# Quant Trading Glossary > 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. Canonical HTML page: https://qanterion.com/glossary Updated: 2026-08-18 ## Risk and sizing ### Liquidation Liquidation is the forced closure of a leveraged position by the venue when its margin falls below the maintenance requirement. It is not a request like a stop-loss — it executes regardless of intent, usually at a worse price, and typically with an additional fee. At 10× leverage with a 0.5% maintenance rate, roughly a 9.5% adverse move is enough to trigger it. https://qanterion.com/glossary/liquidation ### Maximum drawdown Maximum drawdown is the largest percentage decline from an equity peak to a subsequent trough before a new peak is set. It measures the worst loss a strategy has actually inflicted, not the loss it might inflict, and it is asymmetric: recovering a 50% drawdown requires a 100% gain, which is why drawdown control matters more to compounding than peak return does. https://qanterion.com/glossary/max-drawdown ### Position sizing Position sizing is the rule that determines how much of an asset to buy or sell for a given trade. Under fixed-fractional sizing — the standard systematic approach — you fix the loss you are willing to take as a percentage of equity, divide it by the distance between entry and stop, and the quantity falls out. The loss is then decided before the trade opens rather than discovered afterwards. https://qanterion.com/glossary/position-sizing ### Risk of ruin Risk of ruin is the probability that a sequence of trades drives an account down to a defined failure threshold before the strategy’s edge has time to compound. It depends on the win rate, the payoff ratio, the risk taken per trade, and how much drawdown counts as ruin — and it is dominated by the last two, which is why identical strategy statistics can be perfectly safe or nearly certain to fail. https://qanterion.com/glossary/risk-of-ruin ### Stop-loss A stop-loss is a predefined exit price at which an open position is closed, converting an open-ended loss into a bounded one. On its own the stop bounds nothing: the loss it caps is only known once the position size is derived from the stop distance, so a trade risking 1% of a $10,000 account with a stop 4% from entry is sized at $2,500 and not more. When triggered, a stop order becomes a market order and fills at whatever price is available, which in a gap can be well past the stop; a stop-limit order may not fill at all. https://qanterion.com/glossary/stop-loss ### Volatility Volatility is the standard deviation of an asset's or strategy's returns over a stated horizon, and the horizon is part of the number: a 2% daily standard deviation is roughly 31.7% annualised for equities (√252 trading days) and 38.2% for crypto that trades 365 days a year. It measures how widely returns are dispersed around their average, counting upside and downside moves equally, and it is the denominator of the Sharpe ratio, so a strategy measured over a calm window will look better than the same strategy measured through a storm. https://qanterion.com/glossary/volatility ## Performance measures ### CAGR CAGR, the compound annual growth rate, is the constant annual rate that would take a starting value to an ending value over a given period. It is a geometric mean, which is why it differs from a simple average of yearly returns: a +50% year followed by a −50% year averages 0% arithmetically but produces a CAGR of −13.4%, and the second figure is the one the account actually experienced. https://qanterion.com/glossary/cagr ### Calmar ratio The Calmar ratio is compound annual growth rate divided by the absolute maximum drawdown over the same window, conventionally the trailing 36 months. It expresses return in units of the worst peak-to-trough loss a holder actually had to sit through, rather than in units of volatility as the Sharpe ratio does. A 20% CAGR with a 10% maximum drawdown is a Calmar of 2.0; the same 20% with a 40% drawdown is 0.5. https://qanterion.com/glossary/calmar-ratio ### Expectancy Expectancy is the average outcome of a trade expressed per unit of risk: win rate multiplied by payoff ratio, minus the loss rate. A strategy with a 45% win rate and a 2:1 payoff has an expectancy of +0.35, meaning it earns 0.35 units for every unit risked over a long series. When expectancy is zero or negative, no amount of position sizing, leverage, or discipline makes the strategy profitable. https://qanterion.com/glossary/expectancy ### Profit factor Profit factor is gross profit divided by gross loss across a set of closed trades — equivalently, win rate times average win, divided by loss rate times average loss. A factor of 1.0 is break-even before costs; systems that survive live trading usually sit between 1.3 and 2.0 after fees. A factor above about 3 on a backtest of fewer than a few hundred trades is more likely overfitting or a single outlier trade than a durable edge. https://qanterion.com/glossary/profit-factor ### Sharpe ratio The Sharpe ratio is excess return divided by volatility: subtract the risk-free rate from a strategy’s return and divide by the standard deviation of those returns. It answers how much compensation the strategy delivered per unit of risk taken. Above 1.0 is generally considered good and above 2.0 excellent, but the figure is only comparable between strategies measured over the same period at the same frequency. https://qanterion.com/glossary/sharpe-ratio ### Sortino ratio The Sortino ratio is the Sharpe ratio with the denominator replaced by downside deviation: excess return over a minimum acceptable return (MAR, usually 0 or the risk-free rate) divided by the root-mean-square of the shortfalls below that MAR, so volatility on the upside is not penalised. For returns symmetric around the MAR the Sortino is about √2 times the Sharpe, so a Sharpe of 1.0 implies a Sortino near 1.4 with no skew at all; a Sortino well above that multiple signals positive skew, well below it negative skew. https://qanterion.com/glossary/sortino-ratio ### Win rate Win rate is the proportion of closed trades that ended in profit, expressed as a percentage. On its own it describes frequency and says nothing about magnitude, so it cannot indicate whether a strategy makes money. A rule winning 90% of the time is unprofitable if the 10% of losses are each ten times the size of a win, and a rule winning 31% of the time is profitable whenever its average win is large enough relative to its average loss. https://qanterion.com/glossary/win-rate ## Market mechanics ### Funding rate A funding rate is a periodic payment exchanged between the long and short holders of a perpetual futures contract, which keeps the contract price tethered to spot. A positive rate means longs pay shorts. It is quoted per interval — usually every eight hours — which makes it look trivial: 0.01% per interval is 0.03% a day, but 10.95% annualised, comparable to the entire expected return of many systematic strategies. https://qanterion.com/glossary/funding-rate ### High-frequency trading High-frequency trading is automated trading in which positions are opened and closed over seconds to minutes, and profitability depends on execution quality rather than on predicting where a market is going. The edge per trade is small by design and is repeated many times, which means fees, spread, and slippage are not a rounding error but the dominant term. A rule that is profitable before costs and unprofitable after them is the normal outcome, not an unlucky one. https://qanterion.com/glossary/high-frequency-trading ### Leverage Leverage in trading is the ratio of a position's notional size to the margin posted for it: $1,000 of margin at 10× controls $10,000 of exposure. It multiplies every outcome the position produces — gains, losses, fees and funding — by the same factor, and does nothing to the probability of being right. Because the loss that exhausts the margin shrinks as leverage rises, an isolated 10× long is liquidated by roughly a 9.5% adverse move and a 50× long by roughly 1.5%, before fees. https://qanterion.com/glossary/leverage ### Maker and taker fees Maker and taker fees are the two trading-fee tiers venues charge based on whether an order adds or removes liquidity. A maker order rests on the order book and is charged less — sometimes paid a rebate. A taker order crosses the spread and consumes resting liquidity, so it is charged more. On perpetual futures, taker fees commonly sit around 0.04%–0.06% per side. https://qanterion.com/glossary/maker-taker-fees ### Slippage Slippage is the difference between the price a trade was intended to execute at and the price it actually filled at, expressed as a percentage of the intended price. It arises because an order consumes available liquidity: a market order walks the book until it is filled, and the deeper it walks, the worse the average price. Slippage grows with order size, with volatility, and with thinness of the market. https://qanterion.com/glossary/slippage ## Method and strategy ### Arbitrage Arbitrage is the simultaneous purchase and sale of the same or an equivalent exposure in two places to capture a price difference, with, in theory, no directional risk. In practice every real arbitrage carries execution, funding, counterparty and basis risk, which makes it closer to a carry trade than to free money. The arithmetic is unforgiving: a 0.30% gross spread paid through two 0.10% taker fees and 0.05% of slippage on each side nets exactly 0.00%. https://qanterion.com/glossary/arbitrage ### Backtesting Backtesting is the practice of running a trading strategy over historical market data to estimate how it would have performed. It produces an estimate of behaviour under conditions that already occurred, not a prediction. The value of a backtest depends almost entirely on what it models: a test that omits fees, slippage, and funding is not a conservative estimate of live results — it is a different strategy. https://qanterion.com/glossary/backtesting ### Breakout trading Breakout trading enters a position when price moves beyond a level that has previously contained it — the high of a range, a prior session extreme, or the edge of a consolidation. The premise is that the level was holding order flow back, and that crossing it releases the flow in one direction. Most breakouts fail, so the strategy is defined by how quickly it abandons the ones that do rather than by how it picks them. https://qanterion.com/glossary/breakout ### Grid trading Grid trading is a market-making style strategy that divides a price range into levels and places buy orders below and sell orders above, capturing the spread each time price oscillates between two levels. It earns small, frequent profits in a ranging market. In a trending market it stops completing pairs and accumulates a directional position instead — the strategy is not broken when that happens, the market regime is. https://qanterion.com/glossary/grid-trading ### Martingale strategy The martingale strategy is a position-sizing rule that doubles the stake after every losing trade so that the first winning trade recovers all prior losses plus one base unit. The win rate it produces looks spectacular, often above 95%, because most losing sequences end before the capital does. The arithmetic is the problem: nine straight losses at a $10 base have cost $5,110 and demand a $5,120 tenth stake, $10,230 of capital in total, and against a finite bankroll the gambler's-ruin result puts the long-run probability of ruin at 1 for any fair or negative-edge game. https://qanterion.com/glossary/martingale ### Mean reversion Mean reversion is a strategy family that treats a large move away from a reference level — a moving average, a session VWAP, a prior close — as more likely to be partly retraced than continued. It assumes the reference is stable and the deviation is noise. The assumption is what fails: when a market re-rates, the reference moves to the price instead of the price returning to the reference, and every entry taken on the way down is a loss. https://qanterion.com/glossary/mean-reversion ### Momentum trading Momentum trading is a strategy family that treats a move already underway as more likely to continue than to reverse. It buys relative strength and exits relative weakness, taking its edge from the persistence of trends rather than from any view about value. The persistence is real but finite: momentum earns steadily through an extended move and gives a large share of it back at the turn, which is why exit discipline decides the outcome more than entry does. https://qanterion.com/glossary/momentum ### Overfitting Overfitting is the result of tuning a strategy until it describes the noise in a historical sample rather than any repeatable structure in the market. The tell is that performance collapses on data the parameters were not chosen from. It is not a rare failure mode but the default outcome of unconstrained optimisation: given enough parameters and enough attempts, any data set can be fitted perfectly. https://qanterion.com/glossary/overfitting ### Paper trading Paper trading is running a strategy against live market data using simulated rather than real capital. Unlike a backtest, it operates forward in time on data the strategy has never seen, which removes the possibility of fitting to the outcome. Unlike live trading, no capital is at risk — and that is both its purpose and its central limitation. https://qanterion.com/glossary/paper-trading ### Pyramiding Pyramiding is a position-management rule that adds to a trade only after it has moved in its favour, with each addition smaller than the last, so the average entry stays close to the original price and the new size is funded by open profit. Adding 4, 3, 2 and 1 units at 100, 104, 108 and 112 gives an average entry of 104; the same units added in reverse give 108, and a pullback of under 4% erases the whole gain. Pyramiding is the anti-martingale: size rises after wins and never after losses, and every addition is re-sized against the current stop so total open risk stays inside the per-trade budget. https://qanterion.com/glossary/pyramiding ### Trend following Trend following is a rules-based strategy that enters in the direction of an established move and stays in it until a predefined exit triggers. It makes no forecast about where price is going and no judgement about value; it reacts to what has already happened. Most individual trades lose small amounts, and the strategy depends on a minority of long-held positions paying for all of them, which is why cutting a winner early is more damaging here than taking a loss. https://qanterion.com/glossary/trend-following ### Walk-forward analysis Walk-forward analysis is a backtest procedure that fits the parameters of a strategy on one window of history (in-sample), runs them unchanged on the following window (out-of-sample), then rolls both windows forward and repeats. The stitched out-of-sample segments are the only performance figure that counts; the in-sample results are the cost of choosing the parameters, not evidence. A typical split is twelve months in-sample and three months out-of-sample, rolled quarterly, and a walk-forward efficiency — out-of-sample return divided by in-sample return — below roughly 0.5 says the parameters are not stable. https://qanterion.com/glossary/walk-forward-analysis ## Other languages - 简体中文: https://qanterion.com/zh/glossary - 繁體中文（台灣）: https://qanterion.com/zh-TW/glossary - 繁體中文（香港）: https://qanterion.com/zh-HK/glossary - 日本語: https://qanterion.com/ja/glossary - 한국어: https://qanterion.com/ko/glossary - Português (Brasil): https://qanterion.com/pt-BR/glossary - Türkçe: https://qanterion.com/tr/glossary - Bahasa Indonesia: https://qanterion.com/id/glossary - العربية: https://qanterion.com/ar/glossary ## Risk notice Definitions are educational. Nothing here is investment advice, and no metric described on this page predicts future results.