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Positive expectancy calculation
Started:September 21st, 2016 (11:37 PM) by grego Views / Replies:94 / 2
Last Reply:September 22nd, 2016 (05:00 AM) Attachments:0

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Positive expectancy calculation

Old September 21st, 2016, 11:37 PM   #1 (permalink)
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Positive expectancy calculation

Please forgive me for not visiting for some time to the forums. However I am looking for some help

Calculate viable risk/reward trade when win rate is known???

To be a profitable trader you don't necessarily need a high win rate, you just need your winners to be bigger than your losers. We've all heard that before right?
So we could have 4 out of ten trades winners and if they are twice as big as our losers, we still come out in front.

So I have a strategy with an above 70% win rate but the risk-reward can be as low as 1:2 (possibly worse by a bit)

So risk $1 to make 0.50 cents at times. This ratio varies from day to day it can be 1:1 or even 2:1 but as low as 1:2

The stop loss is at a predetermined level before entering the trade based on bar length ie: its at the other end of the bar plus a few pips. And i know my profit target in pips, also predetermined based on an ATR %.

For example. the ATR might be 10pips, which is my profit target. And the bar that I use to enter from is also 10 pips long, I add a few pips on to bar length and that's my stop level. So my risk/ reward would be just under 1:1

However the next day the ATR could have jumped to 12 yet the bar length for entry is 24, My stop is still the other end of that bar from the entry point. Make 12 pips and risking 24 (26 with stop added ) So my risk/reward isn't great. Maybe 0.45:1

I have already determined over an extended period of time (keeping records) that trading this has a better than 70% win rate, without taking into account risk/reward ratio. So just take the trade regardless of R:R

However being human with emotions which I am trying to get rid of thanks to listening to a lot to Mark Douglas, I want to be able to calculate how low a risk reward ratio is still viable for this strategy, can somebody suggest a formula?

I want to make this as mechanical as possible where I enter every trade down to the point where the risk/reward is not viable. So in other words 2:1 is great , even 1:1 and maybe 0.5:1. However I don't want to start entering trades that lose so big that they negate the win rate or edge.

I appreciate I am contradicting myself by saying I want to enter every trade and mechanically, yet still expect to calculate a cutoff point where I don't trade the strategy

I think basically it relates to still having a positive expectancy of profit over a given number of trades ?

I have checked some of the other threads, but find them a little confusing. Or maybe it's me that is confusing

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Old September 21st, 2016, 11:37 PM   #2 (permalink)
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Old September 22nd, 2016, 05:00 AM   #3 (permalink)
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Hi @grego

So, are you able to calculate expectancy for the above, or is the expectancy formula what you are after?

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