Trading is applied statistics. You do not need advanced probability theory, but you do need working familiarity with six concepts. This piece defines each one and explains why it matters.
1. Expectancy
Average result per trade, in R multiples. Positive expectancy is the entire prerequisite for professional trading. Compute it monthly.
2. Variance
How spread out results are around the expectancy. Two systems can share the same expectancy but very different variance. Lower variance means smoother equity curves and easier psychology.
3. Sample Size
Any conclusion from fewer than 30 trades is essentially noise. Meaningful judgment about a system requires 100–500 trades. Traders who abandon systems after 20 trades are quitting on noise, not signal.
4. Sharpe / Sortino Ratio
Sharpe = return divided by volatility. Sortino uses downside volatility only. Both measure how efficient the returns are — not just how large. A high-Sharpe system is more scalable and psychologically easier to run than a high-return-low-Sharpe system.
5. Maximum Drawdown
The largest peak-to-trough decline. Ratio of return to max drawdown (MAR ratio) is one of the most useful single measures of a strategy's quality.
6. Correlation
How similarly two instruments (or strategies) move. Correlated positions compound risk. Uncorrelated strategies compound edge.
Expectancy, variance, sample size, Sharpe, drawdown, correlation. Six numbers. Learn to compute and read them, and your decisions become qualitatively different.
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