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Expectancy/Probability for zwentz
Started:November 8th, 2009 (12:59 AM) by steve2222 Views / Replies:1,161 / 0
Last Reply:November 8th, 2009 (12:59 AM) Attachments:0

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Expectancy/Probability for zwentz

Old November 8th, 2009, 12:59 AM   #1 (permalink)
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Expectancy/Probability for zwentz

zwentz, this may help your chat questions.

I have saved some articles/postings on this topic from various sources.

This one I find easier to apply/reconcile as it is in $.

Note: the obvious .... if you don't have a positive expectancy, no amount of money management will save you

"Expectancy is your profit percentage per win multiplied by your win rate minus your loss percentage per loss multiplied by your loss rate. I will use an example of Expectancy from Dr. Van K. Tharpís Book: Trade your way to Financial Freedom:
Expectancy = (Probability of Win * Average Win) - (Probability of Loss * Average Loss) Expectancy = (PW*AW) less (PL*AL)
PW is the probability of winning and PL is the probability of losing.
AW is the average gain (win) and AL is the average loss
So letís do an example using another basic approach (assume $12,500 per position, a $100,000 portfolio using 1% equity risk):
If my trades are successful 40% of the time and I realize an average profit of 20% but I lose an average of 5%, my expectancy is $625 per trade.
(0.4 * $2,500) - (0.6 * $625) = $1,000-$375 = $625
I lose 60% of the time yet I show a profit of $625 per trade. If I have a system that produces 65 trades per year, I would realize an annual gain of $40,625 (hypothetical scenario). A 40% gain on the original $100,000 (minus all commissions, fees, taxes and compounding).
Letís look at the calculation one more time using only percentages:
PW: 40%
AW: 20%
PL: 60%
AL: 5%
(40% * 20%) - (60% * 5%) = 5.00%
What this tells me is that I have a positive expectancy of 5% or $625 per trade from the original $12,500. It doesnít mean that I will make $625 on every single trade but my system will average a profit of $625 per trade over the course of a year with a combination of winners and losers. I can always make more trades or fewer trades in a year so my total profit will be adjusted accordingly."

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