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What is performance attribution in trading portfolios?

Performance attribution dissects portfolio returns into components—alpha (skill), beta (market exposure), and residual effects (timing, execution, fees). In forex, attribution may separate returns by pairs, strategies, and factors (carry, momentum, value). Example: a portfolio earned +10% YTD, of which +6% came from USD carry trades, +3% from EUR trend-following, and -1% from execution costs. Attribution is critical for identifying which strategies truly add value versus luck. Institutions use it to adjust capital allocation, cut underperformers, and demonstrate value to investors. Retail traders benefit by journaling results not just by trades but by strategy buckets, identifying where real edges lie. Without attribution, traders may misallocate effort, chasing setups that appear profitable but lose once costs are accounted.