Risk management math you cannot skip

Annual return divided by max drawdown. Simple, drawdown-focused alternative to Sharpe. Higher = better risk-adjusted return.

Plot of account equity over time. Shape reveals strategy character (smooth uptrend, choppy, exponential, deteriorating).

Average profit/loss per trade, in R-multiples. The single number that determines if a strategy is statistically profitable.

Risk the same % of current equity on every trade. Default position sizing method for most retail strategies.

Position-sizing formula maximizing long-run geometric growth. f* = (W × R - L) / R, where W = win rate, L = loss rate, R = win/loss ratio.

Pre-committed maximum drawdown threshold — past which trading stops to preserve capital and re-assess strategy. The circuit breaker.

Simulate thousands of possible trade orderings to bound the distribution of outcomes. Reveals tail-risk scenarios a backtest doesn't show.

Trade outcome expressed as a multiple of initial risk (R). +2R = profit twice the initial risk; -1R = full stop. Universal trade-quality metric.

Probability that account equity falls below a critical threshold (often 50% drawdown or zero) given system stats and position sizing. The math of survival.

Ratio of planned profit target to planned risk. 1:3 = $1 risked for $3 of target. The single most-cited but most-misunderstood trade quality metric.

Like Sharpe but only penalizes DOWNSIDE volatility. (Return - risk-free) / downside deviation. Better for asymmetric return distributions.

Per-trade tracked metrics that reveal system character over time: R-multiple, win rate, payoff, hold time, setup type, time of day, instrument.

Drawdown-weighted volatility metric — measures pain by combining depth and duration of drawdowns. Lower is better.

Tradeoff between fraction of winning trades (win rate) and size of winners vs losers (payoff). High win-rate strategies usually have lower payoff; vice versa.