Equity R-Squared
Trading Intelligence
9 min read
equityR2
Measure how closely your equity curve follows a straight line of growth — the simplest indicator of strategy consistency.
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9 min read
Measure how closely your equity curve follows a straight line of growth — the simplest indicator of strategy consistency.
Equity R-Squared (R²) measures how closely your equity curve follows a straight line. It answers a deceptively simple question: how consistent is your strategy's growth?
R² is the coefficient of determination from a linear regression of your cumulative equity curve against trade number (or time).
Calculation:
Where:
R² ranges from 0 to 1:
| R² Value | Quality | Description |
|---|---|---|
| 0.95 - 1.00 | Excellent | Near-linear growth, very consistent |
| 0.85 - 0.95 | Good | Steady growth with manageable variation |
| 0.70 - 0.85 | Moderate | Noticeable drawdowns but overall upward trend |
| 0.50 - 0.70 | Weak | Significant equity volatility, questionable consistency |
| <0.50 | Poor | Equity curve is essentially random noise around a trend |
Consider two strategies:
Strategy A made more money, but its equity curve was chaotic — periods of huge gains followed by deep drawdowns. Strategy B's equity grew steadily. Which would you trust with real capital?
Strategy B is almost always the better choice. A high-R² strategy is psychologically easier to trade, more predictable for risk management, and more likely to be genuinely robust rather than lucky.
If a strategy has excellent returns in a backtest but low R², the returns likely came from a few outsized trades. Remove those trades and the strategy may be unprofitable. A high R² means the edge is distributed across many trades, not concentrated in outliers.
With high R², you can size more aggressively because the equity path is predictable. With low R², even optimal Kelly sizing becomes dangerous because the equity volatility makes drawdowns deeper and less predictable than the formula assumes.
R² allows fair comparison between strategies with different return profiles. A strategy with moderate returns but R² = 0.90 may be preferable to one with high returns and R² = 0.60, especially when you factor in the psychological cost of drawdowns.
R² and Sharpe Ratio are related but not identical:
A strategy can have a high Sharpe but moderate R² if returns are good on average but the equity curve has a curved (exponential) shape. Conversely, a strategy with a perfectly linear equity curve (R² = 1.0) will have a high Sharpe.
In practice, high R² almost always implies a respectable Sharpe, but the reverse is not always true.
For a quick approximation using your trade log:
Most spreadsheet tools and programming languages have built-in functions for this.
If your equity R² is low, investigate:
Experiment with different win rates and payoff ratios to see how they affect equity curve smoothness. A high R² strategy produces a near-linear equity curve — consistent and predictable.
Equity R² is the simplest and most intuitive measure of strategy quality. It answers the question every trader should ask: "Is my growth consistent, or am I just getting lucky?" A strategy with R² above 0.85 and a positive slope is one you can trade with confidence — not because it guarantees profits, but because its behavior is predictable enough to manage.