Trading Glossary
Short definitions of the terms you meet on VolatiCloud. When learning mode is on (Profile > Assistant memory), the assistant links each term to its entry here the first time it uses it.
Backtest
A replay of a strategy over past market data. It shows what the strategy would have done, not what it will do. See Analyzing Results.
Max drawdown
The largest drop from a peak in your balance to the lowest point after it, as a percentage. A 20% max drawdown means that at the worst moment you were 20% below your best balance so far. It is the number that tells you how much pain to expect.
Sharpe ratio
Return divided by how much the returns swing. Higher is steadier. Above 1 is usually considered good for a strategy; a very high value on a short backtest is often a sign of overfitting.
Sortino ratio
Like the Sharpe ratio, but it only counts the downward swings, so a strategy is not penalised for big wins.
Profit factor
Gross profit divided by gross loss. Above 1 means the winning trades earned more than the losing trades lost.
Win rate
The share of trades that closed in profit. A low win rate can still be profitable when the wins are much larger than the losses.
Stop loss
A rule that closes a trade once it has lost a set percentage, to cap the loss on any single trade.
Trailing stop
A stop loss that moves up as the price rises, so it locks in part of a gain while still closing the trade if the price turns.
ROI (take profit)
The profit at which a trade is closed. In Freqtrade it can change with how long the trade has been open, for example 5% right away and 1% after an hour.
Timeframe
The length of one candle the strategy reads, such as 5m, 1h or 4h. Shorter timeframes trade more often; longer ones trade less and react more slowly.
Trading pair
The two assets a trade exchanges, such as BTC/USDT: you buy or sell the first and pay or receive the second.
Stake amount
How much of the stake currency one trade uses.
Dry run
Running a bot on live market data with simulated money. Orders are not sent to the exchange, so nothing is at risk.
Overfitting
Tuning a strategy so closely to past data that it stops working on new data. The more settings you try, the more likely the best one is lucky rather than good.
Out-of-sample
Data the strategy was not tuned on. Testing on an out-of-sample period is the simplest check against overfitting.
Hyperopt
Freqtrade's automatic search for the best strategy settings over a backtest period. Its winner should always be checked out-of-sample.
Leverage
Trading with borrowed funds. 3x leverage makes gains and losses three times larger, and a large enough move closes the position (liquidation).
Spot trading
Buying and selling the asset itself, with no borrowing. The most you can lose is what you put in.
Futures
Contracts on an asset's price rather than the asset itself. They allow leverage and short positions (profiting when the price falls).
DCA (dollar-cost averaging)
Buying in several smaller steps instead of all at once, so the average entry price follows the market.