Question 1

What is variance in trading?

Accepted Answer

Variance is how much results scatter around their long-run average from one stretch to the next. Even a strategy with a real edge will have winning runs and losing runs purely from the order trades happen to fall in. Variance is the noise that sits on top of the signal.

Question 2

How do you tell luck from skill?

Accepted Answer

You cannot tell from a single run. Over a small number of trades, luck dominates and a good streak can look exactly like skill. Only a large sample, read for expectancy and the worst losing stretch, starts to reveal whether a repeatable edge is really there.

Question 3

Why does a profitable backtest still not prove skill?

Accepted Answer

Because one backtest is one path out of many that could have happened. Reorder the same wins and losses and the equity curve changes shape. A single profitable line can be a lucky ordering of an edge that is weak or even absent.