Mathematical expectation

Visaria · Jul 30, 2014

Can expected value be calculated in trading like one can calculate the (negative) expected value of casino games such as blackjack or roulette?

Daal · Jul 30, 2014

It can be estimated but its prone to be incorrect due black swans, fat tails, gaps etc. Thats why its important to have a margin of safety in your trades, you do this by being more selective about which trades you enter

Maverick74 · Jul 30, 2014

Visaria said:
Can expected value be calculated in trading like one can calculate the (negative) expected value of casino games such as blackjack or roulette?

Yes expected value can be used. But you need to know the variance around that expected value.

JJayFX · Jul 30, 2014

Visaria said:
Can expected value be calculated in trading like one can calculate the (negative) expected value of casino games such as blackjack or roulette?

As Van Tharp says: Expectancy = (Probability of Win * Average Win) â (Probability of Loss * Average Loss)

The fact is that unless you are following a disciplined plan time & time again, which includes managing the trades in the same manner time & time again, the statistics (and expectancy) loses significance.

In order for any statistic regarding your trading to make sense, you must trade through all types of markets using the same approach.

Hope this makes sense...

panzerman · Jul 30, 2014

Also, the probability of a win has a large variance unless you have a significant numbers of trades in a year, on the order of a 1000 trades (using all the same trade method of course.)

See the latest episode:
https://www.tastytrade.com/tt/shows/the-skinny-on-options-math/episodes

Visaria · Jul 30, 2014

JJayFX said:
As Van Tharp says: Expectancy = (Probability of Win * Average Win) â (Probability of Loss * Average Loss)

The fact is that unless you are following a disciplined plan time & time again, which includes managing the trades in the same manner time & time again, the statistics (and expectancy) loses significance.

In order for any statistic regarding your trading to make sense, you must trade through all types of markets using the same approach.

Hope this makes sense...

How do i determine the probability of win and loss?

Visaria · Jul 30, 2014

panzerman said:
Also, the probability of a win has a large variance unless you have a significant numbers of trades in a year, on the order of a 1000 trades (using all the same trade method of course.)

See the latest episode:
https://www.tastytrade.com/tt/shows/the-skinny-on-options-math/episodes

interesting, ta

Visaria · Jul 30, 2014

Maverick74 said:
Yes expected value can be used. But you need to know the variance around that expected value.

Mav, i wanted to know how to calculate it! Good point re variance..which then begs the question, how do you calculate the variance?

Would we need to take an estimated RANGE of probabilities to work out ev? I don't think one specific probability can be calculated or used.

Is it just a stab in the dark?

panzerman · Jul 30, 2014

Visaria said:
How do i determine the probability of win and loss?

For options, the delta can give a reasonable approximation of the probability of the price finishing OTM. The probability of price touching the strike is approximately twice the probability of finishing OTM.

Maverick74 · Jul 30, 2014

Visaria said:
Mav, i wanted to know how to calculate it! Good point re variance..which then begs the question, how do you calculate the variance?

Would we need to take an estimated RANGE of probabilities to work out ev? I don't think one specific probability can be calculated or used.

Is it just a stab in the dark?

No,no, no, there is no guessing. This is not TA.

Tell me specifically what you are trying to do because the posters on this thread are talking about options and p&l and win rates, etc. Tell me specifically what you are trying to solve for.