Expectancy
Posted: Thu Nov 04, 2010 8:01 pm
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.
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.