Confidence bands show you the expected range where your equity curve should fall based on your strategy's historical trade variance. They help you understand if your current performance is within normal expectations or if something has changed.
How Confidence Bands Work
VivaTrades uses bootstrap resampling to generate confidence bands:
- Takes your historical trades and randomly resamples them 500 times
- For each resample, builds a simulated equity curve
- Calculates the 5th percentile (lower band), 50th percentile (median), and 95th percentile (upper band)
The result: a realistic range showing where 90% of possible outcomes would fall given your strategy's trade distribution.
The Three Lines
| Line | Meaning | What It Tells You |
|---|---|---|
| Lower Band (5th) | Bottom 5% of outcomes | Only 5% of simulations would be worse than this |
| Median (50th) | Middle outcome | The expected equity curve |
| Upper Band (95th) | Top 5% of outcomes | Only 5% of simulations would be better than this |
When to Worry
Your strategy might be broken if:
- Below lower band for 2+ months: This is not normal variance. Either market conditions changed or the strategy is failing.
- Below lower band for 6+ months: Stop trading immediately. The strategy is not working as expected.
- Above upper band consistently: Might indicate overfitting to historical data. Future performance may revert to mean.
Understanding Band Width
The width of the confidence bands tells you about your strategy's consistency:
| Band Width | What It Means | Implication |
|---|---|---|
| Narrow (15%) | Low variance, consistent returns | Predictable outcomes, can size positions larger |
| Medium (15-30%) | Moderate variance | Some fluctuation expected, normal for most strategies |
| Wide (30%+) | High variance, unpredictable | Results heavily depend on luck and timing, size conservatively |
Real-World Example
Trader A has a strategy with narrow bands (12% width):
- Expected return: 25% annually
- Lower band: 22% | Upper band: 28%
- If equity drops to 15% return after 6 months: Red flag, investigate immediately
Trader B has a strategy with wide bands (45% width):
- Expected return: 25% annually
- Lower band: 5% | Upper band: 50%
- If equity drops to 8% return: Still within expected range, might just be bad luck
Using Confidence Bands in Live Trading
- Set position size based on band width: Narrower bands = can trade larger positions
- Define exit rules: "If below lower band for X consecutive days, reduce position size by 50%"
- Avoid premature shutdowns: Brief drops into the lower band are normal and expected ~5% of the time
- Don't expect to stay in the median: Your equity will fluctuate between the bands
Limitations
- Assumes similar market conditions: Bands won't account for regime changes
- Requires sufficient trades: Need at least 50+ trades for reliable bands
- Not prediction: Bands show historical variance, not future guarantees
- Ignores sequence risk: The order of wins/losses matters for actual trading
In VivaTrades
Enable confidence bands by toggling the switch on your equity curve chart. VivaTrades calculates them automatically and provides analysis on band width, your current percentile position, and duration spent outside the expected range.