Annualised Return

The annualised return is the percentage increase in assets you would have after a year of trading, including all transaction costs and other fees. For instance if you started with $100 and saw a 20% annualised return for a year, you would have $120 at the end of the year.

See also Directional Return.

Basis Points or Bps

1 Basis Point = 1% of 1% = 1 / 10000 = 0.0001

Basket

A collection of different quantities of different financial instruments. For instance, 800 shares of Google, 500 shares of Apple and 1 share of Nous is a basket of stocks.

Bull & Bear

(Trader slang)
To be bullish is to expect the value to increase or price to go up.
To be bearish is to expect the value to decrease or price to go down.

Conviction

Conviction is a word often used in finance and describes a situation where you have a particularly strong belief in your view. Good traders use their conviction to avoid losing too much on risky trades and make extra money on more probable trades.. if their conviction is right!

Delta-one

Just means that value changes one-for-one with some other thing (or should, anyway). If A and B are delta-one, a 1.5% price increase in A should see a corresponding 1.5% price increase in B.

Directional Return

The directional return is the change in asset price expected over a year, if all transaction costs and other fees are reduced to zero. In other words, what was the return for guessing (correctly or incorrectly) where the market would move to?

If someone's annualised returns are low but their directional returns are high, it means that they are trading too often or paying too much for their transactions.

Financial Index

An index is a single price representing something which cannot be bought or sold directly but which people are interested in. Stock market indices usually attempt to measure the value of most or all the stocks listed on that market by computing the value of a basket of stocks.

Financial Instrument

Something with a financial value - so something with a price. Not all financial instruments can be traded directly, for instance, indices cannot. Instruments that cannot be traded directly can usually be traded by a delta-one proxy. In the case of an index, the proxy could be an ETF or an Index Future.

Logarithmic Returns / Log Returns

This is the return computed using the natural logarithm "ln". For example suppose that you bought at price 123.00 and sold at 125.00. The "log returns" are ln(125.00) - ln(123.00), or equivalently ln(125.00/123.00), which is the value 0.016129381929884.

Just like price returns, the value is usually multiplied by 100 (for %) or 10,000 (for bps) to make it easier for people to use.

Spark Profit uses log-returns multiplied by 1,000,000 as the scoring system for the most liquid instruments. So a score of 1,000 points is equivalent to log returns of 10 bps or 0.1%.

Liquidity

Liquidity defines how easy something is to buy or sell. Highly liquid instruments can be bought or sold very easily - and large quantities can be bought or sold without impacting the price much.

Currency markets are among the most liquid of all markets. Small-cap stocks are not very liquid (also known as illiquid)

Mark-to-market

If you have some trades open - say you bought some shares but didn't sell them yet - then "marking to market" will tell you how much you are worth, as if you sold those shares on the market right now.

This is very easy to do for liquid assets like currencies or stocks, but very hard to do for other types of financial instrument that are not traded on public exchanges.

Proxy

A proxy is a substitute, usually not exactly what you wanted but good enough to do the job. In finance we often say a "X is a proxy for Y" to mean that we cannot trade or see X directly, but Y is available and it's very similar to X for our purposes.

Price Returns

The price return is the change in price from some starting price to some final price. Returns are usually measured relative to the starting price and so are measured in basis points or percents.

Sharpe Ratio

Sharpe ratio is an attempt to adjust returns by how risky (or volatile) they are.

Positive sharpe ratios are desirable and anything more than 1 is impressive.

Trading Skill

There is no single way to measure the entire range and all types of trading skill. However to make things simple we have introduced our own measurement.

We define trading skill as the chance that the returns are better than a machine making random trades with the same volatility of returns. (In other words, what is the chance the returns are due to actual skill). It includes realistic transaction costs in the returns. It is quite similar to the Sharpe ratio

A value of 50% or more is desirable and above 55% is impressive.

Transaction Costs

Trading in all markets incurs transaction costs. These need to cover at least the cost of operating the market itself, but also usually contain bid/offer spread if your strategy requires crossing the spread.

View

A view (or opinion, expectation, prediction, etc.) is what someone thinks will happen in the future. As a simple example, you might have a view that the market will move up, which is also called a bullish view.

Volatility

Volatility is a measurement of how much something changes over time. In finance people nearly always mean the volatility of the price return sequence but that itself just means "does the price move a lot or a little?".

If a particular financial instrument doesn't change price much, say less than one percent a day on average, it has a low volatility. Conversely if it regularly moves several percent every day, we would say it is a high volatility, or just "volatile", instrument.