Algorithmic Trading Glossary
Key terms and concepts in algorithmic trading, explained simply. 9 terms and growing.
Algorithmic Trading
The use of computer programs and predefined rules to automatically execute trading decisions — including what to buy, when to buy, and how much to buy — without manual intervention.
Backtesting
The process of testing a trading strategy against historical market data to evaluate how it would have performed in the past, before risking real capital.
CAGR
Compound Annual Growth Rate — the annualised rate of return that an investment would need to grow from its beginning value to its ending value, assuming profits are reinvested.
Max Drawdown
The maximum observed loss from a portfolio's peak value to its lowest point before a new peak is reached. Measures the worst-case decline an investor would have experienced.
Momentum
A trading strategy that buys securities showing upward price trends and sells those showing downward trends, based on the empirical observation that recent winners tend to continue winning.
Quantitative Trading
An approach to trading that uses mathematical and statistical models to identify profitable opportunities, relying on data analysis rather than subjective judgment.
Rebalancing
The process of realigning a portfolio's holdings to match a target allocation — buying securities that have become underweight and selling those that have become overweight.
Sharpe Ratio
A risk-adjusted return metric that measures the excess return per unit of volatility. Higher values indicate better risk-adjusted performance.
Sortino Ratio
A variation of the Sharpe Ratio that only penalises downside volatility, making it more relevant for strategies that have asymmetric return distributions.