Trading Glossary
34 key terms in quantitative trading, explained in plain English.
Strategy
Technical
Simple Moving Average (SMA)
An arithmetic average of a security's price over a specified number of periods. Used to smooth out price data and identify trends.
Exponential Moving Average (EMA)
A type of moving average that gives more weight to recent prices, making it more responsive to new information than SMA.
Relative Strength Index (RSI)
A momentum oscillator measuring the speed and change of price movements on a scale of 0-100. Traditionally, RSI above 70 indicates overbought conditions and below 30 indicates oversold.
MACD
Moving Average Convergence Divergence — a trend-following momentum indicator showing the relationship between two EMAs (typically 12 and 26 period).
Bollinger Bands
A volatility indicator consisting of a middle band (SMA) and upper/lower bands at a specified standard deviation distance. Bands widen during volatile periods and contract during calm ones.
Average True Range (ATR)
A volatility indicator that measures the average range between high and low prices over a period, accounting for gaps.
Golden Cross
A bullish signal occurring when a shorter-period moving average crosses above a longer-period moving average (typically SMA 50 crossing above SMA 200).
Momentum
The rate of change of a security's price. Momentum strategies assume that assets moving in one direction tend to continue in that direction.
Overbought / Oversold
Conditions where an asset's price has risen (overbought) or fallen (oversold) significantly and may be due for a reversal. Typically measured by RSI or stochastic oscillators.
Risk
Maximum Drawdown
The largest peak-to-trough decline in portfolio value during a backtest period. It measures the worst-case scenario for an investor.
Volatility
A statistical measure of the dispersion of returns. Higher volatility means larger price swings and more uncertainty.
Stop Loss
A predefined price level at which a losing trade is automatically closed to limit the loss. A fundamental risk management tool.
Risk Management
The process of identifying, assessing, and controlling financial risks. Includes position sizing, stop losses, and portfolio diversification.
Statistics
Sharpe Ratio
A measure of risk-adjusted return, calculated as the excess return per unit of volatility. Higher values indicate better risk-adjusted performance.
Win Rate
The percentage of trades that were profitable out of total trades executed. A fundamental measure of trading accuracy.
Annualized Return
The geometric average return per year over the backtest period. Normalizes returns across different time periods for fair comparison.
Profit Factor
The ratio of gross profits to gross losses. A profit factor above 1.0 means the strategy is profitable overall.
Sortino Ratio
Similar to the Sharpe ratio, but only considers downside volatility. It penalizes strategies for bad volatility (losses) rather than all volatility.
Calmar Ratio
The ratio of annualized return to maximum drawdown. It measures how efficiently a strategy generates returns relative to its worst decline.
Expectancy
The average amount you can expect to win (or lose) per trade. Calculated from win rate and average win/loss sizes.
Payoff Ratio
The ratio of average winning trade size to average losing trade size. Also known as the reward-to-risk ratio.
Total Return
The overall percentage gain or loss of a strategy over the entire backtest period, including all trades.
Markets
Backtesting
Walk-Forward Validation
A testing methodology where a strategy is optimized on historical data (in-sample) and then tested on unseen future data (out-of-sample) to verify it isn't overfit.
Backtesting
The process of testing a trading strategy against historical market data to evaluate how it would have performed in the past.
Overfitting
When a strategy is too closely tailored to historical data, capturing noise rather than genuine patterns. Overfit strategies perform well in backtests but poorly in live trading.
Equity Curve
A graphical representation of a portfolio's value over time during a backtest. Shows how the strategy's capital grew or shrank.
In-Sample
The portion of historical data used to optimize and train a strategy. The 'training set' in backtesting.
Out-of-Sample
The portion of historical data held back and never used during strategy optimization. The 'test set' for validation.
Gilito
Gilito Score
A proprietary composite score (0-100) that ranks trading strategies based on multiple performance dimensions including returns, risk, consistency, and walk-forward validation.
Trading Signal
A buy, sell, or hold recommendation for a specific asset, generated by the top-performing strategy for that asset as determined by the Gilito Score.
Signal Confidence
A percentage (0-100%) indicating how reliable a trading signal is, based on the underlying strategy's backtested performance metrics.