Categories
Tips

Calculate Your Expectancy

Expectancy is the formula you use to determine how reliable your system is. You should go back in time and measure all your trades that were winners versus losers, then determine how profitable your winning trades were versus how much your losing trades lost.

Take a look at your last 10 trades. If you haven’t made actual trades yet, go back on your chart to where your system would have indicated that you should enter and exit a trade. Determine if you would have made a profit or a loss. Write these results down. Total all your winning trades and divide the answer by the number of winning trades you made. Here is the formula:

\begin{aligned} &E= \left[1+ \left(\frac{W}{L}\right)\right] \times P-1\\ &\textbf{where:}\\ &\text{E}=\text{Expectancy}\\ &\text{W}=\text{Average Winning Trade}\\ &\text{L}=\text{Average Losing Trade}\\ &\text{P}=\text{Percentage Win Ratio} \end{aligned}​E=[1+(LW​)]×P−1where:E=ExpectancyW=Average Winning TradeL=Average Losing TradeP=Percentage Win Ratio​

Example:

If you made 10 trades, six of which were winning trades and four of which were losing trades, your percentage win ratio would be 6/10 or 60%. If your six trades made $2,400, then your average win would be $2,400/6 = $400.

If your losses were $1,200, then your average loss would be $1,200/4 = $300. Apply these results to the formula and you get E= [1+ (400/300)] x 0.6 – 1 = 0.40, or 40%. A positive 40% expectancy means your system will return you 40 cents per dollar over the long term, if you keep your risk equivalent to 1% of your account on every trade.

Leave a Reply

Your email address will not be published. Required fields are marked *