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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). 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
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: 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: 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 ### 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 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. 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. 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.