Why high expectancy trading is so important

fibonelli

fibonelli

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Expectancy and not win rate is the key to trading success. :medieval:

Expectancy = (Avg win * Win rate) minus (Avg Loss * Loss rate)

Therefore, the emphasis is on maximising winners and minimising losses through effective position sizing and risk management.

Assumption: You do need a trading edge.

Discuss!
 
Last edited:
Definitely. It seems very unfashionable though, with a preference instead for maximizing win rates with as tight a stop as possible.

Optimal position sizing can improve returns far more dramatically than the ever-diminishing benefits from attempting to improve the edge.

You don't need that significant an edge either (card counting for example).
 
Joey25 said:
with a preference instead for maximizing win rates with as tight a stop as possible.
Click to expand...

What gives you that impression Joey? The mere mention of the phrase "tight stops" around here would cause an almost uncontrollable riot. Now you say there is a preference? Please explain. If you ask me the preference around here is for pretty coloured lines and 'systems'.
 
new_trader said:
What gives you that impression Joey? The mere mention of the phrase "tight stops" around here would cause an almost uncontrollable riot. Now you say there is a preference? Please explain. If you ask me the preference around here is for pretty coloured lines and 'systems'.
Click to expand...

I think because that is my weakness, I'm tending to focus on people who are trading successfully with tight stops.

In all seriousness, if I could do it without the technological and psychological issues which make it difficult for me, I would.

Wide stops, in my opinion, don't necessarily affect the expectancy ratio, but they undoubtedly restrict your ability to compound.
 
just a quick fact: most (not all, most) profitable trading systems used by funds average a 40-45%win. Do not ask us why, it's just something we noticed!

thx,Alex
 
alex i heard it was 81 %
+
average pips per trade >=20

everthing above is doomed
 
I love hearing the word "Expectancy", game changer for me.

Really simple...
Win ratio's, risk reward, tight stops, doesn't matter what you do, is your method profitable?
 
jpadventure said:
I love hearing the word "Expectancy", game changer for me.

Really simple...
Win ratio's, risk reward, tight stops, doesn't matter what you do, is your method profitable?
Click to expand...

+1

Truly silly buzzword. The bottom line is: are you making money?
 
Formula of expectancy:

image6.png


Expectancy is made up of accuracy and payoff. Improving the accuracy and the average win-to-average loss payoff are important tools to reduce our risk of ruin.

If your probability of winning is 35%, your average winning trade profits $10, and your average losing trade loses -$3, this trading system has a positive expectancy because over the long-term, it should yield an average profit of $1.55 per trade.

In contrast, consider a trading system that wins 90% of the time gaining $1 on average but loses $20 on average on the 10% of losing trades, this trading system is worthless despite its 90% success rate because it has a negative expectancy (-$1.10).
 
lcchong76 said:
Formula of expectancy:

image6.png


Expectancy is made up of accuracy and payoff. Improving the accuracy and the average win-to-average loss payoff are important tools to reduce our risk of ruin.
Click to expand...

As i said before this term is just a buzzword IMO. It has been shown in this blog to be mathematically equivalent to the simpler statement that the net profit is greater than zero.

If at the end of a given period you have made money, by definition the expectancy is greater than zero for the period. So what? What was the drawdown? The Sharpe ratio? The rate of return? Expectancy tells nothing really other than the fact that money was made. No serious trader should rely in a simplistic and naive formula like that.
 
intradaybill said:
As i said before this term is just a buzzword IMO. It has been shown in this blog to be mathematically equivalent to the simpler statement that the net profit is greater than zero.

If at the end of a given period you have made money, by definition the expectancy is greater than zero for the period. So what? What was the drawdown? The Sharpe ratio? The rate of return? Expectancy tells nothing really other than the fact that money was made. No serious trader should rely in a simplistic and naive formula like that.
Click to expand...

This is also wrong. All of it. Sorry.

Edit: Actually no, I missed your 'for the period'. But your formula is wrong in this context. Also the idea that you should use expectancy for a discrete period is wrong in this context.
 
Expectancy is the realization that if you follow a definite plan which has been tested and is profitable, then you will become a consistently profitable trader. Anything less, is your mental problems getting in the way.
 
​
jpadventure said:
Expectancy is the realization that if you follow a definite plan which has been tested and is profitable, then you will become a consistently profitable trader. Anything less, is your mental problems getting in the way.
Click to expand...

:LOL:

you have to laugh
 
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