Probability Distributions

Tutorial: Using Tradewell to Assess Strategy Risk

This 2-minute video teaches you how to use the probability distributions to get a better handle on the risk-reward tradeoff of your trading strategy.

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Probability Distribution Insight Definitions

Kurtosis

The height and thickness of the peak of a frequency-distribution curve. High values are associated with fat tails, which imply occasional extreme returns.

Skewness

The extent to which the distribution of returns for your backtested strategy varies from a normal distribution. Positive skewness implies that extreme returns with values above the mean are likely to occur more frequently than extreme returns with values below the mean.

Mean Return

The average forward of a given time interval for all of the signals triggered by your trading strategy within an observed lookback period.

T-Test

A statistic used to determine if there is a significant difference between the mean forward return of your trading strategy and the mean forward return of all data data points for an asset within a single lookback period.