Glossary
Algorithmic trading, risk, and quantitative finance terms — defined the way practitioners actually use them.
- Glossary·Metrics
Sortino Ratio
Risk-adjusted return measured against downside deviation only — penalizes losses while ignoring upside volatility. Often more honest than Sharpe for asymmetric strategies.
·4m - Glossary·Position Sizing
Kelly Criterion
Position-sizing formula maximizing geometric (compounded) growth. Mathematically optimal in theory, almost always too aggressive in practice.
·4m - Glossary·Risk
Maximum Drawdown
The largest peak-to-trough decline in an equity curve. The most behaviorally honest risk metric — what investors actually felt during the worst stretch.
·4m - Glossary·Risk
Regime Change
Persistent shift in the statistical properties of a market — volatility, correlation, mean return — that breaks the assumptions a strategy was designed under.
·4m - Glossary·Methodology
Walk-Forward Optimization
Out-of-sample testing protocol that rolls optimization and validation forward in time. The institutional standard against single-period backtest overfitting.
·5m - Glossary·Methodology
Backtest Overfitting
Selection of strategy parameters that fit historical noise rather than persistent edge. The single biggest reason backtests outperform live trading.
·5m - Glossary·Metrics
Sharpe Ratio
Risk-adjusted return measure: excess return per unit of total volatility. The default benchmark for systematic strategies — and the one most often abused.
·4m - Glossary·Metrics
Calmar Ratio
Return divided by maximum drawdown — the metric that maps cleanest to "how much pain to make this money." Underused outside CTA evaluation.
·3m - Glossary·Execution
Slippage
The difference between the expected fill price and the realized fill price. The largest single gap between paper backtests and live P&L for most retail strategies.
·4m - Glossary·Position Sizing
Volatility Targeting
Position-sizing rule that scales exposure inversely with realized volatility to hit a constant target risk level. Standard in CTA and systematic equity portfolios.
·4m