Key Concepts
Systematic investing relies on a set of key statistical and financial concepts that form the foundation of rigorous performance evaluation and risk management. Understanding these concepts is essential for interpreting strategy results, comparing performance across different time periods and market conditions, and making informed investment decisions.
| Concept | Definition |
|---|---|
| Volatility | A measure of how much an investment’s returns fluctuate around its average. High volatility = larger price swings; low volatility = more stable returns. Typically measured as standard deviation of returns. |
| Drawdown | The peak-to-trough decline in a portfolio’s value during a given period. Maximum drawdown shows the worst loss experienced from a peak to a subsequent low point. Critical for understanding downside risk. |
| Win Rate | The percentage of trades or periods that result in a profit. A 60% win rate means 6 out of 10 trades were profitable. Should be considered alongside profit factor and expectancy. |
| Profit Factor | The ratio of gross profit to gross loss. A profit factor of 2.0 means the strategy made $2 in profit for every $1 lost. Higher values indicate better risk-reward dynamics. |
| Expectancy | The average profit or loss per trade, accounting for both win rate and average win/loss sizes. Calculated as: (Win Rate × Avg Win) − (Loss Rate × Avg Loss). Positive expectancy = profitable strategy over time. |
| Regression to the Mean | The statistical principle that extreme performance tends to normalize over time. Unusually high returns tend to revert toward the average; unusually low returns tend to improve. Important for distinguishing skill from luck. |