you control a position larger than your balance, for example 1:30. It multiplies gains and losses alike. Your real risk is set by your stop loss and lot size, not by the leverage figure.

Stop loss

An order that closes a trade at a set price to cap the loss. The distance from entry to stop, times the lot size, is the amount you risk on that trade.

Drawdown

The fall from a peak balance (or equity) to a later low, as an amount or a percentage. Maximum drawdown is the deepest such fall over a period.

R-multiple

A result measured in units of the amount you risked. Risk $100 and make $250 and the trade is +2.5R; a full stop-out is −1R. It lets you compare trades of different sizes.

Risk-reward ratio

The potential reward divided by the risk. A stop 20 pips away with a target 40 pips away is a 1:2 ratio, or 2R.

Win rate

The share of trades that closed in profit. On its own it says little; read it together with the average win and the average loss.

Expectancy

The average result per trade, ideally in R: (win rate × average win) − (loss rate × average loss). A positive expectancy over many trades is what a working method looks like on paper.

Profit factor

Gross profit divided by gross loss. Above 1 you won more than you lost; 1.5 means $1.50 won for every $1 lost.

Swap

A fee or credit for holding a position past the daily rollover, based on the interest-rate difference between the two currencies. It appears on your trade record.

Slippage

The difference between the price you expected and the price you got, most often in fast markets or around news.

Daily loss limit

A rule, common on prop firm accounts, that fails the account or ends your day when the loss in one day passes a set amount or percentage of the account.

These definitions are educational and are not investment advice.