Trading Terms Glossary
A plain-English reference for the most important terms in algorithmic trading and strategy validation. Click any linked term to see how AlgoChef measures or uses it.
A
Algorithmic Trading
Trading using a computer program that automatically executes trades based on predefined rules — entry conditions, exit conditions, risk per trade, and risk management — without human intervention in individual trade decisions.
Allocation
How capital is divided across the strategies in a portfolio. AlgoChef's Allocation Methods compare ten different capital-split approaches side by side.
Alpha
The return a strategy generates above what simply holding a benchmark would have earned, adjusted for market risk. Positive alpha means genuine outperformance. See Strategy vs Benchmark.
Annualized Return
The compound annual growth rate of a strategy, normalized to a yearly percentage regardless of how long the backtest ran. Used to compare strategies with different backtest lengths. See Profitability Metrics.
Average Trade (Expectancy)
The average dollar profit or loss per trade. Positive expectancy means each trade is expected to make money on average. The most fundamental metric for a trading system. See Trade Statistics.
B
Backtest
Testing a trading strategy against historical price data to see how it would have performed in the past. A backtest does not guarantee future performance — it is a validation tool, not a prediction. See Why Strategies Fail in Live Trading.
Beta
How much a strategy moves with the market. Beta of 1 moves in lockstep with the benchmark; beta of 0 is market-neutral. See Strategy vs Benchmark.
Big Point Value (BPV)
The dollar value of a one-point price move for one futures contract (e.g. $50 for the E-mini S&P 500). Set per contract in the Instruments catalog — it converts point-based P&L into dollars.
Bootstrap
A statistical resampling method that randomly samples trades from your history (with replacement) to estimate the range of possible outcomes. One of AlgoChef's five Monte Carlo simulation methods.
C
CAGR (Compound Annual Growth Rate)
The annualized rate at which an account grows, accounting for compounding. The standard way to compare returns across strategies with different backtest lengths. See Advanced Metrics.
Calmar Ratio
Annualized return divided by maximum drawdown. Directly answers "how much return do I get per unit of my worst loss?" See Risk Ratios.
Circuit Breaker
A safety mechanism in AlgoChef's scoring system that caps or zeros a score when a fundamental problem is detected — such as too few trades, excessive drawdown, or no statistical edge. See Casey Strategy Index (CSI).
Confidence Score
AlgoChef's proprietary score (0–100) measuring the statistical reliability of a strategy's results — whether the edge is backed by enough evidence or could be luck. See Confidence Score.
Correlation
How closely two strategies' returns move together, from -1 (perfect opposites) to +1 (identical). Low or negative correlation between strategies is the raw material of diversification — see Portfolios Hub.
CVaR (Conditional Value at Risk)
The average loss in the worst scenarios beyond a chosen confidence level — "when things go really wrong, how bad is it on average?" Used by the MinCVaR allocation method and in tail metrics.
Curve-Fitting (Overfitting)
Over-optimizing a strategy to historical data so that it performs well in backtesting but fails in live trading. The strategy has "memorized" past noise rather than discovered a genuine market edge. Detected using Monte Carlo IS/OOS Validation. See Why Strategies Fail — Curve-Fitting for detection methods.
CSI (Casey Strategy Index)
AlgoChef's master composite score (0–100) that combines Profitability, Risk, and Confidence into a single number using a proprietary weighted formula. See Casey Strategy Index.
D
Drawdown
The decline in account equity from a peak to a subsequent trough before a new high is reached. Expressed in dollars or as a percentage of the peak equity. The most important risk metric. See Drawdown Metrics.
Drawdown Duration
How long a drawdown lasts — from the moment equity peaks to when it recovers to a new high. A long drawdown duration tests psychology even when the dollar amount is small.
Diversification
Combining strategies whose losses don't happen at the same time, so the portfolio's drawdowns are shallower than its parts'. The core reason to build portfolios — see Portfolios Hub.
E
Edge
A statistical advantage that allows a trading strategy to generate positive returns over many trades. Without a real edge, any profitability is likely due to luck.
Equity Curve
A chart showing account balance over time as trades are executed. A smooth, upward-sloping equity curve indicates consistent performance. See Strategy Analyzer.
Expectancy
See Average Trade.
Exposure %
The percentage of total time that capital is deployed in active trades. A strategy with 30% exposure has money at risk 30% of the time. See Time Analysis.
H
Health Score
AlgoChef's proprietary score (0–100) that detects strategy degradation by comparing recent performance against historical baselines. Independent of the CSI. See Health Score.
HRP (Hierarchical Risk Parity)
A portfolio allocation method that clusters strategies by correlation and distributes risk across the clusters. Robust because it doesn't rely on fragile return forecasts. See Allocation Methods.
I
In-Sample (IS)
The portion of historical data used to develop and optimize a trading strategy. Results on in-sample data are expected to look good — the real test is out-of-sample performance. See Monte Carlo Simulation.
K
Kelly Criterion
A formula for calculating the mathematically optimal percentage of capital to risk per trade based on win rate and payoff ratio. In practice, most traders use a fraction of Kelly (half or quarter) to reduce volatility. See Trade Statistics.
K-Ratio
Measures equity curve smoothness by fitting a straight line to the log of the equity curve. A high K-Ratio means consistent, steady growth. See Risk Ratios.
Kurtosis
A measure of how extreme the outliers in your trade P&L distribution are. High kurtosis means occasional very large wins or losses. See Distribution Metrics.
M
MAE (Maximum Adverse Excursion)
How far a trade moves against you before it closes. Used to optimize stop-loss placement — if most trades don't go far against you before becoming winners, your stop may be too tight. See Trade Statistics.
Max Drawdown
The largest peak-to-trough decline in account equity during the backtest period. The single most important risk metric. See Drawdown Metrics.
MFE (Maximum Favorable Excursion)
How far a trade moves in your favor before it closes. Used to optimize take-profit placement. See Trade Statistics.
Margin
The capital a broker requires to hold a futures position — overnight margin for held positions, intraday margin for day trades. Stored per contract in the Instruments catalog and respected by capital-sizing calculations.
Monte Carlo Simulation
A technique that runs thousands of randomized variations of a strategy's trade history to test robustness. If results only hold up in the exact historical sequence, the strategy is fragile. See Monte Carlo Simulation.
O
Omega Ratio
The ratio of all gains to all losses, weighted by probability. Similar to Profit Factor but accounts for the full distribution of returns rather than just averages. See Risk Ratios.
Out-of-Sample (OOS)
The portion of historical data held back from strategy development and used only for validation. Strong OOS performance is evidence of a genuine edge rather than curve-fitting. See Monte Carlo Simulation.
Overfitting
See Curve-Fitting.
P
Payoff Ratio
Average winning trade divided by average losing trade. A payoff ratio of 2.0 means winners are twice the size of losers on average. Works in combination with win rate to determine overall profitability. See Trade Statistics.
Permutation Test
A statistical test that shuffles data randomly many times to check whether an observed result could have occurred by chance. Used in Crisis Dependency analysis.
Portfolio
A weighted combination of several strategies traded together from shared capital. Built in the Portfolios Hub, analyzed in Portfolio Studio.
Profit Factor
Gross profit divided by gross loss. Above 1.0 means the strategy makes more than it loses. Above 1.5 indicates a solid edge. See Trade Statistics.
Profitability Score
AlgoChef's proprietary score (0–100) measuring how effectively a strategy generates returns — not just raw profit, but consistency and efficiency. See Profitability Score.
R
R-Multiple
A trade result expressed as a multiple of the initial risk (1R = average loss). A trade that makes 3x your risk is a 3R win. Developed by Dr. Van Tharp. See Volatility & R-Multiple Metrics.
R-Expectancy
The average R-multiple per trade. An R-Expectancy of 0.35 means you earn 0.35R per trade on average. See Volatility & R-Multiple Metrics.
Recovery Factor
Net profit divided by maximum drawdown. Answers "was the pain worth the gain?" A Recovery Factor of 5.0 means you earned $5 for every $1 of worst drawdown. See Risk Ratios.
Risk Score
AlgoChef's proprietary score (0–100) measuring how well a strategy protects capital across drawdowns, volatility, and recovery characteristics. See Risk Score.
Risk of Ruin
The probability of losing a specified percentage of capital. Used in AlgoChef's Monte Carlo Capital Sizing and the Portfolio Robustness check to determine safe starting capital levels.
Rebalancing
Adjusting a portfolio's allocations back to their targets after market movement causes drift. Portfolio Studio's Allocate tab flags drift and re-solves allocations on demand.
S
Sharpe Ratio
Return per unit of volatility. The most widely used risk-adjusted return metric. Above 1.0 is acceptable, above 2.0 is good. See Risk Ratios.
Skewness
Whether trade returns lean toward wins (positive skew) or losses (negative skew). Positive skewness is generally preferred — outlier trades tend to be winners. See Distribution Metrics.
Slippage
The difference between the expected trade entry or exit price and the actual fill price. Slippage is a real cost that reduces net profit, particularly for high-frequency strategies.
Sortino Ratio
Like the Sharpe Ratio, but only penalizes downside volatility — large wins are not penalized. Better suited for strategies with positive skew. See Risk Ratios.
SQN (System Quality Number)
A composite measure of system quality developed by Dr. Van Tharp, accounting for expectancy, consistency, and sample size. See Volatility & R-Multiple Metrics.
Stagnation
The longest period a strategy goes without making a new equity high. High stagnation means capital is tied up going nowhere. See Advanced Metrics.
Stress Testing
Deliberately degrading a strategy's metrics (win rate, drawdown, slippage) to test whether it remains viable under adverse conditions. See Monte Carlo Simulation.
T
Time Underwater
The percentage of total backtest time spent in drawdown — below the equity peak. Even strategies with small max drawdowns can have high time underwater if drawdowns are frequent. See Advanced Metrics.
Trade Statistics
Metrics that break down individual trade results — win rate, average win/loss, streaks, and ratios. See Trade Statistics.
U
Ulcer Index
A risk metric that measures both the depth and duration of all drawdowns — not just the worst. Lower is better. See Risk Ratios.
W
Walk-Forward Testing
A validation method that repeatedly optimizes a strategy on a rolling in-sample window and tests it on the following out-of-sample window. One of the most rigorous forms of strategy validation. See FAQ — What is walk-forward testing?.
Win Rate
The percentage of trades that result in a profit. High win rates feel good psychologically but are not sufficient alone — a 90% win rate with catastrophic occasional losses can still lose money. See Trade Statistics.
Tip
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