From 49d30ad0e250aa935a51b49e250c90ae3e297967 Mon Sep 17 00:00:00 2001 From: misagh Date: Mon, 5 Nov 2018 15:55:35 +0100 Subject: [PATCH] doc WIP 2 --- docs/edge.md | 14 +++++++++++--- 1 file changed, 11 insertions(+), 3 deletions(-) diff --git a/docs/edge.md b/docs/edge.md index cab2de748..d5648d9df 100644 --- a/docs/edge.md +++ b/docs/edge.md @@ -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). - +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: - +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: - +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.