Reducing Variance To Improve Trading Profitability

In this week’s review, we will understand how to improve an already profitable system and what to be aware. 

What really stood out in this journal is the impact of variance and being able to find specific components of a trader’s performance that are responsible for a significant amount of variance can be worth a lot. 

Finding such specific areas in one’s trading is only possible through journaling when your trading journal allows you to break down individual components of your trading strategy. 

What is variance?

We briefly want to address what variance means and how it manifests in trading performance. 

Basically, variance means the fluctuations in your account development. If you see that your equity graph shows wide swings, deep drawdowns, followed by steep climbs, then we usually speak of a trading performance with a lot of variances. 

Variance can be caused by a low winrate, coupled with a small reward:risk ratio, disproportionately large losses, large position sizing and high risk can also attribute to variance. 

In Edgewonk, you can simulate potential future account growth based on your current performance. The Simulator in Edgewonk shows multiple potential outcomes and the further apart the individual lines are, the more variance a system has. When the different lines are close together, then the system has less variance.

Below we compare a low and high variance performance. You can clearly see how the left screenshot shows a simulation where the lines are far apart, compared to the low variance simulation on the right.

The problems and dangers of variance

Even an already profitable systems can have a lot of variances and reducing variance should be a priority for traders when looking for improvements.

Losing streaks or long periods of sideways account development can be frustrating and it can easily lead to bad and sloppy trading behavior. Even though a trader was able to overcome previous periods of mixed trading results, it does not mean that it will always be the case. This is why trying to look for ways to minimize variance is so important. 

Edgewonk finds variance drivers

As this week’s review showed, there are different ways how Edgewonk can help you identify areas of your trading that cause variance. 

Here are a few tips how to use Edgewonk:

• Compare trades with a small and large RRR
• Find out of greater risk and higher position size causes more variance
• Do you have individual setups that are underperforming?
• Utilize a “Grade” custom statistic and find out if different qualities of trades perform differently
• Analyze negative trade entry, exit, and management comments and see which bad behavior is contributing most to your losses
• You can either use the simulator to check for the potential future variance or also look for large losses in the “Sum Gains” column in your trade analytics.

Do you want us to review your journal next time? Take a look at our free review service