Definitions with the arithmetic attached
Quant Trading Glossary
What each term means, how it is calculated, and the specific way it gets misread.
Updated
This glossary defines the quantitative trading terms that decide whether a strategy survives: risk and sizing concepts such as maximum drawdown, liquidation price, position sizing and risk of ruin; performance measures such as the Sharpe ratio, expectancy and CAGR; market mechanics such as funding rates, slippage and maker-taker fees; and method terms such as backtesting, paper trading, grid trading and overfitting. Each entry gives the definition, the formula where one exists, and the mistake the term most often invites.
Risk and sizing
- Liquidation
- Liquidation is the forced closure of a leveraged position when margin falls below maintenance. Definition, the price formula, and why a stop must sit inside it.
- Maximum drawdown
- Maximum drawdown is the largest peak-to-trough decline in account equity. Definition, formula, the asymmetric recovery arithmetic, and how the figure gets misread.
- Position sizing
- Position sizing converts a fixed risk budget into an order quantity. Definition, the fixed-fractional formula, and why leverage should be an output rather than a setting.
- Risk of ruin
- Risk of ruin is the probability a strategy reaches a failure threshold before its edge compounds. Definition, formula, and why it is a sizing problem, not an edge problem.
- Stop-loss
- A stop-loss is a predefined exit that turns an open-ended loss into a bounded one. How it ties to position size, what Kaminski and Lo measured, and how the order fills in a gap.
- Volatility
- Volatility is the standard deviation of returns over a stated horizon. The annualised volatility formula (√252 vs √365), realized vs implied, and why it is not the same thing as loss.
Performance measures
- CAGR
- CAGR is the compound annual growth rate — the constant yearly rate that links a starting value to an ending one. Definition, formula, and what it hides.
- Calmar ratio
- The Calmar ratio divides annualised return by maximum drawdown, pricing return in units of the worst loss. Formula, the 36-month window, and why short windows inflate it.
- Expectancy
- Expectancy is the average result per unit risked. Definition, formula, the break-even win rate, and why win rate alone tells you nothing.
- Profit factor
- Profit factor is gross profit divided by gross loss over closed trades. What 1.0, 1.5 and 3.0 actually mean, how costs move it, and the one test that exposes a fake one.
- Sharpe ratio
- The Sharpe ratio measures excess return per unit of volatility. Definition, formula, how to read the value, and the three ways the number is inflated.
- Sortino ratio
- The Sortino ratio is the Sharpe ratio with downside deviation in the denominator, so upside swings are not penalised. Formula, the √2 benchmark against Sharpe, and why it is noisy.
- Win rate
- Win rate is the share of trades that close in profit. Why it means nothing without the average win and loss beside it, and what a good figure actually looks like.
Market mechanics
- Funding rate
- A funding rate is the periodic payment between long and short holders of a perpetual future. Definition, formula, who pays, and why the annualised figure matters.
- High-frequency trading
- High-frequency trading holds positions for seconds to minutes and lives on execution quality rather than forecasting. What HFT is, and why friction decides the outcome.
- Leverage
- Leverage multiplies exposure, not edge. The notional arithmetic, why the liquidation distance shrinks as 1/leverage, and the caps regulators set for retail traders.
- Maker and taker fees
- Maker fees apply to orders that rest on the book; taker fees to orders that cross the spread. Definition, why they differ, and how leverage multiplies them.
- Slippage
- Slippage is the difference between the price you expected and the price you got. Definition, formula, why it scales with size, and how it invalidates backtests.
Method and strategy
- Arbitrage
- Arbitrage buys and sells the same exposure in two places to capture a price gap. The three retail forms, the friction that eats the spread, and why it is a carry trade, not free money.
- Backtesting
- Backtesting runs a strategy over historical data to estimate how it would have behaved. Definition, what a credible test must model, and the limits of the result.
- Breakout trading
- Breakout trading enters when price leaves a defined range. How the level is chosen, why most breakouts fail, and what separates a real one from a false one.
- Grid trading
- Grid trading places layered buy and sell orders across a price range. Definition, the per-grid economics, and the trend risk the marketing leaves out.
- Martingale strategy
- Martingale doubles the stake after every loss so that one win recovers it all. The arithmetic of a losing streak, gambler's ruin, and why a 95% win rate is not an edge.
- Mean reversion
- Mean reversion trades the return of price to a reference level. What it assumes, why a low win rate is normal for it, and the market condition that breaks it.
- Momentum trading
- Momentum trading buys what is already rising and sells what is already falling. The evidence behind it, the horizons it works on, and the reversal that ends it.
- Overfitting
- Overfitting is tuning a strategy to historical noise rather than signal. How to avoid overfitting trading strategies: the warning signs, and why it is the default outcome of optimisation.
- Paper trading
- Paper trading runs a strategy against live market data with simulated capital. Definition, how it differs from backtesting, and what it cannot test.
- Pyramiding
- Pyramiding adds to a winning position in shrinking increments as a trade moves in its favour. The upright-vs-inverted arithmetic, and the stop rule that keeps the adds from adding risk.
- Trend following
- Trend following holds a position while a move persists and exits when it stops. The rules, why most trades lose, and why the exit carries the whole strategy.
- Walk-forward analysis
- Walk-forward analysis fits parameters on one window of history, tests them untouched on the next, then rolls forward. How to read walk-forward efficiency, and how the test gets undone.
Definitions are educational. Nothing here is investment advice, and no metric described on this page predicts future results.
Definitions are the easy part
Knowing what drawdown means is not the same as having a system that halts on it. QANTERION applies these limits while a strategy runs.