Skill Attribution: SQN & Edge Ratio Explained
Every trader wonders: "Am I actually good at this, or have I just been lucky?" Skill attribution metrics answer that question with statistical rigour. Two of the most powerful tools in this space are the System Quality Number (SQN) and the Edge Ratio.
What Is Skill Attribution?
Skill attribution separates genuine trading ability from market noise. A trader might post strong returns for three months purely from favourable conditions. Skill attribution asks whether those returns are statistically significant enough to indicate a repeatable edge.
Practice—Process calculates skill attribution across your entire trade history, then breaks it down by strategy, instrument, and time period so you can see exactly where your edge lives—and where it does not.
System Quality Number (SQN)
Developed by Van K. Tharp, SQN measures how consistent your edge is relative to the variability of your results. The formula is straightforward:
SQN = (Mean R-Multiple / Standard Deviation of R-Multiples) x Square Root of Number of Trades
Interpreting SQN Values
| SQN Range | Rating | Meaning | |-----------|--------|---------| | Below 1.6 | Poor | Difficult to trade profitably | | 1.6 – 1.9 | Below average | Edge exists but inconsistent | | 2.0 – 2.4 | Average | Workable system with discipline | | 2.5 – 2.9 | Good | Solid, consistent edge | | 3.0 – 5.0 | Excellent | Strong professional-grade system | | 5.0 – 6.9 | Superb | Exceptional performance | | 7.0+ | Holy Grail | Extremely rare and robust |
What SQN Tells You
A high SQN does not simply mean large profits—it means your returns are consistent relative to their variability. A trader making 0.3R per trade with a tight standard deviation of 0.8R scores higher than someone averaging 1.2R with a standard deviation of 4R.
This distinction matters enormously for position sizing and drawdown management. Consistent returns allow for more aggressive compounding; erratic returns demand conservative sizing regardless of average outcome.
Edge Ratio
Edge Ratio examines how your entries perform relative to random entries. It compares the Maximum Favourable Excursion (MFE) against the Maximum Adverse Excursion (MAE) in the early stages of a trade.
Edge Ratio = Average MFE at Time T / Average MAE at Time T
Reading the Edge Ratio Chart
In Practice—Process, the Edge Ratio chart plots this ratio over time from entry. A value above 1.0 means your entries move in your favour more than against you—evidence of genuine entry skill.
| Edge Ratio | Interpretation | |------------|---------------| | Below 0.8 | Entries worse than random | | 0.8 – 1.0 | No meaningful edge at entry | | 1.0 – 1.3 | Slight edge, worth refining | | 1.3 – 1.8 | Good entry timing | | Above 1.8 | Excellent entry precision |
Why Edge Ratio Matters
Many traders have a genuine exit strategy but poor entries. Their win rate might look acceptable, yet they are leaving significant capital at risk during the initial phase of each trade. Edge Ratio isolates entry quality from overall trade management, letting you optimise each component independently.
Using Both Metrics Together
SQN and Edge Ratio answer different questions:
A trader with a high SQN but low Edge Ratio has strong trade management compensating for mediocre entries. A trader with a high Edge Ratio but low SQN enters well but lets winners become losers or holds losers too long.
Practice—Process Implementation
Navigate to Analytics then Skill Attribution to see:
The rolling SQN chart is particularly useful. Watch for periods where your SQN drops below 2.0—these often correlate with changes in market conditions or lapses in discipline.
Practical Application
Portfolio Allocation
If you trade multiple strategies, allocate capital proportionally to SQN. A strategy with SQN 3.5 deserves more capital than one at 1.8, assuming similar liquidity requirements.
Entry Refinement
If your Edge Ratio is below 1.0, your entries need work. Review MAE patterns to identify whether you are entering too early (before confirmation) or too late (chasing moves already extended).
System Development
When testing a new approach, track SQN from the start. Once you have 30 or more trades, the metric becomes statistically meaningful. An SQN above 2.0 at that stage suggests the approach warrants continued development.
Build your track record with data, not hope. Skill attribution gives you the statistical foundation to know whether your edge is real.