Quick definitions for key concepts and metrics used throughout our guides.
The largest peak-to-trough equity decline as a percentage. Lower is better. For many swing strategies, <30% is reasonable; >50% is high risk.
Gross profits divided by gross losses. Values >1.0 indicate profitability; 1.3-1.8 is common for robust, cost-inclusive systems.
Formula for optimal bet size based on edge. Full Kelly is volatile; most traders use 25-50% of Kelly to reduce drawdowns.
Ratio of test performance to train performance in walk-forward analysis. Aim for >0.70 (good), >0.85 (excellent).
Difference between expected and actual fill price due to spreads, liquidity, and latency. Model per market and per order type.
Periodic payments on perpetual futures to align prices with spot. Positive funding means longs pay shorts; negative means shorts pay longs.
Time delay between decision and execution. Critical for execution-sensitive algorithms (market making, arbitrage). Model in backtests where relevant.
Ratio of average win to average loss. Higher R:R can offset lower win rates; e.g., 40% win rate with 2:1 R:R can be profitable.