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The Kelly criterion gives the fraction of capital to risk per trade that maximizes long-run growth: f = W − (1 − W) / R. This glossary entry covers where it comes from, worked examples, why full Kelly sizes of 10-20% are too aggressive, how sample size makes the inputs uncertain, and how traders use it as a ceiling rather than a target.
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The Kelly criterion gives the fraction of capital to risk per trade that maximizes long-run growth: f = W − (1 − W) / R. This glossary entry covers where it comes from, worked examples, why full Kelly sizes of 10-20% are too aggressive, how sample size makes the inputs uncertain, and how traders use it as a ceiling rather than a target.
Value at Risk estimates the loss an account should not exceed over a set period at a chosen confidence level. This glossary entry shows how to calculate it from a trading journal, how the historical and parametric methods differ, and why VaR marks the start of the tail rather than the worst case.
A stop-loss order closes a position automatically once price reaches a stop price set in advance. The stop price is a trigger, not a promised fill: a standard stop becomes a market order and can fill well past the stop in a gap. How the trigger works, stop-market vs stop-limit, why a mental stop is weaker, and which three stop fields a trading journal should record.
Slippage is the difference between the price you expected when you placed an order and the price it actually filled at, caused by the short delay before an order reaches the market. What causes it, the difference between positive and negative slippage, how market and limit orders compare, and why it matters for backtests and trading journals.
Revenge trading is placing a trade specifically to recover a recent loss, rather than because the setup meets the trader's own rules. Covers the precise definition, how it differs from a deliberate martingale-style sizing strategy, and how it compares to FOMO and overtrading.
A daily loss limit is a pre-set maximum amount, in dollars or as a percentage of the account, that a trader allows themselves to lose in a single trading day before stopping. Covers how to set one, common trigger types, and how it differs from a prop firm's daily drawdown rule.
Position sizing is the calculation that turns a planned dollar risk and a stop-loss distance into a number of shares, contracts, or units to trade. Covers the formula, a worked example, how it differs from leverage, and fixed fractional versus fixed dollar sizing.
A short definition of risk-reward ratio, the formula for calculating it from a planned stop and target, a worked example, and how it differs from R-multiple and expectancy, which measure a trade after it closes rather than before entry.
A prop firm challenge is a paid trading evaluation with a profit target and strict loss limits. See the typical two-phase structure, real FTMO rule examples, and what changes after you pass.
Expectancy is the average result a trading strategy produces per trade, measured in R. See the formula, a worked example, and why pairing it with trade frequency (opportunity) matters.
An R-multiple expresses a trade's profit or loss as a multiple of the amount risked, called R. Learn the formula, a worked example, and how to read R-multiples in a trading journal.
Profit factor is gross profit divided by gross loss. Above 1.0 means a strategy made more on winners than it lost on losers; a definition, formula, and interpretation guide.
