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Van Tharp's Max Expectancy


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Van Tharp's Max Expectancy

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  #1 (permalink)
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I just uploaded another NinjaTrader optimizer type max expectancy. The credit goes to Elliott Wave. Anagoge also helped.

It is here:


If you are not familiar with expectancy, here are few articles to whet your appetite:
Market Talk with Piranha: What is Expectancy?

Advance Your Finance: The Art of Expectancy

Trading 101: Expectancy - Trader Mike

Amazon.com: Trade Your Way to Financial Freedom (0639785305590): Van K. Tharp: Books

To quote a few key pieces of information:


Quoting 
So what is expectancy?

Expectancy is your profit percentage per win multiplied by your win rate minus your loss percentage per loss multiplied by your loss rate.

Expectancy tells you what you can expect to make (win or lose) for every dollar risked. Casinos make money because the expectancy of every one of their games is in their favor. Play long enough and you are expected to lose and they are expected to win because the “odds” are in their favor.


Quoting 
Example, you could have 99 losing trades, each costing you a dollar. Thus, you would be down $99. However, if you had one winning trade of $500, then you would have a net payoff of $401 ($500 less $99)—despite the fact that only one of your trades was a winner and 99% of your trades were losers.

It is my hope you will find this info valuable and can use it to further explore some better trade management, risk management and overall money management systems.

"Let us be thankful for the fools. But for them the rest of us could not succeed." - Mark Twain

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  #2 (permalink)
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Here is a spreadsheet that can be used to calculate expectancy if you like to use Excel instead of Ninja.

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Register to download File Type: xls expectancy.xls (21.0 KB, 518 views)
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  #3 (permalink)
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I mentioned this in the NT forum thread concerning this, but it might be worth repeating here. In my opinion, expectancy is a useful bit of data to know about your trading system and evaluate risk/reward, but it is not a very good way to optimize a trading system. The reason is that the expectancy number ignores the number of trades. Expectancy will be higher for a system that averages $100 per trade but only trades once a week compared to a system that earns $50 per trade and trades every hour. For this reason, I'd definitely recommend SQN over expectancy for optimizing. An exception to this might be if you are optimizing a strategy that you only want to trade occasionally, and you are willing to invest your money in alternative strategies when this one isn't issuing signals. In that case, having a system with limited signals (but high expectancy) may not be a problem.

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Anagoge View Post
I mentioned this in the NT forum thread concerning this, but it might be worth repeating here. In my opinion, expectancy is a useful bit of data to know about your trading system and evaluate risk/reward, but it is not a very good way to optimize a trading system. The reason is that the expectancy number ignores the number of trades. Expectancy will be higher for a system that averages $100 per trade but only trades once a week compared to a system that earns $50 per trade and trades every hour. For this reason, I'd definitely recommend SQN over expectancy for optimizing. An exception to this might be if you are optimizing a strategy that you only want to trade occasionally, and you are willing to invest your money in alternative strategies when this one isn't issuing signals. In that case, having a system with limited signals (but high expectancy) may not be a problem.

i wrote a custom formula that weighs the net profit, expectancy, and number of trades per day. it throws out (return double.NegativeInfinity) values that also have fewer than a certain number of trades per set/job.

i am really finding it quite useful. i like SQN as well but like expectancy better with my custom weighted formula.

still what you've said is absolutely true.

"Let us be thankful for the fools. But for them the rest of us could not succeed." - Mark Twain

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  #5 (permalink)
ma
 
 
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I think that I like 'expectancy score' better because it also takes into account time. I found it at URC Trading - Expectancy Score vs Sharpe Ratio and is expectancy * opportunity where expectancy = (aw*pw+al*pl)/|al| and opportunity = # trades * 365/studydays. A good explanation is provided at the link I gave.

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rickt

Since Trade Your Way to Financial Freedom, Tharp has expanded on the concept of system quality by creating a variation of the Student's T-Test called System Quality Number (SQN).
SQN = SquareRoot(N) * (Avg Trade Result/Standard Deviation(Avg Trade Result))
Where:
N = # of Trades (Truncated at 100 -- this is Tharp's variation)
Avg Trade = another way to determine expectancy
This formula takes frequency (N), reliability (Standard Deviation of avg trade), and expectancy (Avg Trade) and produces an objective score of any system.

Tharp goes into more detail in his book, The Definitive Guide to Position Sizing.

I find SQN to be a much better measure of a system's overall performance than expectancy alone.

-Samurai

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ma
 
 
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I understand about SQN, but I think it is lacking because it does not take time into account. An investment that returns 10% in 2 days is better than an investment that returns 10% in more than 2 days.

Expectancy score is NOT the same as expectancy. It uses expectancy and then multiplies by opportunity, which is where time is factored in.

To my way of thinking, time is a critical element in any trading or investing strategy.

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rickt View Post
I think that I like 'expectancy score' better because it also takes into account time. I found it at URC Trading - Expectancy Score vs Sharpe Ratio and is expectancy * opportunity where expectancy = (aw*pw+al*pl)/|al| and opportunity = # trades * 365/studydays. A good explanation is provided at the link I gave.


rickt

I agree with you - after reading the article at the link you posted.

Do you have code for the "expectancy score" that you can share?

Verge

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ma
 
 
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Sorry - the only 'code' that I have it in is EXCEL. Maybe one of these days I will learn what it is you guys here use.

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rickt View Post
Sorry - the only 'code' that I have it in is EXCEL. Maybe one of these days I will learn what it is you guys here use.


I had a look at the original thread started by Ellio Wave here :

Optimizer Type: Max. Expectancy - NinjaTrader Support Forum

He mentions early in the thread that he only got the "expectancy score" version working.

I now had a look in the Expectancy optimizer type. The following formula is used:
expectancyTemp = (aveWin * percentWin + aveLose * percentLose)/ Math.Abs(aveLose)

Note the devision by the absolute value of the losing trades - which may not be what everyone thinks it should be.



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