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, 7:05pm   #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 7:10pm.
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Old Mar 3, 2009, 7:33pm   #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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Thanks! The following members like this post: fibonelli
Old Mar 3, 2009, 7:46pm   #3
 
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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, 8:18pm   #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, 11:40pm   #5
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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

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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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Old Jun 22, 2011, 6:00pm   #11
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Re: Why high expectancy trading is so important

Quote:
Originally Posted by lcchong76 View Post
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.
As i said before this term is just a buzzword IMO. It has been shown in this blog to be mathematically equivalent to the simpler statement that the net profit is greater than zero.

If at the end of a given period you have made money, by definition the expectancy is greater than zero for the period. So what? What was the drawdown? The Sharpe ratio? The rate of return? Expectancy tells nothing really other than the fact that money was made. No serious trader should rely in a simplistic and naive formula like that.
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Old Jun 23, 2011, 1:22pm   #12
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Re: Why high expectancy trading is so important

Quote:
Originally Posted by fibonelli View Post

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

No.
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Old Jun 23, 2011, 1:23pm   #13
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Re: Why high expectancy trading is so important

Quote:
Originally Posted by intradaybill View Post
As i said before this term is just a buzzword IMO. It has been shown in this blog to be mathematically equivalent to the simpler statement that the net profit is greater than zero.

If at the end of a given period you have made money, by definition the expectancy is greater than zero for the period. So what? What was the drawdown? The Sharpe ratio? The rate of return? Expectancy tells nothing really other than the fact that money was made. No serious trader should rely in a simplistic and naive formula like that.
This is also wrong. All of it. Sorry.

Edit: Actually no, I missed your 'for the period'. But your formula is wrong in this context. Also the idea that you should use expectancy for a discrete period is wrong in this context.
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Old Jun 24, 2011, 4:43pm   #14
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Re: Why high expectancy trading is so important

Expectancy is the realization that if you follow a definite plan which has been tested and is profitable, then you will become a consistently profitable trader. Anything less, is your mental problems getting in the way.
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Old Jun 26, 2011, 8:13pm   #15
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Re: Why high expectancy trading is so important

no.
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