Glossary of Definitions

A living reference of every term defined across the PropLedger research library. Each entry links to the papers that use it; entries are regenerated weekly from the published papers so the glossary can never drift from the library. Diagrams are drawn programmatically from the definition, not by a model.

78 terms across 62 papers.

Contents

• Start Here
• Stocks
• Futures
• Quantitative
• Order Flow & Structure

Start Here

Bid-ask spread: The difference between the highest price buyers are willing to pay (bid) and the lowest price sellers are willing to accept (ask), representing the immediate cost of execution via market order. Used in: Market Orders vs. Limit Orders: Why Your Order Type Matters More Than You Think

Limit order: An instruction to buy at a specified maximum price or sell at a specified minimum price, guaranteeing the fill will not exceed those bounds but offering no guarantee of execution. Used in: Market Orders vs. Limit Orders: Why Your Order Type Matters More Than You Think

Market impact: The additional execution cost incurred when an order quantity exceeds available liquidity at the best price level, forcing the order to fill at progressively worse prices across multiple price levels. Used in: Market Orders vs. Limit Orders: Why Your Order Type Matters More Than You Think

Market order: An instruction to buy or sell immediately at the best available price in the order book, prioritizing execution certainty over price control. Used in: Market Orders vs. Limit Orders: Why Your Order Type Matters More Than You Think

Order book: A real-time ledger displaying all outstanding buy orders (bid side) and sell orders (ask side) at each price level, representing current market supply and demand. Used in: Market Orders vs. Limit Orders: Why Your Order Type Matters More Than You Think

Regular Trading Hours (RTH): For U.S. Equity index futures, the period from 9:30 AM to 4:00 PM ET when institutional participation and liquidity are typically highest. Used in: Market Orders vs. Limit Orders: Why Your Order Type Matters More Than You Think

Slippage: The difference between the expected execution price and the actual fill price at which an order is filled, commonly negative (higher cost) for retail market orders in volatile or illiquid conditions. Used in: Market Orders vs. Limit Orders: Why Your Order Type Matters More Than You Think

Stocks

Alpha decay: The decline in excess returns following academic publication or widespread investor adoption of a trading signal, as market participants arbitrage away the anomaly. Used in: Why Factor Performance Decays: Understanding Alpha Decay and Crowding in Long-Term Investing

Capital allocation: The process by which a company deploys its earnings and cash reserves across investments, dividends, debt repayment, and share buybacks. Used in: Retention Ratio and ROE: Why Earnings Reinvestment Unlocks Long-Term Stock Growth

Compounding: The process by which investment returns generate their own returns over time, with gains remaining invested to contribute to future growth. Used in: Retention Ratio and ROE: Why Earnings Reinvestment Unlocks Long-Term Stock Growth

Convergent factor: A factor anchored to fundamentals and subject to negative feedback loops, such that crowding reinforces rather than undermines the underlying signal (example: value). Used in: Why Factor Performance Decays: Understanding Alpha Decay and Crowding in Long-Term Investing

Divergent factor: A factor that lacks fundamental anchors and is subject to positive feedback loops, such that crowding amplifies price movements and eventual reversals (example: momentum). Used in: Why Factor Performance Decays: Understanding Alpha Decay and Crowding in Long-Term Investing

Dividend yield: The annual cash dividend paid by a company expressed as a percentage of its current stock price. Used in: Retention Ratio and ROE: Why Earnings Reinvestment Unlocks Long-Term Stock Growth

Factor crowding: The erosion of factor returns as increasing capital competes for the same profitable signal, dividing available alpha among more participants according to a fixed alpha capacity. Used in: Why Factor Performance Decays: Understanding Alpha Decay and Crowding in Long-Term Investing

Factor investing: An investment approach that targets quantifiable characteristics (such as size, value, or momentum) that explain differences in security returns across a portfolio. Used in: Why Factor Performance Decays: Understanding Alpha Decay and Crowding in Long-Term Investing

Factor premium: The excess return earned by securities exhibiting a particular factor characteristic, measured relative to the broad market over a defined period. Used in: Why Factor Performance Decays: Understanding Alpha Decay and Crowding in Long-Term Investing

Judgment factor: A factor requiring subjective interpretation of the underlying signal (such as value, where 'cheapness' admits multiple definitions), creating persistent disagreement and higher barriers to crowding. Used in: Why Factor Performance Decays: Understanding Alpha Decay and Crowding in Long-Term Investing

Mechanical factor: A factor with an unambiguous, easily replicated signal (such as momentum based on past price performance) that is quick to arbitrage once identified and therefore prone to rapid crowding. Used in: Why Factor Performance Decays: Understanding Alpha Decay and Crowding in Long-Term Investing

Retention ratio: The percentage of a company's net income that is reinvested in the business rather than distributed to shareholders as dividends, calculated as (Net Income − Dividends) / Net Income. Used in: Retention Ratio and ROE: Why Earnings Reinvestment Unlocks Long-Term Stock Growth

Return on equity (ROE): A measure of profitability calculated by dividing net income by average shareholders' equity, indicating how efficiently a company generates returns on shareholder capital. Used in: Retention Ratio and ROE: Why Earnings Reinvestment Unlocks Long-Term Stock Growth

Sustainable growth rate: The maximum rate at which a company can expand using only internally generated cash flow without raising new debt or equity, calculated as Retention Ratio × ROE. Used in: Retention Ratio and ROE: Why Earnings Reinvestment Unlocks Long-Term Stock Growth

Futures

Contract multiplier: A standardized factor that converts a futures contract's quoted price into its dollar value per point or tick movement, such as $50 per point for ES or $20 per point for NQ. Used in: Notional Value vs. Margin: Why Margin Alone Blinds Prop Traders to Real Risk

Drawdown limit: A maximum loss threshold set by prop trading firms, expressed as a percentage of account equity, beyond which a trader's account may be closed or trading halted. Used in: Notional Value vs. Margin: Why Margin Alone Blinds Prop Traders to Real Risk

End of day (EOD) trailing drawdown: A drawdown calculation that updates once per trading session based on closed balance, leaving intraday unrealized profit changes untracked. Used in: End of Day vs Intraday Trailing Drawdown: What Funded Traders Need to Know

High-water mark: The highest account balance or equity value reached during a trading period; a trailing drawdown is set as a fixed distance below this mark. Used in: End of Day vs Intraday Trailing Drawdown: What Funded Traders Need to Know

Intraday trailing drawdown: A drawdown calculation that updates continuously in real time, typically tracking open equity including unrealized P&L, so that intraday peaks immediately move the threshold upward. Used in: End of Day vs Intraday Trailing Drawdown: What Funded Traders Need to Know

Margin requirement: The minimum deposit of capital a trader must maintain with a broker to hold an open futures position; distinct from notional value and not representative of total risk exposure. Used in: Notional Value vs. Margin: Why Margin Alone Blinds Prop Traders to Real Risk

Micro contract: A futures contract representing one-tenth the notional exposure of the corresponding standard e-mini contract, allowing finer position sizing such as MES versus ES or MNQ versus NQ. Used in: Notional Value vs. Margin: Why Margin Alone Blinds Prop Traders to Real Risk

Notional value: The total dollar amount of market exposure represented by a futures position, calculated as the contract price multiplied by the contract multiplier and the number of contracts held. Used in: Notional Value vs. Margin: Why Margin Alone Blinds Prop Traders to Real Risk

Round trip: A trade that opens, moves into profit, then reverses back through the entry point or lower without closing profitably, potentially breaching a tightened drawdown limit despite no realized session loss. Used in: End of Day vs Intraday Trailing Drawdown: What Funded Traders Need to Know

Tick value: The dollar amount gained or lost per minimum price movement in a futures contract; used to calculate risk and position size at specific stop-loss distances. Used in: Notional Value vs. Margin: Why Margin Alone Blinds Prop Traders to Real Risk

Trailing drawdown: A dynamic loss threshold that rises when an account reaches new highs but does not fall when profits are given back, used by prop firms to enforce capital preservation during evaluations and funded trading. Used in: End of Day vs Intraday Trailing Drawdown: What Funded Traders Need to Know

Unrealized P&L: Profit or loss on open positions that has not yet been locked in by closing the trade. Used in: End of Day vs Intraday Trailing Drawdown: What Funded Traders Need to Know

Use: The ratio of notional exposure to account equity; for example, controlling $250,000 notional value with a $50,000 account represents 5:1 use. Used in: Notional Value vs. Margin: Why Margin Alone Blinds Prop Traders to Real Risk

Quantitative

Backtest: Historical simulation of a trading strategy using past price and fundamental data to validate that its ranking rules or decision rules had statistical edge before live deployment. Used in: Quant Core, Human Gate: An AI Investor-Committee for Daily Stock Plans

Backtesting: Simulation of a trading strategy on historical data to estimate its past performance before deployment with live capital. Backtests are upper bounds on future results and do not account for all frictions present in live execution. Used in: Auditing Your Own Edge: Results From a Cross-Asset Backtesting Program

Base rate: The historical frequency or statistical probability of an outcome in a defined population, used to anchor discretionary judgments and prevent pure narrative reasoning from dominating investment decisions. Used in: Quant Core, Human Gate: An AI Investor-Committee for Daily Stock Plans

Catalyst: A near-term, identifiable corporate or market event such as an earnings announcement, regulatory filing, or competitor action that is expected to move a stock's price or valuation. Used in: Quant Core, Human Gate: An AI Investor-Committee for Daily Stock Plans

Confidence score: A quantitative ranking from 0 to 100 assigned to each stock by a backtested statistical engine, reflecting the strength of historical edge in the stock's historical price and feature patterns before any catalyst or fundamental analysis. Used in: Quant Core, Human Gate: An AI Investor-Committee for Daily Stock Plans

Conviction: A 0-to-1 probability estimate assigned by the language-model research layer reflecting confidence in an investment thesis after catalyst identification and risk assessment. Used in: Quant Core, Human Gate: An AI Investor-Committee for Daily Stock Plans

Cross-venue disagreement: Price variation in the same event contract across different prediction exchanges, indicating either relative mispricing or differences in market composition. This system screens for disagreement between Kalshi and other venues as a signal of potential edge. Used in: A Committee of Agents for Prediction-Market Trading: Design of a Paper-Only Kalshi System

Favorite-longshot bias: A documented tendency in prediction markets where heavily favored outcomes are priced slightly lower than their empirical frequency, creating a systematic mispricing opportunity. This bias has been observed across multiple betting venues and forms the basis for relative-value screening in this system. Used in: A Committee of Agents for Prediction-Market Trading: Design of a Paper-Only Kalshi System

Hard block: An automatic veto condition in the committee system that rejects a candidate trade regardless of analyst votes, typically triggered by phantom pricing, illiquid order books, or adverse price movement on volume. Hard blocks enforce minimum execution quality standards before human review. Used in: A Committee of Agents for Prediction-Market Trading: Design of a Paper-Only Kalshi System

Holdout set: A portion of historical data reserved and untouched during model development and validation, evaluated only once at the end to provide an unbiased performance estimate free from data-mining bias. Used in: Auditing Your Own Edge: Results From a Cross-Asset Backtesting Program

Kelly criterion: A position-sizing formula that calculates the optimal fraction of bankroll to wager on each bet by maximizing expected logarithmic wealth growth; the formula is f* = (bp − q) / b, where b is odds, p is win probability, and q is loss probability. Beyond full Kelly, larger fractions increase volatility and eventual ruin risk. Used in: A Committee of Agents for Prediction-Market Trading: Design of a Paper-Only Kalshi System

Lookahead bias: An error in backtesting where the code accesses information that did not exist at the time a trading decision was made, typically through repainting or higher-timeframe data lookups. Used in: An Anti-Overfit Protocol for Strategy Backtesting on TradingView

Maximum drawdown: The largest peak-to-trough percentage decline in cumulative returns over a specified period, expressed as a negative percentage; a measure of downside risk. Used in: Auditing Your Own Edge: Results From a Cross-Asset Backtesting Program

Microstructure analysis: Assessment of order-book mechanics, bid-ask spreads, volume patterns, and fill likelihood to determine whether a quoted price is executable and real. In this system, microstructure analysis acts as a gating filter to reject trades with poor fill odds or wide spreads. Used in: A Committee of Agents for Prediction-Market Trading: Design of a Paper-Only Kalshi System

Multiple-testing correction: A statistical adjustment that raises the significance threshold when many hypotheses are tested on the same dataset, reducing the probability of accepting spurious results as real due to random chance. Used in: Auditing Your Own Edge: Results From a Cross-Asset Backtesting Program

Overfitting: The tuning of strategy parameters until historical results appear profitable on the dataset used for optimization, without evidence the parameters will perform on unseen data. Used in: An Anti-Overfit Protocol for Strategy Backtesting on TradingView

Paper trading: Simulated execution of trades using real-time or historical market data without committing actual capital, used to test strategy logic, risk controls, and parameter assumptions. This system operates six parallel paper books under different sizing regimes to measure Kelly theory predictions against observed outcomes. Used in: A Committee of Agents for Prediction-Market Trading: Design of a Paper-Only Kalshi System

Pine Script v6: TradingView's proprietary scripting language for writing custom indicators and trading strategies on its charting platform. Used in: An Anti-Overfit Protocol for Strategy Backtesting on TradingView

Plan-only boundary: An operational constraint that restricts an AI agent to generating and recommending fully reasoned investment plans while forbidding it from executing, placing, or modifying real orders. Used in: Quant Core, Human Gate: An AI Investor-Committee for Daily Stock Plans

Profit factor: The ratio of gross profit to gross loss over a strategy's trade history; a ratio above 1.0 indicates total wins exceed total losses. Used in: An Anti-Overfit Protocol for Strategy Backtesting on TradingView, VWAP: The Institutional Benchmark That Turns Pullbacks Into Entries

Repainting: A behavior in charting libraries where indicator values recalculate on historical bars as new data arrives, causing backtests to show signals that would not have appeared in real time. Used in: An Anti-Overfit Protocol for Strategy Backtesting on TradingView

Selection bias: The contamination that occurs when multiple strategy variants are tested silently and only the best-performing variant is reported, ignoring the failed attempts that preceded it. Used in: An Anti-Overfit Protocol for Strategy Backtesting on TradingView

Sharpe ratio: The average excess return of a strategy divided by its standard deviation, a dimensionless measure of risk-adjusted performance that penalizes both downside and upside volatility equally. Used in: Auditing Your Own Edge: Results From a Cross-Asset Backtesting Program

Survivorship bias: Systematic overstatement of historical returns that occurs when a dataset includes only securities that survived to the present, excluding those that delisted or failed during the period. Used in: Auditing Your Own Edge: Results From a Cross-Asset Backtesting Program

Train/validation split: A methodological division of historical data into a training window used for parameter optimization and a validation window used for out-of-sample testing without parameter adjustment. Used in: An Anti-Overfit Protocol for Strategy Backtesting on TradingView

Walk-forward backtesting: A backtesting discipline in which a dataset is divided into sequential, non-overlapping in-sample and out-of-sample periods to simulate live deployment and reduce lookahead bias. Used in: Auditing Your Own Edge: Results From a Cross-Asset Backtesting Program

Order Flow & Structure

Break-even win rate: The minimum percentage of winning trades required for a strategy to generate zero cumulative profit or loss, determined by the formula WR = 1 / (1 + reward-to-risk ratio). Used in: Win Rate vs. Risk-Reward: The Math That Kills Most Funded Traders

Breakaway gap: A gap occurring at the beginning of a significant price trend with low probability of being filled, typically triggered by directional news. Used in: Gap Fill Probability: Why Most Gaps Don't Fill the Day They Open

Drawdown: The peak-to-trough percentage or dollar decline in account equity from a previous high point. Used in: Win Rate vs. Risk-Reward: The Math That Kills Most Funded Traders

Exhaustion gap: A gap occurring near the end of a price move with high probability of being filled within days, often signaling potential reversal. Used in: Gap Fill Probability: Why Most Gaps Don't Fill the Day They Open

Gap: A discontinuity between the closing price of one trading session and the opening price of the next, typically caused by overnight news or market events. Used in: Gap Fill Probability: Why Most Gaps Don't Fill the Day They Open

Gap fill: The subsequent price movement that closes the gap by returning price to the previous session's closing level. Used in: Gap Fill Probability: Why Most Gaps Don't Fill the Day They Open

Gap-and-go: A market condition where a large gap opens outside the previous day's range in volatile conditions and rarely fills intraday, indicating sustained directional momentum. Used in: Gap Fill Probability: Why Most Gaps Don't Fill the Day They Open

Globex: The CME's electronic trading platform where futures trade continuously outside regular trading hours, including overnight sessions between RTH close and open. Used in: Gap Fill Probability: Why Most Gaps Don't Fill the Day They Open

Intraday Indicator: A technical tool that is calculated and reset within a single trading session and does not carry over across sessions; examples include VWAP and intraday moving averages. Used in: VWAP: The Institutional Benchmark That Turns Pullbacks Into Entries

Mean Reversion: A trading approach based on the hypothesis that prices tend to move back toward a historical average or reference level after deviating from it. Used in: VWAP: The Institutional Benchmark That Turns Pullbacks Into Entries

Position sizing: The number of shares or contracts traded in a position, adjusted to maintain consistent dollar risk per trade across setups with different stop-loss distances. Used in: Win Rate vs. Risk-Reward: The Math That Kills Most Funded Traders

Pullback Entry: A trade initiated when price retreats toward a support or reference level after moving away from it, typically with entry triggered by a reversal signal at that level. Used in: VWAP: The Institutional Benchmark That Turns Pullbacks Into Entries

R-multiple: The actual profit or loss on a trade expressed as a multiple of the planned risk amount; for example, if planned risk is $100 and actual profit is $300, the result is +3R. Used in: Win Rate vs. Risk-Reward: The Math That Kills Most Funded Traders

Risk-reward ratio: The relationship between the amount of capital risked on a trade and the potential profit target, expressed as a ratio such that 1:2 means risking $1 to target $2 in profit. Used in: Win Rate vs. Risk-Reward: The Math That Kills Most Funded Traders

RTH (Regular Trading Hours): The official market session for a futures contract, typically 9:30 a.m. To 4:00 p.m. ET for US equity index futures. Used in: Gap Fill Probability: Why Most Gaps Don't Fill the Day They Open

Stop loss: A pre-determined price level at which a losing trade is exited to limit losses, typically set based on chart structure or technical support and resistance levels. Used in: Win Rate vs. Risk-Reward: The Math That Kills Most Funded Traders

Volume Weighted Average Price (VWAP): An intraday price benchmark calculated by dividing the sum of price multiplied by volume at each transaction by total session volume; it resets at each market open and is used to assess whether current prices represent value relative to that day's trading activity. Used in: VWAP: The Institutional Benchmark That Turns Pullbacks Into Entries

Win rate: The percentage of trades that close profitably relative to total trades taken. Used in: Win Rate vs. Risk-Reward: The Math That Kills Most Funded Traders, VWAP: The Institutional Benchmark That Turns Pullbacks Into Entries

Key definitions

Glossary: An alphabetical reference of terms with their definitions and the sources that use them.

References

• Every entry is derived from a published PropLedger paper; each paper carries its own References section.

Educational research on historical data only. Not investment advice, not a signal, and never a performance promise. Past results do not predict future performance. Every reference is link-verified before publication and every paper is re-audited weekly against the library's editorial standard.

Last reviewed by the PropLedger research pipeline: 2026-08-30. Educational research on historical data, not financial advice.