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@ -24,20 +24,20 @@ The answer comes to two factors:
Means over X trades what is the percentage 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 percentage 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) `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:
R = Profit / Loss `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:
average profit = (Sum of profits) / (Number of winning trades) `Average profit = (Sum of profits) / (Number of winning trades)`
average loss = (Sum of losses) / (Number of losing trades) `Average loss = (Sum of losses) / (Number of losing trades)`
R = (average profit) / (average loss) `R = (Average profit) / (Average loss)`
### Expectancy ### Expectancy
@ -47,7 +47,7 @@ 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: So lets say your Win rate is 28% and your Risk Reward Ratio is 5:
Expectancy = (5 * 0.28) - 0.72 = 0.68 `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.