Are you related to Perfect Profit?

Okay, by now you’ve probably discovered you are not the perfect trader. You are but a fraction (if that) of the money-banking machine. He is no longer your friend, this creature known as Perfect Profit is your competition. Now that you’ve formally met your competition, what is the family resemblance between your equity curve and Perfect Profit’s equity curve? Are you brother and sister, second cousins or do you need to go all the way back to Tiktaalik roseae to find a common gene? On the practical level, what is the correlation between your equity curve and Perfect Profit’s equity curve?

The formula for correlation is actually quite simple. I could derive it for you, but this is not high-school statistics, so I’ll just show it below:

It’s the best depiction I found on the Internet. Look at the bottom part of the equation and just substitute that gobblygook with standard deviation of X and standard deviation of Y and you have a much cleaner looking equation.

Oh, yawn. Where’s the stock tip? I need to know what stock I need to buy tomorrow so please, stop with the algebra already.

These highly trending equity markets will not sustain themselves indefinitely, and you need to start thinking about the range-bound scenario that may happen in the next couple years. For that you need a system. And I offer you a metric now to compare your system’s equity curve with Perfect Profit’s equity curve.

What does a high correlation indicate? Well, that you are extracting profits (albeit at a slower pace than Perfect) in-line with what your competition is doing.

What does low correlation indicate? Your system is not achieving its destined returns based on what the market offers.

If your system has low correlation with your ultimate competitor, Perfect Profit, then you probably are just lucky right now. There is nothing wrong with being lucky and being rich, but consider your fortune as a potential predicament.

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