Stock Market Index
An index is a measure of the overall performance of the Stock Market. An example is the Standard and Poor’s 500 Index (SPX). The SPX is basically just the values of 500 stocks added up and divided by some number thereby creating the index. There are Indexes that measure every type of stock market segment you can imagine. e.g. the Nasdaq 100 (NDX) measures the 100 biggest companies traded on the NASDAQ exchange. These are generally technology stocks.
Drawdown
Drawdown is an unrealized loss that your trading account suffers. For example, if you invest $10,000 and it rises 50% to $15,000, then temporarily falls to $12,000. Your drawdown is 20%.
Maximum Drawdown (MDD)
Measured over a period, the MDD is the largest drawdown (see above) an account suffers over that period. e.g. Over the period 01/02/90 to 12/31/99, the maximum drawdown for the SPX was -19.92% on 10/11/90.
Next Day Trading
Basing historical analysis results of a timing system on the act of making your transaction at the open or close on the following day after a timing system generates a buy or sell signal.
Long Position
A portfolio is in a long position or long when it owns positions that will appreciate if the market or stock goes up in value.
Short Position
A portfolio is in a short position or short when it owns positions that will appreciate if the market or stock goes down in value.
Cash Position
A portfolio is in cash when it is earning risk-free interest regardless of whether the market goes up or down.
Composite
A combination of systems and composite strategies to create an overall investment plan.
Indicator
An indicator takes stock market related data as input and outputs a number. For example: Breadth Ratio = NYSE Advancing Issues / NYSE Declining Issues. (Notice that there are no buy/sell rule in an indicator).
System
A system uses indicators to generate buy/sell signals based on its rules or formula. For example: Buy: Breadth Ratio > 1.5 on the last trading day of a week. Sell: After Holding one day.
Total Gain
The end value minus the start value then divided by the start value.
Compounded Annual Return (CAR)
(Often referred to as Annualized Return). This is not just the total gain divided by the number of years the analysis covers. For example, at a CAR of 20% for 10 years $1000.00 becomes $6191.74. This is a gain of 519.17%. If you divide this gain by 10 years, it comes to 51.9% per year. This 51.9% result is a meaningless statistic. The CAR is 20%.
Compounded Annual Return While Invested (CARWI)
Annualized Return while a system is invested. This is a great indication of how good a system is at picking opportune times to be invested. Systems that are invested less are lower risk simply by the fact that they are in cash more of the time.