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@ -17,6 +17,30 @@ The answer comes to two factors:
- Win Rate
- Risk Reward Ratio
Win rate 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;x=\frac{-b\pm\sqrt{b^2-4ac}}{2a}" title="\Large x=\frac{-b\pm\sqrt{b^2-4ac}}{2a}" />
### Win Rate
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}" />
### 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}" />
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}" />
### Expectancy
At this point we can combine W and R to create an expectancy ratio. This is a simple process of multiplying the risk reward ratio by the percentage of winning trades, and subtracting the percentage of losing trades, which is calculated as follows:
Expectancy Ratio = (Risk Reward Ratio x Win Rate) – Loss Rate
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.
You can also use this number to evaluate the effectiveness of modifications to this system.