> ## Documentation Index
> Fetch the complete documentation index at: https://www.questforedge.io/llms.txt
> Use this file to discover all available pages before exploring further.

# Trading Risk Management Glossary

> Clear definitions of expectancy, drawdown, risk of ruin, position sizing, prop-firm loss limits, correlated exposure, and related trading terms.

## Core terms

**Account equity**\
Account balance plus or minus unrealized profit and loss. Some loss rules are measured from equity rather than closed balance.

**Drawdown**\
A decline from a prior equity or balance peak, expressed in money or as a percentage.

**Edge**\
A repeatable advantage that produces positive expected value after realistic costs and execution effects. An edge is a property of a complete process, not a guarantee on an individual trade.

**Expectancy**\
The average amount a system is expected to win or lose per trade over a large sample:

**expectancy = (win probability × average win) − (loss probability × average loss)**

**Maximum drawdown**\
The largest peak-to-trough decline observed in a particular history or simulation. An observed maximum is not a guaranteed future ceiling.

**Position sizing**\
The process of translating an allowed monetary loss and an invalidation distance into the number of shares, contracts, lots, or units to trade.

**Risk of ruin**\
The probability of reaching a defined failure threshold before a target or over a specified horizon. The estimate depends on assumptions about edge, variance, dependence, costs, and sizing.

**Risk-reward ratio**\
A comparison between the amount at risk and the potential gain. It does not show win probability, costs, or expectancy by itself.

**R-multiple**\
Profit or loss divided by the trade's initial planned risk. A full planned loss is −1R; a profit twice the initial risk is +2R.

## Prop-trading terms

**Daily loss limit**\
The maximum permitted loss during a firm's defined rule day. Calculation may include realized P\&L, unrealized P\&L, commissions, and fees.

**Maximum loss limit**\
The overall loss boundary for an account. It can be static or trail a balance or equity high-water mark.

**Trailing drawdown**\
A loss threshold that moves upward when the account reaches new highs. Its update frequency and stopping behavior depend on the rule set.

**Loss buffer**\
The remaining distance between current account value and a breach threshold. It is more relevant to immediate risk capacity than nominal account size.

**Personal daily stop**\
A trader-defined limit placed inside the firm's hard boundary to preserve a safety margin.

## Exposure terms

**Aggregate exposure**\
Risk across all open positions and pending orders considered together.

**Correlation**\
A statistical description of how returns have moved together over a sample. Correlation can change and does not fully describe joint tail risk.

**One-side betting**\
Multiple positions that depend on the same directional outcome, even when they use different instruments.

**Risk per trade idea (RPTI)**\
The maximum planned loss across every position expressing the same thesis, catalyst, or market factor.

**Stop-based risk**\
Estimated loss between entry and stop, multiplied by position size and adjusted for costs. Actual loss can be larger because of gaps or slippage.

## Execution terms

**Slippage**\
The difference between an expected execution price and the price actually received.

**Hard limit**\
A boundary enforced by a platform, firm, or automated control rather than left to discretionary judgment.

**Risk override**\
Any manual action that weakens, disables, or bypasses a predefined control.

<CardGroup cols={2}>
  <Card title="What is expectancy?" icon="calculator" href="/documentation/core-concepts/what-is-expectancy-in-trading">
    See the formula in worked examples.
  </Card>

  <Card title="Prop risk management" icon="shield-halved" href="/system/prop-trading/prop-firm-risk-management">
    Apply these terms to funded-account constraints.
  </Card>

  <Card title="Position sizing" icon="ruler" href="/documentation/risk-fundamentals/what-is-position-sizing">
    Convert allowed loss into trade size.
  </Card>

  <Card title="Editorial standards" icon="clipboard-check" href="/reference/editorial-methodology">
    See how the content is developed and sourced.
  </Card>
</CardGroup>