When reviewing your trading performance, do you focus primarily on win rate or expectancy?
Win ratio simply looks at the number of times you win versus the number of trades you make.
How many times have you made the right call?
This may seem like an important question, but if you look at the bigger picture, it doesn’t matter.
“Dr. Pepslow, how can you say that? Surely, you can’t make money if you don’t at least know most of the deals you’re making!”
In trading, you must realize that Making money and always being right are not mutually exclusive. What this basically means is that one can exist without the other.
This is where “reward to risk ratio” Enter.
Let’s say that at the end of the year, 80% of your 50 trades were losing trades. After doing some math, you find that your average loss was about $100.
At first glance, it may seem like you’re a really bad trader – you’ve lost 40 of your trades, which translates to losses of around $4,000.
But upon closer examination, you will find that the other ten trades had a large reward-to-risk ratio.
Your average winning trade was $500. In the end, you make $5,000 on your winning trades and only lose $4,000 on your losing trades.
At the end of the year, You still make money even if you’re right only 20% of the time..
Now let’s look at the opposite scenario. What if you were right 80% of the time instead of being wrong 80% of the time?
This happened because you closed your trades immediately after they went a few pips in your direction.
As for losing trades, it is better to let them continue because you cannot handle the idea of losing.
The average profit on the 40 winning trades was $50. The average profit on the 40 losing trades was $500. By the end of the year, you have made $2,000 but lost $5,000.
This just goes to show that You shouldn’t just focus on being right.You have to take into consideration. Expectation From all your deals.
Expectation Focusing on profit is one of the most important aspects of any trading strategy. Unfortunately, most people tend to ignore this aspect and focus only on the profits of each trade.
For those of you who are not familiar with this term, it’s time to get some education in Forex!
Expectancy is basically how much you might gain (or lose) for each dollar of risk.
The formula for the prediction is this:
Expectancy = (average gain X win %) – (average loss X loss %)
Let me give you an example to illustrate this.
Let’s say Ryan has a trading account with a balance of $10,000. Over the years, Ryan has realized that he wins 40% of the time, and that he makes about $250 on each trade.
When he loses (which happens 60% of the time), he loses an average of $100 per trade.
So what are Ryan’s expectations?
Expectancy = ($250 X .40) – ($100 x .60) Expectancy = $100 – $60 Expectancy = $40
This means that Ryan can expect to make $40 on each trade over the long term. Notice how Ryan was able to generate positive expectancy even though he lost more trades than he won.
So, after 100 trades, Ryan should make $4,000 ($40 x 100).
On the other hand, if Ryan had a much higher probability of winning but his average wins were lower than his average losses, he would see his account slowly drained over the long run.
Here is an example.
Let’s say Ryan’s average profit per trade was $100 per trade And the possibility of winning was 60%.
His average loss is about $ 200 The possibility of losing it is 40%.
This gives him an expectation of ($100 x 0.60) – ($200 x 0.40) = ($60 – $80) = -$20.
This means that for each trade, Ryan is expected to lose $20.
It may take a really long time, but his account will It will eventually be emptied. If you maintain this level of expectation.
The important point is, don’t be fooled into thinking that traders who win 90% of all their trades end up being profitable in the long run.
When trading in the Forex market, being right most of the time is not as great as you might think.
To be profitable, all you need is: Positive expectations.