Who this is for — Traders who want to quantify result volatility before increasing exposure. A useful tool to compare strategies with similar average return but different risk.
In plain terms — Variance measures how much results "swing" around the mean. The higher it is, the more unstable the capital path.
Prerequisites — Complete silver-path first (min.: setup, expectancy, win-rate, sample-size). Foundation: bronze-path.
Practical reading of variance
Variance rises when trades are far from average outcome. It indicates not only loss risk, but unpredictability of the path. Combine it with positive-expectancy: average return without dispersion control can be unmanageable. In portfolio management, variance enters weight and allocation limit calculations.
Example — Strategies A and B both average +0.4R per trade. A oscillates between −1R and +1R, B between −4R and +5R. The second has much higher variance and requires lower size.
From variance to operational decisions
Variance alone is not enough: translate it into the more intuitive standard-deviation. If variance rises suddenly, it may signal regime change or execution deterioration. A persistent increase suggests reducing risk until behaviour is coherent again. On the Gold path it is also used to estimate aggregate-risk across systems.
Card
- What it is: quadratic measure of return dispersion.
- How to use it: compare stability across strategies and periods.
- Typical mistake: ignoring that it changes with regime over time.
Gold path — Module: Edge and statistical advantage. Part of gold-path.