{"id":29825,"date":"2012-06-02T11:00:13","date_gmt":"2012-06-02T15:00:13","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=29825"},"modified":"2012-06-02T11:00:13","modified_gmt":"2012-06-02T15:00:13","slug":"a-bit-more-on-expectations-in-trading","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/06\/02\/a-bit-more-on-expectations-in-trading\/","title":{"rendered":"A Bit More on Expectations in Trading"},"content":{"rendered":"

By Taro Hideyoshi<\/strong><\/p>\n

The expectations is one of the aspects traders should take into their consideration when trading. I have mentioned to expectations many in many of my articles. In this article, we will dig a bit deeper in order to paint clearer picture in this topic.<\/p>\n

The question “How much do you expect to earn on each trade on average over the long run from your trading system or method?” is a good one to describe what the expectation is in trading.<\/p>\n

Of course, no one expects to lose. Therefore, the first thing you have to make sure is the system you are using must have a positive expectation. If your system has the positive expectation, it will ultimately generate you profits if you keep trading by it over enough time.<\/p>\n

The following equation is a mathematical equation for positive expectation. The higher result, the more positive expectation you have.<\/p>\n

E = (1 + (W \/ L)) x P – 1<\/em><\/strong><\/p>\n

Where:<\/strong>
\nE = Expectation<\/em>
\nW = How much you gain when you win<\/em>
\nL = How much you loss when you lose<\/em>
\nP = Probability of winning<\/em><\/p>\n

According to the equation, you will see that it does not only depend on percentage of winning trades but also the amount you gain from winning trades.<\/p>\n

For example, assume a trading system has 50% wining trades. Now, assume the average winning trade is $500 and the average losing trade is $350.<\/p>\n

E = (1 + (500\/350)) x 0.5 – 1 = 0.214<\/em><\/strong><\/p>\n

For comparison, let considers another trading system that has only 40% winning trades with an average winner of $1,000 and average loser of $350.<\/p>\n

E = (1 + (1,000\/350)) x 0.4 – 1 = 0.543<\/em><\/strong><\/p>\n

The second trading system’s positive expectation is 2.5 times that of the first although it has much lower percentage of winning trades.<\/p>\n

Let’s take a look in another aspect. The following equation is a mathematics equation mentioned in the book “The Complete Turtle Trader” by “Michael W. Covel”.
\nThe equation calculates the expected value from trades.<\/p>\n

E = (PW x AW) – (PL x AL)<\/em><\/strong><\/p>\n

Where:<\/strong>
\nE = Expected value<\/em>
\nPW = Winning percent<\/em>
\nAW = Average winner<\/em>
\nPL = Losing percent<\/em>
\nAL = Average loser<\/em><\/p>\n

From the above example, the expected value from the first trading system will be as follow.<\/p>\n

E = (0.5 x 500) – (0.5 x 350) = $75 on average per gain per trade<\/em><\/strong><\/p>\n

Also for the comparison, the expected value from the second trading system<\/a> will be as follow.<\/p>\n

E = (0.4 x 1,000) – (0.6 x 350) = $190 on average per gain per trade<\/em><\/strong><\/p>\n

Do you get a clearer picture of the expectations in trading<\/a> now? Hopefully, you do.<\/p>\n

About the Author<\/h3>\n

Taro is an experience trader who trades in stocks, futures, forex. He strongly focuses on technical analysis, trading systems and money management.<\/p>\n

If you would like to find more articles on MetaStock Tutorials, MetaStock Formulas, Trading Systems and Money Management. Please go to MetaStock Trading System<\/a>.<\/p>\n

You would also find the list of recommended books for trading & investing at The Investing Books<\/a>.<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

By Taro Hideyoshi The expectations is one of the aspects traders should take into their consideration when trading. I have mentioned to expectations many in many of my articles. In this article, we will dig a bit deeper in order to paint clearer picture in this topic. The question “How much do you expect to … <\/p>\n

Continue reading “A Bit More on Expectations in Trading”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-29825","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/29825","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=29825"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/29825\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=29825"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=29825"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=29825"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}