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Essential trading vocabulary

Understand these words and you'll understand almost everything else. No needless jargon — just what they really mean.

Price and instrument

Pip

The standard minimum price move. On most currency pairs it's 0.0001 (the fourth decimal); on yen pairs, 0.01. It's the unit that measures how much the market moves.

Spread

The gap between the buy (ask) and sell (bid) price. It's the invisible cost of every trade: you enter already down the spread. Tighter is better for you.

Lot

The position size. A standard lot is 100,000 units of the base currency; 0.1 is a mini lot and 0.01 a micro lot. The lot decides how much you win or lose per pip.

Leverage

Trading with more money than you have, lent by the broker (e.g. 1:100). It multiplies gains… and losses equally. It's not «free»: it's the accelerator that also crashes you faster if you don't control risk.

Your trading

Stop-loss (SL)

The order that closes your trade automatically if price moves against you to a limit. It's your seatbelt. Trading without a stop-loss is the fastest way to blow an account.

Take-profit (TP)

The order that closes the trade when you hit your profit target.

Win rate

The percentage of trades you win. Careful: a high win rate doesn't mean you're profitable. You can win 70% and still lose money if your losses are huge and your wins tiny.

R (risk/reward ratio)

How much you win on average per unit risked. Risk 100 to make 150 and your R is 1.5. Profitability comes from combining win rate and R, not from one alone.

Expectancy

What you make on average per trade over the long run: win rate × R − (1 − win rate). If it's negative, no position size will save you. It's the number that truly decides whether you have a business or an expensive hobby.

Risk (what decides who survives)

Drawdown (DD)

The fall from your account's high point to its low. A 50% drawdown isn't recovered with a 50% gain: you need 100%. That's why protecting capital matters more than chasing maximum profit.

Risk of ruin

The probability of losing so much the account becomes unviable. It depends on your edge and, above all, how much you risk per trade. Calculate it here.

Money management / position sizing

Deciding how much to risk on each trade. Golden rule: set your risk first (e.g. 1% of the account) and let that set the size, not the other way around. Position size calculator.

Analysis and evaluation

Profit Factor (PF)

Gross profit divided by gross loss. PF 1.0 = break-even; above 1 you win. But beware: a sky-high PF in a backtest usually signals overfitting, not genius.

Backtest

Testing a strategy on historical data. Useful… and dangerous: it's easy for it to look perfect in the past and fail live. Here's why backtests lie.

Overfitting

When a strategy is so «tuned» to the past that it memorises noise instead of capturing a real edge. As soon as the market changes, it breaks.

EA / robot / bot

Expert Advisor: a program that trades on its own by rules. Neither magic nor cursed; it just automates a strategy — which can be good or garbage. That's why you must validate it with real ticks before trusting it with money.

Next: how indicators work →