This is a collection of terms I frequently use in my blog posts. I encourage readers to refer to the glossary periodically, and offer suggestions to help everyone stay on the same page.
Hypothesis Testing
The systematic method for testing a theory’s validity through rigorous analysis and planning, usually using statistical methods on sample data.
Statistically Significant
When the likelihood of a relationship between two or more variables is larger than random chance. Generally, a relationship is deemed statistical significant if the probability of randomness is less than 5%.
T-stat
A standard value used for hypothesis testing, specifically to reject or accept a null hypothesis. Generally, a t-stat greater than 2 is considered statistically significant.
Walk Forward Analysis
Methodology of parameter testing a signal with a fixed window approach across time series data. One most notable benefit is the consistency of inputs and outputs.
Alpha
A measure to represent unexplained performance relative to a benchmark.
Beta
A measure to represent explained performance directly from a benchmark.
A measure to estimate statistical significance of returns by adjusted for risk. Roughly calculated by: returns / standard deviation.
Mean Reversion
The tendency for a time-series to move towards the average value over time. Many trading algorithms are focused on predicting timings of mean reversion.
Short-Term Reversals
A common factor that describes the phenomena where prices move rapidly in the opposite direction of the current trend for a short duration – often between a week and a month.
Factors
Variables that can explain risk and returns for certain securities. Common ones include Momentum, Value, Quality, Size, Volatility and Short-Term Reversals.
Leverage
Total percentage of net holdings used in a portfolio.
Basis Point
1 basis point (bps) is equal to 0.01%.
Slippage
The difference between the intended fill price and the actual final price for a trade.
Commission
The fixed amount paid to the broker in order to execute trades.