Help Need Calculating Expectancy and R:R

[SimpleMeLike]

So hopefully someone else learns from my questions originally asked. I went back recalculated my metrics for both systems based on corrected calculations and results are attached.

Any questions or recommendations is welcomed.

Lessons Learned so far while recording stats:
1. Include time in trade per trade
2. Breakeven at a loss (commission) is considered a loss and effects the average risk vs reward
3. I did not record the MAE or MFE per trade.

I still have more metrics to consider calculating but this is a start for now.

 

[stevegee58]

MAE and MFE are very important. If you have a technical signal that you think has an edge, an MAE/MFE analysis can tell you where to place your SL and TP. In other words, you'd analyze price movement after your signal with no SL and TP (or at least very wide). You may find that after your signal price moves X points against you 90% of the time and moves Y points in your favor 90% of the time. This knowledge provides a statistical basis for SL and TP placement.
Once you know that, you can size each trade based on a fixed percent of capital depending on your risk aversion.

 

[SimpleMeLike]

MAE and MFE are very important. If you have a technical signal that you think has an edge, an MAE/MFE analysis can tell you where to place your SL and TP. In other words, you'd analyze price movement after your signal with no SL and TP (or at least very wide). You may find that after your signal price moves X points against you 90% of the time and moves Y points in your favor 90% of the time. This knowledge provides a statistical basis for SL and TP placement.
Once you know that, you can size each trade based on a fixed percent of capital depending on your risk aversion.

stevegee58,

I could not agree with you more. I mess up and did not record the MAE and MFE per trade.

As you see from results, the system in green has a R:R = 1, so its barely maintaining profitability. I often wonder if I can reduce the stop loss. BUT, I have no data to prove moving it will help. I will start writing MAE and MFE from now.

Lessons Learning.

 

[Steve Alexander]

Hello,

Can please request some help calculating my average reward vs risk, and Expectancy of the two systems I have been backtesting. My first time calculating both, and a bit confused. Just want to be sure.

Below is the attachment.

I think I calculated average reward vs risk wrong. I used (Total Wins / #total of trades) for average reward and (Total Loss / # total trades) for average risk. I am not sure this is correct. My profit varies per trade, but loss remains the same per trade

I think average reward should be Total Wins / #total number wins.

From now on I will calculate the R:R per trade.

Appreciate the help in advance.

Your method seems waaay too complicated to me. I have a simple spreadsheet that calculates expectancy, but the site declined to allow me to upload it. Bummer.

 

[jk90029]

If there is no comm/tax, then probably half of traders might be a winner, like in home poker.

However most frequent traders (95%) shall end as a loser, since he is expected to pay at least 500K to 1000K during his entire 50 years in trading (30 to 80)

My friend told me spent 20 year in trading, to find out "I cannot win in the long run since I already spent >400K in comm/tax". I am sure he does NOT have 400K now.

PS) Tell me if you have different opinion.

 

[SimpleMeLike]

If there is no comm/tax, then probably half of traders might be a winner, like in home poker.

However most frequent traders (95%) shall end as a loser, since he is expected to pay at least 500K to 1000K during his entire 50 years in trading (30 to 80)

My friend told me spent 20 year in trading, to find out "I cannot win in the long run since I already spent >400K in comm/tax". I am sure he does NOT have 400K now.

PS) Tell me if you have different opinion.

Hello jk90029,
I am sorry for your friend.

For me, it will be a cold day in hell before i lose $400K trading, heck I am not losing more then time now. The most i lose so far in the past 4 years is $6K.

I will paper trade until my eyes fall off or turn wrinkle before I put my hard earn money into trading if I don't know I can win. I am not in the business of giving money away man. I will paper trader for 10 years if before I trade my real money if I don't have high odds in my favor of winning. And when I do go live, I am trading 1 contract for about 2-3 years until I am playing with money I earned. My initial investment money going back in the bank.

However, i will pay for my trading education. I have no issue with that. But losing more then $400K trading. I am sorry man, but that's just crazy to me. It's not that serious.

 

[jk90029]

Hello jk90029,
I am sorry for your friend.

For me, it will be a cold day in hell before i lose $400K trading, heck I am not losing more then time now. The most i lose so far in the past 4 years is $6K.

I will paper trade until my eyes fall off or turn wrinkle before I put my hard earn money into trading if I don't know I can win. I am not in the business of giving money away man. I will paper trader for 10 years if before I trade my real money if I don't have high odds in my favor of winning. And when I do go live, I am trading 1 contract for about 2-3 years until I am playing with money I earned. My initial investment money going back in the bank.

However, i will pay for my trading education. I have no issue with that. But losing more then $400K trading. I am sorry man, but that's just crazy to me. It's not that serious.

My friend lost 400K for 20 years, as he told me.
Suppose his current asset is 400K (mostly winning money), then his TaxRate (=Expense/ProfitBeforeExpense) is 50% since 400/800=0.5.

Therefore I can say most winning traders (roughly 5% of all) shows TaxRate >> 50%.
If one paid 400K of expense with winning 40K (in his cash account), then his TaxRate is 400/(400+40)= 10/11, which is roughly AS MUCH AS 90%.
Suppose his cash is now 100K, then his TaxRate is 400/(400+100)=80%.

 

[SimpleMeLike]

My friend lost 400K for 20 years, as he told me.
Suppose his current asset is 400K (mostly winning money), then his TaxRate (=Expense/ProfitBeforeExpense) is 50% since 400/800=0.5

Therefore I can say most winning traders (roughly 5% of all) shows TaxRate >> 50%.
If one paid 400K of expense with winning 40K (in his cash account), then his TaxRate is 400/(400+40)= 10/11, which is roughly AS MUCH AS 90%.
Suppose his cash is now 100K, then his TaxRate is 400/(400+100)=80%.

Hello jk90029,

That sounds to complicated for me. I rather keep it simple.

I don't know much, but I do know to keep it simple and risk as little as possible in any business. For me, I'm trading 1 contract until initial investment ($10k or so) is back in my savings account where it belongs. Then I trade money earned from there.

Taxes is taxes, not much you can do about that.

But as i am learning, you will lose money in trading if no proven trading method. It's really that simple. Finding the proven trading method is the only challenge.

 

[DougStewart]

This article may help you:
https://www.learningmarkets.com/determining-expectancy-in-your-trading/

Hello Smile,
I read your article, thank you. Sorry to hijack the thread, but the article begs the question...
It mentions the issue of "position sizing" is very important and says it will discuss in a follow up. I searched the site, but can find no such follow up. Can you provide any link for discussion/advice for "position sizing" in regards to trading SP500 emini futures? Thanks.

 

[SimpleMeLike]

Hello Smile,
I read your article, thank you. Sorry to hijack the thread, but the article begs the question...
It mentions the issue of "position sizing" is very important and says it will discuss in a follow up. I searched the site, but can find no such follow up. Can you provide any link for discussion/advice for "position sizing" in regards to trading SP500 emini futures? Thanks.

Hello DougStewart,

Hijack my threads anytime you like.

For position, in my opinion, i would start with 1 contract to make sure your trading method works and can produce consistent money for about a year or longer or shorter.

Once you double your money with 1 contract. Take that money put in the bank. Then repeat again with one contract. Once you double your money again, then go to 2 contracts. Double your money again , then go to 3 contracts. Double your money with 3 contracts then go to 4 contracts.

To me, this just makes things simple and simple goals.

So if you have $5000 to invest, start with 1 contract, make, $10k. Put 5k in bank. Then get account to $10k again. Then trade 2 contracts. If your account get back to $5k, go back to 1 contract.

Does this make sense? Atleast this how I see it, but I like things easy.