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Great article on expectancy and our inherent need to be correct
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Great article on expectancy and our inherent need to be correct

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Fortitudo et Honor
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Great article on expectancy and our inherent need to be correct

Trading Expectancy and Being Right

I've found that many people (especially non-traders) have difficulty understanding the concept of expectancy.

The notion that you can win less than 50% of the time and make money isn't readily apparent until you explain to them the concept of "win big, lose little."

The article does a great job of explaining why many traders are naturally "steered" toward systems that feature higher win rates (albeit lower expectancy).

We have a natural tendency to give up (fear/doubt) on strategies and approaches that feature "intolerable" losing streaks. A high expectancy system that features a winning percentage of say 35% may indeed result in significant losing streaks that make us question the validity of our approach.

Similarly, we find comfort in strategies and systems that are "right" more of the time, because we feel it validates our theories and approach better.

The key to understanding profitability vs. correctness is being able to adequately handicap your systems "expectancy." Van Tharp's expectancy is one particular technique, there are others.

Simply observing the net profit/trade performance is another, simple way.

"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
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  #3 (permalink)
Elite Member
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great article. I agree. If anyone hasn't taken van's profile test, it's not a bad $100 investment.

thank you rm99.

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Elite Member
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Good article. I am probably an extreme example of low win rate but high expectancy.

It is pretty difficult to trade this way as the article mentioned because I have had losing streaks that last for 6 months, but so far I have been right at least once per year which provides a good income. I've only been doing this for 3 years, though.

I've often wondered why so many traders are focused on consistency in the middle of the greatest financial calamity of our lifetimes. It seems to me that now is the time to try to hunt for the big gain. Especially if you are a relatively new trader like myself, I think it is much easier to try to catch a couple of big moves rather than to be right every day.

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Consistenty vs Net Profit

I think one of the reasons people hunt for strategies that have a high percentage of profitable trades is that this confirms to them that their strategy is profitable. The error that a strategy with a high % of profitable trades will be a net loser seems less likely than the error that a strategy with a low % of profitable trades will be a net winner.

In other words - no one knows whether a strategy will be successful in the future. People are more willing to believe that a strategy that has a high % of winners (but perhaps small $$ winners) will be profitable over the long run versus a strategy that shows a relatively longer string of losses (perhaps smaller $$ losses) but ends up catching a few big winners.

Perhaps this is blindingly obvious, but that doesn't mean it's not true, either.

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Agreed. My point is that the opportunity of this global meltdown only comes around once. The one thing I am most certain about is that there are rough waters ahead. Not sure if small winners are the best way to play it.

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