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The question of an edge

  #31 (permalink)

Legendary Market Wizard
Cleveland Ohio/United States
 
Trading Experience: Advanced
Platform: Tradestation
Broker/Data: Tradestation, DeCarley, others
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Grantx View Post
@kevinkdog

I see now the importance of expectancy however as a day trader I just cannot accept that expectancy is at the top of my hierarchy of needs.

Here's my point: regardless of your style of trading, if you don't have a way(s) of entry and exit that over the long haul produces profit, nothing else matters - you will lose.

Too many people think journaling, or money management, or psychology, etc. is the key to making them profitable. Not true!

Think of it like roulette. Many people invent money management schemes, record past data, journal their thoughts on how to win, etc. And you know what? They still all lose in the long run. Why? Because they are playing a negative expectancy game - the odds are not in their favor.

That is why I put expectancy at the top of the list. If your trading method - whatever it is - does not have a long term positive expectancy, then all those other things do not matter. Having all those other things may help you lose money more slowly, but you will still lose money in the long run.

The ironic (and confusing) part of this is that even if you do have a long term positive expectancy method, bad/lack of money management, psychology, etc can still make you a loser. It is like this:

Negative expectancy trading method, Poor psychology, money management, discipline : You LOSE
Negative expectancy trading method, Excellent psychology, money management, discipline : You LOSE
Positive expectancy trading method, Poor psychology, money management, discipline : You LOSE
Positive expectancy trading method, Excellent psychology, money management, discipline : You WIN


I hope this clarifies it.


By the way, the expectancy description was good, but way too complicated.

Simple:

Expectancy = Average Trade


(Van Tharp also has an expectancy I call "Tharp Expectancy" = avg trade/avg losing trade)

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