Equity Decomposition: Understanding Your P&L Drivers
An equity curve going up is encouraging. But it tells you nothing about why it is going up—or what might cause it to stop. Equity decomposition breaks your P&L into its component parts so you can see exactly which drivers contribute to your bottom line.
What Is Equity Decomposition?
Traditional equity curves show a single line: your cumulative P&L over time. Equity decomposition separates that line into layers, each representing a different driver of performance. Think of it as an X-ray of your equity curve.
Practice—Process decomposes your P&L by:
The Waterfall Chart
The primary visualisation is a waterfall chart that shows how each component adds to or subtracts from your total P&L. Green bars represent positive contributions; red bars represent negative contributions. The cumulative result equals your total return.
This immediately highlights:
Strategy Decomposition
When you trade multiple strategies, it is critical to understand which ones earn their allocation. The strategy decomposition view shows:
Contribution by Strategy
A stacked area chart where each colour represents a strategy. If your "breakout" strategy accounts for 80% of profits but only 30% of trades, you should consider reallocating capital toward it.
Risk-Adjusted Contribution
Raw P&L can be misleading if one strategy uses more capital. The risk-adjusted view normalises each strategy's contribution by the capital deployed, showing return per unit of risk.
Correlation Between Strategies
Strategies that contribute during different market conditions provide genuine diversification. The decomposition highlights whether your strategies are complementary or redundant.
Instrument Decomposition
Breakdown by instrument reveals:
If an instrument has been a net negative across 50 or more trades, the data suggests removing it from your watchlist—regardless of how well you think you understand it.
Temporal Decomposition
Time-based decomposition reveals how profits distribute across:
Fee and Slippage Impact
Often overlooked, fees and slippage can be the difference between profitability and breakeven. The fee decomposition layer shows:
Using Decomposition for Decisions
Capital Allocation
If Strategy A contributes 60% of profits with 2% of drawdown while Strategy B contributes 15% of profits with 40% of drawdown, the allocation decision becomes clear. Let the decomposition guide where your capital works hardest.
Pruning Underperformers
The decomposition often reveals that removing your worst instrument or strategy would have improved overall returns. Test this hypothesis by filtering it out and observing the impact on your equity curve.
Identifying Regime Changes
When a previously strong strategy shifts from green to red in the decomposition, it signals a regime change. This is an early warning to reduce exposure before the drawdown deepens.
Navigate to Analytics then Equity Decomposition to see exactly what is driving your P&L—and what is holding it back.