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@ -22,16 +22,20 @@ The answer comes to two factors:
Means over X trades what is the perctange of winning trades to total number of trades (note that we don't consider how much you gained but only If you won or not).
<img src="https://latex.codecogs.com/svg.latex?\Large&space;W = \frac{NumberOfWinningTrades}{TotalTrades}" title="\Large x=\frac{-b\pm\sqrt{b^2-4ac}}{2a}" />
W = (Number of winning trades) / (Number of losing trades)
### Risk Reward Ratio
Risk Reward Ratio is a formula used to measure the expected gains of a given investment against the risk of loss. it is basically what you potentially win divided by what you potentially lose:
<img src="https://latex.codecogs.com/svg.latex?\Large&space;R = \frac{Profit}{Loss}" title="\Large x=\frac{-b\pm\sqrt{b^2-4ac}}{2a}" />
R = Profit / Loss
Over time, on many trades, you can calculate your risk reward by dividing your average profit on winning trades by your average loss on losing trades:
<img src="https://latex.codecogs.com/svg.latex?\Large&space;R = \frac{\frac{\sum Profit}{NumberOfWinningTrades}}{\frac{\sum Loss}{NumberOfLosignTrades}}" title="\Large x=\frac{-b\pm\sqrt{b^2-4ac}}{2a}" />
average profit = (Sum of profits) / (Number of winning trades)
average loss = (Sum of losses) / (Number of losing trades)
R = (average profit) / (average loss)
### Expectancy
@ -39,6 +43,10 @@ At this point we can combine W and R to create an expectancy ratio. This is a si
Expectancy Ratio = (Risk Reward Ratio x Win Rate) – Loss Rate
So lets say your Win rate is 28% and your Risk Reward Ratio is 5:
Expectancy = (5 * 0.28) - 0.72 = 0.68
Superficially, this means that on average you expect this strategy’s trades to return .68 times the size of your losers. This is important for two reasons: First, it may seem obvious, but you know right away that you have a positive return. Second, you now have a number you can compare to other candidate systems to make decisions about which ones you employ.
It is important to remember that any system with an expectancy greater than 0 is profitable using past data. The key is finding one that will be profitable in the future.