Chapter 5. Evaluating Performance of High-Frequency Strategies

The field of strategy performance measurement is quite diverse. Many different metrics have been developed over time to illuminate a strategy's performance. This chapter summarizes the most popular approaches for performance measurement and discusses strategy capacity and the length of time required to evaluate a strategy.


Trading strategies may come in all shapes and sizes, but they share one characteristic that makes comparison across different strategies feasible—return.

The return itself, however, can be measured across a wide array of frequencies: hourly, daily, monthly, quarterly, and annually, among others. Care should be exercised to ensure that all returns used for inter-strategy comparisons are generated at the same frequency.

Returns of individual strategies can be compared using a variety of performance measures. Average annual return is one such metric. An average return value is a simplistic summary of the location of the mean of the return distribution. Higher average returns may be potentially more desirable than lower returns; however, the average return itself says nothing about dispersion of the distribution of returns around its mean, a measure that can be critical for risk-averse investors.

Volatility of returns measures the dispersion of returns around the average return; it is most often computed as the standard deviation of returns. Volatility, or standard deviation, is ...

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