| | From The Desk of The Trader |
| “It’s not magic… It’s math. And simple math at that.”
-- The Trader
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| | FAF19 Day 9 Lesson 8 13 February 2019 |
| | Daily Goal: 60 Ticks
Max Contract Size (Per Trade): 3 (Margins $700; acct balance over $2100)
Performance: +69 Ticks on 3 Contracts
Summary: Stocks continued their move higher early today before suffering a reversal of fortune. Fortunately, I’d already grabbed my Daily Goal for the day.
Recap Video: Click here.
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| Today’s Trading Lesson: Expectancy
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| I first discovered the term expectancy from trading psychologist and coach Van K. Tharp. It’s a relatively simple concept premised on some pretty simple mathematical principles. The technical definition of expectancy is about how much you money you make with your trading strategy per dollar risked. Put another way, it’s the average impact on your account per trade per dollar risked.
Translation…
Expectancy is how much money you make when you win versus how much you lose when you lose. The key is to make sure you make more when you win than you do when you lose… on average.
You do remember from the earlier lesson that you WILL have losses don’t you?
At any rate, to determine the expectancy of a trading strategy, use the following formula…
AP*WP - AL*LP = Expectancy where,
AP = Average $ won when you win
WP = Win %
AL = Average $ loss when you lose
LP = Losing %
Let’s look at a few examples to drive the point home shall we?
If AP = $9; WP = 50%; AL = $6; and LP = 50% Expectancy = $1.50.
Another example…
If AP = $163; WP = 50%; AL = $153; and LP = 50% Expectancy = $5.00.
Another…
If AP = $163; WP = 30%; AL = $153; and LP = 70% Expectancy = -$58.20.
Here, the significantly lower win rate led to negative expectancy... i.e., over the long haul,
One more example…
If AP = $163; WP = 30%; AL = $60; and LP = 70% Expectancy = $6.90.
In other words… STILL POSITIVE.
In case you missed it, this is the real secret of short term (day) trading. You can lose more frequently than you win and still make money as long as the spread between the wins and losses is wide enough.
I know I should probably write a lot more to prove that this is an important lesson that you should take seriously.
But the truth is if the simple math above doesn’t do it for you, there’s nothing I can write to help you. |
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