What is a Profit Correlation Chart?

This chart helps evaluate the stability of trading activities of the account, based on profit correlation over trading weeks/months.

The closer the profit growth levels are to the average line, the more stable the trading activity is, with consistent profit growth. Conversely, a trading activity is unstable when profit growth levels are further away from the average line.

In addition to the average line, the R2 coefficient also indicates the stability of trading. The R2 coefficient, also known as the Coefficient of Determination, ranges from 0 to 1. The closer the value is to 1, the more stable the trading system; the closer it is to 0, the less stable.

Coefficient of determination (R2 or R square)

The data points are always scattered and tend to form a linear shape rather than a perfect line. Therefore, hardly any line can pass through all the data points, there is always a deviation between estimated values and actual values. We will need to calculate the extent of this deviation as well as the appropriateness of the linear regression model with the dataset. A commonly used measure of model fit for linear regression is the coefficient of determination R2 (R square). When most of the data points cluster closely around the regression line, the R2 value will be high; conversely, if the data points are widely scattered away from the regression line, the R2 value will be low.

Characteristics of the R2

• R2 must fall between 0 and 1.
• The closer the value is to 1, the better the model, meaning that the majority of the variance in the dependent variable is explained by the independent variables. The closer the value is to 0, the worse the model, indicating that the independent variables do not explain much of the variance in the dependent variable.

R2 in profit correlation charts

In profit correlation charts, R2 explains the variation of profit over time. As R2 approaches 1, the variation becomes low, indicating a stable trading activities of the account. Conversely, as R2 approaches 0, the profit variation becomes high, indicating an unstable trading activities.

In the figure above, the data points representing daily profits are clustered closely around the regression line, and R2 = 0.9817 indicates a stable trading activities of the account. 

How to Use a Profit Correlation Chart

Using a Profit Correlation Chart is straightforward. Simply select the Week or Month timeframe on the Profit Statistics chart, and the system will draw the profit correlation chart based on the chosen timeframe.

The closer the profit points are to the average line and the closer the R2 value is to 1, the more stable and evenly growing the system is.