Measuring risk honestly
You cannot manage what you do not measure. These pages define every metric a professional uses to quantify trading risk — the drawdown family that shows how much pain a strategy inflicts, the risk-adjusted ratios that put return in the context of risk, and the portfolio measures (volatility, beta, correlation, Value at Risk) that describe risk across positions. Each page gives the exact formula, how to read it, how it is used, and — crucially — the specific way it can mislead you.
Risk Metrics: Risk metrics fall into families: drawdown and pain (maximum and average drawdown, recovery factor, Ulcer index), survival (risk of ruin), risk-adjusted return (Sharpe, Sortino, Calmar), and portfolio and tail risk (volatility, beta, correlation, Value at Risk, Conditional VaR, and maximum adverse/favourable excursion). Each has a precise formula and a specific blind spot — Sharpe punishes upside volatility, VaR ignores the tail beyond its quantile — so they are always read together, and never without the drawdown that shows how much risk earned the return.
Maximum Drawdown
Drawdown metricMaximum drawdown is the largest peak-to-trough percentage decline in account equity over a period, measuring the deepest loss an investor would have …
Average Drawdown
Drawdown metricAverage drawdown is the mean depth of an account's drawdowns, measuring the typical decline below the high-water mark rather than the single deepest …
Recovery Factor
Drawdown metricRecovery factor is a strategy's net profit divided by its maximum drawdown, expressing how many times the worst peak-to-trough loss the strategy earn…
Risk of Ruin
Survival metricRisk of ruin is the estimated probability that a sequence of losses drives trading capital below a defined survival threshold before any edge can com…
Sharpe Ratio
Risk-adjusted returnThe Sharpe ratio is a risk-adjusted return measure equal to a strategy's return in excess of the risk-free rate divided by the standard deviation of …
Sortino Ratio
Risk-adjusted returnThe Sortino ratio is a risk-adjusted return measure equal to a strategy's excess return divided by its downside deviation, counting only harmful down…
Calmar Ratio
Risk-adjusted returnThe Calmar ratio is a risk-adjusted return measure equal to a strategy's annualised return (CAGR) divided by the absolute value of its maximum drawdo…
Ulcer Index
Drawdown metricThe Ulcer Index is a measure of downside risk equal to the square root of the mean of squared percentage drawdowns, capturing both the depth and the …
Portfolio Volatility
Portfolio metricPortfolio volatility is the standard deviation of a portfolio's returns, and unlike the volatility of a single asset it depends not only on each posi…
Beta
Risk metricBeta measures the sensitivity of an asset's returns to the market's returns, equal to the covariance of the asset with the market divided by the mark…
Correlation
Portfolio metricCorrelation is a standardised measure of how strongly two return series move together, defined as their covariance divided by the product of their st…
Value at Risk (VaR)
Tail metricValue at Risk (VaR) is the loss that a portfolio is not expected to exceed over a given horizon at a given confidence level, so a one-day 95 percent …
Conditional VaR (Expected Shortfall)
Tail metricConditional Value at Risk (CVaR), also called Expected Shortfall, is the average loss suffered on the occasions when the loss exceeds the Value at Ri…
Maximum Adverse Excursion
Trade metricMaximum Adverse Excursion (MAE) is the largest unrealised loss a trade reaches at any point between entry and exit, measuring how far the position mo…
Maximum Favorable Excursion
Trade metricMaximum Favorable Excursion (MFE) is the largest unrealised profit a trade reaches at any point between entry and exit, measuring how much profit was…