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Trading Basics

Trade Expectancy

You have been using a strategy for a while now. Sa mga Trader’s Lounge members MAMA, TITA, FISHBALL, etc. na strategy gamit nila.

I think It’s time na eh try natin evaluate if you are winning or losing.  A trader can lose almost all their trades, but if their wins are much bigger than their losses they can still make a good income. On the flip side, there may be a trader that wins almost all the time, but because their losses are so much bigger than their gains they end losing money overall.

There are 3 main elements required to calculate the expectancy of a system in trading:

  1. The win rate (AKA win/loss ratio, or batting average): The percentage of winning trades
  2. The average gain
  3. The average loss

According to Vantage Point Trading, Many new traders only think about trading in terms of winning. They don’t like losing and so they are always trying to (or hoping to) win 8, 9 or 10 trades out of every 10 they take. While winning 8 or 9 trades out of 10 may be possible, it doesn’t mean that trader will be successful over time. There is nothing wrong with winning! Many traders do very well by winning 7 or 8 trades out of 10. The point is, odds alone don’t tell the whole story.

Ito ang formula: (Win % x Average Win Size) – (Loss % x Average Loss Size)

Let’s assume someone using a similar strategy only wins 20% of the time, but they make 10k pesos when they win and they lose 1k pesos when they lose.

The number is positive, which shows the strategy has a positive expectancy. It is making money.

 Consider a trader who wins 70% of the time, making 15,000 pesos on average when they win but losing 40,000 pesos on losing trades.

                              (0.7 x 15,000) – (0.3 x 40,000) = 10,500 – 12,000 = -1,500

For every trade this trader places they can expect, on average, that 1,500 pesos will drain from their account. Over 10 trades they can expect to lose 15,000 pesos. With a negative expectancy, the more trades taken the more money that is lost. This trader may win often, but they aren’t profitable.

How can this trader become more profitable? Probably the easiest fix is to try to reduce the size of the losses, potentially with cutting their losses quick. If this trader can reduce losses to say 20,000 pesos, they will be profitable, even though the wins are only 1,500 pesos. This is because this trader is winning more than they are losing.

                              (0.7 x 15,000) – (0.3 x 20,000) = 10,500 – 6,000 = 4,500

By reducing the size of losses, this trader can now expect to make 4,500 pesos, on average, every time they make a trade.

To get a reasonably trade expectancy, look at results over 30 trades or more.

If you want to learn more about stock trading join our Facebook Group called Trader’s Lounge

Our advocacy is sharing ideas, experiences and knowledge to traders for FREE. We offer free Technical Analysis, Fundamental Analysis and Market Psychology learning materials for free. 

We also have weekly lessons over there. We created different trading strategies like MAMA which made a lot of traders profitable. Other trading strategies include FISHBALL, PAPA, CALMA and more. We want to offer OFW’s, Employees and all Filipino people a chance to learn without paying a cent. 

We also have a Youtube Channel wherein I myself discuss strategies and trading related topics. 

Come join us. Let us push free learning. 

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