Trading terms, defined by how they are computed

Most glossaries tell you what a term means. This one tells you how the number is produced, because two journals can report different figures for the same metric on the same trades and both be right.

Why a glossary needs formulas

Look up "profit factor" and every source gives the same sentence: gross profit divided by gross loss. Then load the same trades into two journals and read two different numbers.

The definitions are not wrong. They are incomplete, because the interesting part of any metric is not the formula — it is what happens at the edges:

  • What does profit factor return when there were no losing trades? Infinity is not a number you can put on a dashboard, and zero would be a lie.
  • Does "profit" mean before or after commission? Both are defensible; they are not the same number.
  • Is drawdown measured on closed equity or including open positions? A prop firm's answer to that decides whether your account survives.
  • Is a break-even trade a win, a loss, or neither? It changes your win rate.

None of these are exotic. They come up in the first hundred trades of any account, and a glossary that skips them is a glossary you cannot reconcile against your own spreadsheet.

What each entry contains

Every page in this section gives four things:

  1. The formula, written so you can reproduce it by hand.
  2. The edge case — the situation where implementations disagree.
  3. What our code does at that edge, stated plainly so a figure in our app can be checked rather than believed.
  4. What the number is actually good for, and where it misleads.

The bias worth knowing about

These entries describe metrics as our own product computes them. That is the point — it makes the numbers auditable — but it also means the edge-case choices are ours, and another journal may legitimately choose differently.

Where a choice is genuinely a judgement call rather than a standard, the page says so. Where there is a real convention and we follow it, the page says that too.

Where to start

If you are reconciling a figure that looks wrong, start with net P&L — most disagreements between two tools trace back to costs being counted twice or not at all, before any ratio is even involved.

In this section

Net P&L

The result of a trade after commission and swap, and why the sign convention in broker exports makes double-counting so easy.

Profit factor

Gross profit divided by gross loss, the edge case that breaks it, and why a high profit factor on few trades means almost nothing.

Expectancy

The expected value of one trade, the break-even win rate it implies, and why the figure needs an error bar to mean anything.

R-multiple

Expressing results as multiples of the amount risked, why it survives account growth, and the case where R stops being comparable.

Win rate

What share of trades finished positive, how break-even trades are counted, and why the figure is uninterpretable without the win-to-loss ratio.

Maximum drawdown

The largest peak-to-trough fall in your account, and the measurement choice that decides whether a prop account survives.

Trailing drawdown

A loss limit that rises with your account and usually never falls back, plus the two sentences in a rulebook that decide when it can end your account.

Consistency rule

A cap on how much of your profit may come from a single day or trade, why it exists, and how it turns a winning account into an unpayable one.

Payoff ratio

The size relationship between a typical winner and a typical loser, how break-even trades drop out of both averages, and why the realised ratio rarely matches the planned one.

SQN (System Quality Number)

Mean R divided by the standard deviation of R, multiplied by the square root of the sample, and the two reasons the score is not comparable between accounts.

Sharpe ratio

Mean daily result divided by its standard deviation and annualised, plus the three assumptions that make a trading journal's Sharpe different from a fund's.

Sortino ratio

Downside deviation instead of total deviation, the two competing conventions for computing it, and which one our implementation uses.

Average holding time

How long a typical trade stays open, why open positions are excluded from the average, and the reason a disposition-effect account reports a short one.