Strategy and performance

Averaging down

Adding to a losing position to improve the average entry price. It lowers the break-even level and raises the size of the loss if the position keeps moving against you.

Backtesting

Running a strategy over historical data to estimate how it would have performed. Useful for rejecting ideas, weak as evidence for accepting them, because the result is fitted to data already seen.

Day trading

Opening and closing positions within the same session, carrying nothing overnight. It avoids swap costs and weekend gap risk, and concentrates all of the account's risk into the daily loss limit.

Expectancy

The average result of a trade over a large sample, combining win rate and average win and loss. A positive expectancy is necessary for a strategy to work and not sufficient for it to pass an evaluation.

Fixed fractional

Risking a constant percentage of equity on every trade, so position size falls after losses and rises after gains. It is the standard position-sizing model and the one most prop rules assume.

Forward testing

Running a strategy on live data it has never seen, in real time. It is the honest test a backtest cannot be, because the results are produced by data that could not have been fitted.

Grid trading

Placing orders at fixed intervals above and below a price so that positions accumulate as the market moves. It profits from oscillation and accumulates exposure in a sustained trend.

Kelly criterion

A formula giving the position size that maximises long-run growth for a known edge. Its output is far too large for real trading, because the inputs are estimates and the drawdowns it accepts are extreme.

Martingale

Doubling position size after each loss so that one win recovers the sequence. The required size grows exponentially, so the strategy needs unlimited capital to survive a long enough losing run.

Maximum consecutive losses

The longest unbroken run of losing trades in a sample. Multiplied by risk per trade it gives the drawdown a strategy has historically produced, which is the figure a fixed floor has to absorb.

Mean reversion

Trading on the expectation that a price stretched away from its average will return to it. Win rates are typically high and individual losses large, which is the mirror image of trend following.

News trading

Trading around scheduled economic releases, where volatility and spreads both spike at once. The strategy depends on execution quality at exactly the moment execution quality is at its worst, which is why most firms restrict it on funded accounts.

Position trading

Holding trades for weeks or months on a longer-term view. Trade frequency is low, financing costs accumulate, and the account's result depends on a small number of outcomes.

Profit factor

Gross profit divided by gross loss across a sample of trades. A profit factor above 1 means the strategy made money; below 1 means it lost, whatever the win rate suggests.

R-multiple

A trade's result expressed in units of its initial risk. Risking $200 and making $600 is +3R; hitting the stop is -1R. It makes results comparable across account sizes and position sizes.

Risk-reward ratio

The size of a trade's target relative to its stop, expressed as a ratio. A 2:1 trade risks one unit to make two, which sets the win rate the strategy needs in order to be profitable.

Scalping

Taking many short-duration trades for small individual gains. It depends on tight costs and reliable execution, because the spread and commission are a large share of every result.

Sharpe ratio

Return above a benchmark cash rate, divided by the volatility of those returns. It measures how much variability was accepted per unit of return, so a smoother equity curve scores higher.

Sortino ratio

A variant of the Sharpe ratio that counts only downside volatility. Large gains no longer lower the score, so it measures the variability a trader actually minds rather than all of it.

Swing trading

Holding positions for days or weeks to capture a larger move. It requires wider stops, which means smaller positions, and it exposes the account to overnight swap and weekend gaps.

Trade journal

A record of every trade with its reasoning, size, levels and result. It is the only way to find out whether a strategy is being followed, as distinct from whether it is working.

Trend following

Entering in the direction of an established move and holding until it ends. Win rates are typically below half, and the result depends on a small number of large winners covering many small losses.

Win rate

The proportion of trades that finish profitable. On its own it says nothing useful - a 90% win rate with one outsized loss and a 35% win rate with large winners can produce the same result.