Why high expectancy trading is so important

This is a discussion on Why high expectancy trading is so important within the First Steps forums, part of the Reception category; Expectancy and not win rate is the key to trading success. Expectancy = (Avg win * Win rate) minus (Avg ...

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Old Mar 3, 2009, 6:05pm   #1
 
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Why high expectancy trading is so important

Expectancy and not win rate is the key to trading success.

Expectancy = (Avg win * Win rate) minus (Avg Loss * Loss rate)

Therefore, the emphasis is on maximising winners and minimising losses through effective position sizing and risk management.

Assumption: You do need a trading edge.

Discuss!
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Last edited by fibonelli; Mar 3, 2009 at 6:10pm.
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Old Mar 3, 2009, 6:33pm   #2
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Definitely. It seems very unfashionable though, with a preference instead for maximizing win rates with as tight a stop as possible.

Optimal position sizing can improve returns far more dramatically than the ever-diminishing benefits from attempting to improve the edge.

You don't need that significant an edge either (card counting for example).
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Old Mar 3, 2009, 6:46pm   #3
 
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Quote:
Originally Posted by Joey25 View Post
with a preference instead for maximizing win rates with as tight a stop as possible.
What gives you that impression Joey? The mere mention of the phrase "tight stops" around here would cause an almost uncontrollable riot. Now you say there is a preference? Please explain. If you ask me the preference around here is for pretty coloured lines and 'systems'.
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Old Mar 3, 2009, 7:18pm   #4
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Originally Posted by new_trader View Post
What gives you that impression Joey? The mere mention of the phrase "tight stops" around here would cause an almost uncontrollable riot. Now you say there is a preference? Please explain. If you ask me the preference around here is for pretty coloured lines and 'systems'.
I think because that is my weakness, I'm tending to focus on people who are trading successfully with tight stops.

In all seriousness, if I could do it without the technological and psychological issues which make it difficult for me, I would.

Wide stops, in my opinion, don't necessarily affect the expectancy ratio, but they undoubtedly restrict your ability to compound.
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Old Mar 3, 2009, 10:40pm   #5
Joined Jun 2005
just a quick fact: most (not all, most) profitable trading systems used by funds average a 40-45%win. Do not ask us why, it's just something we noticed!

thx,Alex
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Old Jun 15, 2011, 9:41am   #6
 
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Re: Why high expectancy trading is so important

alex i heard it was 81 %
+
average pips per trade >=20

everthing above is doomed
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Old Jun 15, 2011, 10:33am   #7
 
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Re: Why high expectancy trading is so important

Whatever happened to Gianni ?
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Old Jun 17, 2011, 3:34pm   #8
Joined Jun 2011
Re: Why high expectancy trading is so important

I love hearing the word "Expectancy", game changer for me.

Really simple...
Win ratio's, risk reward, tight stops, doesn't matter what you do, is your method profitable?
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Old Jun 18, 2011, 4:51pm   #9
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Re: Why high expectancy trading is so important

Quote:
Originally Posted by jpadventure View Post
I love hearing the word "Expectancy", game changer for me.

Really simple...
Win ratio's, risk reward, tight stops, doesn't matter what you do, is your method profitable?
+1

Truly silly buzzword. The bottom line is: are you making money?
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Old Jun 18, 2011, 5:08pm   #10
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Re: Why high expectancy trading is so important

Formula of expectancy:

Click the image to open in full size.

Expectancy is made up of accuracy and payoff. Improving the accuracy and the average win-to-average loss payoff are important tools to reduce our risk of ruin.

If your probability of winning is 35%, your average winning trade profits $10, and your average losing trade loses -$3, this trading system has a positive expectancy because over the long-term, it should yield an average profit of $1.55 per trade.

In contrast, consider a trading system that wins 90% of the time gaining $1 on average but loses $20 on average on the 10% of losing trades, this trading system is worthless despite its 90% success rate because it has a negative expectancy (-$1.10).
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