What do you do to get your edge?
- Thread starter SoyUnGanador
- Start date
https://samuraitradingacademy.com/trading-expectancy/
Here's the thing that you don't often hear on the trading forums - your win rate alone isn't that important and neither is your reward to risk ratio. What really matters is what happens when you combine the two to determine your trading expectancy.
Expectancy = (Probability of Win * Average Win) - (Probability of Loss * Average Loss)
Here's the thing that you don't often hear on the trading forums - your win rate alone isn't that important and neither is your reward to risk ratio. What really matters is what happens when you combine the two to determine your trading expectancy.
Expectancy = (Probability of Win * Average Win) - (Probability of Loss * Average Loss)
That's true for normal distributions,
When markets and PnLs follow a log normal distribution.
You need to use the log normal one,
You overestimate your expectancy otherwise.
Excellent question!
Most people are flat loser or at best marginal, including ET members, so don't expect too much.
Your goal should be to develop a personal relationship with a winning trader and add value to the relative, but you may not be able to do this.
Gurus-for-hire are mostly hustlers.
One Excellent Try Is This:
Apply to be a trader for international trading and market making firm Susquehanna International Group. Google them and study what they do!
My normal distribution is more to the right. So more in the profit zone. That means that I don't need the log version. The expectancy is close to my real trading results in the long term.
I have never seen the log normal one. I find everywhere the one I did post.
There is a very simple filter you can use to turn almost any trading systems into an edge one.
Details; you are short on details. Beat by how much? What market? How long is a long period?
If the market is down 50% and you are only down 49% is that good enough?
How are you measuring the markets for performance? Stocks, Commodities, Forex or Crypto?
A long period for a day trader is tomorrow. A long period for an investor is until they drop dead.
Here is a strategy with an edge;
Buy stocks that are increasing in price.
Sell them when they stop increasing in price.
Don't hold losers in the portfolio.
You can add filters such as market direction, price and volume, or any indicator or ranking system you might think will help.
By definition, the expected value does not depend on the distribution. The formula is the same irrespective of the distribution.
The distribution does affect other metrics, however, and as you rightly point out it is valuable to know the distribution of your profits and losses.
I like to look at the distribution of all my mark-to-market, unrealized profits and losses. I do not merely look at the distribution of realized profits and losses.
Once you have an estimate of the distribution, you can compute many other useful metrics.
The expected value does not reflect risk. Knowing the distribution can help determine risk. There are many definitions of risk and I personally like to use several. A new strategy has to pass all risk metrics in order to be considered for live trading.
You mean risk ajusted risk reward. My edge is risk management^trade management (when actually in trade)