## Expectancy

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eudamonia
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### Expectancy

I meet with a group of local traders about once a month to discuss various things. We had several folks there at the last meeting who astounded me with their lack of knowledge. This is not to be boastful but I realize perhaps I know more about trading than I even realize. Either that or the "average trader" is dumber than I realize. Either way it was quite a realization.

That being said I'm going to post a few threads with things every trader "should" know and mostly regarding risk and understanding your edge:

1)Trading profitability is determined by two statistical factors. The first is your win/loss ratio which is how many winners you have versus how many losers as a percentage. If your win/loss ratio is 75% that means you win 3 out of 4 trades. Secondly, is the ratio of the size of your average winner/average loser. If you win \$10 when you win and lose \$3 when you lose this is different than if you win \$10 when you win and lose \$25 when you lose.
2) Trading expectancy is calculated with the following formula:
a. Expectancy = (Winning %* Average Winner)/(Losing % *Average Loser)
b. Therefore, a trader that wins 75% of the time and wins \$5 when they win and loses 25% of the time and loses \$10 when they lose would have an expectancy of 1.25. That means for every \$1 they risk they are rewarded \$0.25 in return.
c. A trader who wins 35% of the time and wins \$10 when they win and loses 65% of the time and loses \$3 when they lose would have an expectancy of 1.55.
d. Pretty amazing that the guy who only wins 35% of the time is actually more profitable than the guy who wins 75% of the time.
Eudaimonia (pron.: you-die-moan-e-a) (Greek: εὐδαιμονία) is a classical Greek word commonly translated as 'happiness'. The less subjective "human flourishing" is often preferred as a translation.

TheRumpledOne
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Expectancy = (Probability of Win * Average Win) - (Probability of Loss * Average Loss)

You cannot control the probabilities of wining or losing.

You cannot control your average win size.

The only part of the equation of the equation that you can control is your average loss size.