Risk management

Risk is an inherent part of any investment, which is why investors consider risk-adjusted returns when analyzing various investment options. But what is a risk-adjusted return? A risk-adjusted return is a measure of return that compares the potential profit from an investment to the degree of risk that must be accepted in order to achieve…

Risk management is an essential aspect of trading. One of the most valuable indicators for assessing risks is the Ulcer Index. What is the index, and what does it tell you? The Ulcer Index (UI) is a volatility indicator that measures downside risk in terms of both the depth and duration of price declines. It…

The risk of ruin in trading is mostly ignored by traders. Most traders are optimists, but the difference between defense and attack is often tiny. What is the risk of ruin in trading? Can the risk of ruin in trading be calculated? The risk of ruin in trading can be calculated by using specific formulas…

The optimal capital allocation in trading is most likely not very well understood by most traders. The balance between attack and defense is often a thin line. Most of us are optimists and we rarely watch out below. It’s human nature – pessimists never won any wars! What is the optimal capital allocation in trading?…

Trading system and strategy performance metrics are important parameters to evaluate the quality of your trading strategy. Just looking at the end result, the CAGR or the annual returns, might be very misleading. If you’re a short-term trader we are pretty confident in saying that most traders would abandon a strategy if the drawdowns are…

Trading is very much a game of managing risk. This is probably the second most important component in trading after a positive statistical edge! Below we have listed all the articles and posts we have written about the subject: Money, risk, and trade management in trading systems: CAGR – arithmetic and geometric averages: Stop loss…

Rina Index is a performance metric that measures the risk to return ratio. Rina index was created by RINA systems in an attempt to find a performance metric that takes time, drawdown, and profit into consideration. Below we will go into how the Rina Index is calculated and how you can use it in your investments. Rina Index…

Named after Frank A. Sortino, the economist that created it, the Sortino Ratio is another performance metric for measuring the performance of an investment relative to the amount of risk involved. The ratio is considered a variation of the Sharpe Ratio, but what exactly is it? Sortino Ratio is a performance metric that measures the…

As an investor, you would want to know whether your investment’s return is worth the risk. There are different methods you can use to measure the risk-adjusted performance of your portfolio, and the Jensen Ratio (Jensen’s Performance Index) is one of them. But what is the Jensen Ratio? Named after the renowned economist Michael Jensen…

Developed by derivatives trader and statistician Lars Kestner, the K-ratio is a performance metric that tries to address the problem of how returns and consistency of returns are analyzed. Although the K-ratio has been around since 1996 — with some modifications though — do you really know what the K-ratio is and how it is…

The Treynor Ratio, which is sometimes referred to as the reward-to-volatility ratio, was named after Jack Treynor, an American economist who developed it, who also happens to be one of the inventors of the Capital Asset Pricing Model (CAPM). But what is the Treynor Ratio about and how is it calculated? Treynor Ratio is the…

Is a stop loss good or bad? What is the best stop-loss strategy? Are there alternatives to a stop-loss? How many different stop loss strategies are there? When you read books and blogs about trading, one mantra is repeated: you must always have a stop-loss. Why this obsession with stop-loss? Perhaps there are stop loss…

Why is max drawdown in trading important? Why should you spend time thinking about what is a good drawdown percentage? Max drawdown is important in trading because it influences your behavior and obviously your returns. Both are dependent on each other. What is a good or acceptable drawdown percentage? There is no definite answer, but…

180 Years of Stock Market Drawdowns In a presentation to the Institut des Hautes Études Scientifiques (IHÉS), termed An Analysis of 180 Years of Market Drawdowns, which is available on YouTube, Dr. Robert J. Frey, a former hedge fund manager and quant trader (whose firm was actually bought out in the 90s by the legendary…

What is a good Sharpe ratio? Every trader is looking to find high Sharpe Ratio strategies. The Sharpe Ratio is a popular and widely used indicator for comparing the return and its risk. The name is given by its inventor, William Sharpe, who developed the ratio during the 1960s. Sharpe later won the Nobel Prize…

We explain what a good profit factor is in trading (profit factor trading). How do you evaluate a trading strategy? In hindsight, it’s easy to judge a strategy by the result – the CAGR or the annual return. However, the profit factor is a handy tool to quantify the quality of the return and the…