Why favorable R:R?

Quote from osorico:

NeoRio1... Excellent post if I can say so.



Much more important is an understatement.

Expectancy is (or should be) based on probability. Probability is what causes the dichotomy (and virtual uselessness) of the Win%. You know, 75% losers yet still profitable.

There are 2 parts to probability... Probability itself AND expectancy. When both parts are known, risk becomes a sterile and straight forward attribute unrelated to R:R... High profitability with 1:1 or worse!

I am not suggesting 1:1 is "the way" to trade... but it is those setups that you want to find. And find YOUR probabilistic edge within those setups. A reminder... many aspects of signals and setups often go overlooked, such as time of day, day of week, limited market participation (such as foreign holidays), if your hair hurts, etc etc etc. All these factors plus many others affect the probability and expectancy of a given setup/signal. Same setup, different probability, different expectancy. Your job is to find the 1:1 and own it!

Osorico
More...

May I ask a favor, please? Would you (or someone) please simply and clearly define "expectancy"? And perhaps provide an example?

I'm not clear on what you mean by this, therefore I am not clear on the meaning of your post.

I have noticed there are many interpretations on this theme - just like "price action" means different things to different folks.

Thanks for your help.

Paul


Moderator: this is a great troll-free thread so far - thank you, let's keep it this way. There is really something to be learned here.
 
Expentancy does mean different things to different people.

I relate expentancy to the phrase if price does this I will do that and if price does that i will do this. Or it can be if price does A i will do Z, if it does B i will do Y, if it does C i will do X.

But then also with that phrase i will dig deeper and say well has price actually done this and that in the past? Because if it does this and than that multiple times than the next time i see it do this than i will think that the probabilities and profit potential for doing that will be in my favor.

Now lets blow this up from the tiny details of the expentancy thought process to a real life example.

Lets say in the last 60 days price has closed higher everyday. Price has done this and than done that. Price has opened and than closed higher. Price has opened and gone higher.

What I am saying is that I think price will keep doing this if and only if it keeps doing this. The more it does this the more I think it will do it.

If price goes up and down once I have no reason to think it will do it again. If price goes up and down ten times....

The reason I am trading is because i think I can find a high probability of price doing what i expect price to do. The reason for my stop is because I know that price will not always do this and that in infinity and beyond but in the current flavor of historical characteristics I think I am on to something.

Price is always doing something. If you can truly figure out what it has been doing than you might just be able to figure what it will do next.
 
Quote from slapshot:

May I ask a favor, please? Would you (or someone) please simply and clearly define "expectancy"? And perhaps provide an example?
...
More...

Start with an official definition of expectancy. In the context of this discussion I prefer this one...
An expected amount calculated on the basis of actuarial data: a life expectancy of 70 years.

That define, IMO, wraps expectancy with probability in exactly the same way a trader would use it. A man is born in 2008. Life expectancy is Y. A woman is born in 2008. Life expectancy is X.

Based on empirical (including observational) and scientific data the probability of Y being the life expectancy of a man born in 2008 is determined.

The same is true for trading. Based on empirical (including observational) and (perhaps) scientific data, when the opening bell rings, there is a 99.9% probability, and therefore expectancy that the closing bell will ring at it's normal time of day.

Through YOUR empirical and scientific data comes YOUR edge. Based on YOUR analysis of Z happening, a probability and an expectancy is defined. It doesn't matter what the basis is; price action, chart patterns, winning teams, what you eat for breakfast, the moon, gravitational pull, if its spring break or Christmas break, or anything else that you have analyzed. REPEAT: Through analysis (probability and expectancy) of YOUR empirical and scientific data comes YOUR edge.

This is why many traders concentrate on only a handful of markets/instruments and have only a handful of CONSISTENTLY used strategies.

HTH
Osorico
 
Quote from osorico:

Start with an official definition of expectancy. In the context of this discussion I prefer this one...
An expected amount calculated on the basis of actuarial data: a life expectancy of 70 years.

That define, IMO, wraps expectancy with probability in exactly the same way a trader would use it. A man is born in 2008. Life expectancy is Y. A woman is born in 2008. Life expectancy is X.

Based on empirical (including observational) and scientific data the probability of Y being the life expectancy of a man born in 2008 is determined.

The same is true for trading. Based on empirical (including observational) and (perhaps) scientific data, when the opening bell rings, there is a 99.9% probability, and therefore expectancy that the closing bell will ring at it's normal time of day.

Through YOUR empirical and scientific data comes YOUR edge. Based on YOUR analysis of Z happening, a probability and an expectancy is defined. It doesn't matter what the basis is; price action, chart patterns, winning teams, what you eat for breakfast, the moon, gravitational pull, if its spring break or Christmas break, or anything else that you have analyzed. REPEAT: Through analysis (probability and expectancy) of YOUR empirical and scientific data comes YOUR edge.

This is why many traders concentrate on only a handful of markets/instruments and have only a handful of CONSISTENTLY used strategies.

HTH
Osorico
More...


Please excuse me for being thick in the head.

I understand (and had previously understood) this definition of expectancy. It is a simple concept.

What is still unclear to me (as before) was how you would quantify your "expectancy" in trading and express it as math, which is ultimately what trading (and all of life, actually) comes down to.

I am asking this because in general the statement has been made that "expectancy is the most important trading measure" (paraphrased)

A person can expect a lot of things but if the math is flawed, therefore the resulting analysis you mentioned is also flawed. It is a real "garbage in, garbage out" calculation.

R/R, win ratio%, avg. ticks per trade, time per trade - these parameters are all quantifiable, adjustable and mathematically tangible.

Expectancy as defined above in your quote is not quantifiable. So perhaps a better question may have been: "What parameters do you use to calculate your expectancy in your trading?"
 
Quote from slapshot:

Please excuse me for being thick in the head.

I understand (and had previously understood) this definition of expectancy. It is a simple concept.

What is still unclear to me (as before) was how you would quantify your "expectancy" in trading and express it as math, which is ultimately what trading (and all of life, actually) comes down to.

I am asking this because in general the statement has been made that "expectancy is the most important trading measure" (paraphrased)

A person can expect a lot of things but if the math is flawed, therefore the resulting analysis you mentioned is also flawed. It is a real "garbage in, garbage out" calculation.

R/R, win ratio%, avg. ticks per trade, time per trade - these parameters are all quantifiable, adjustable and mathematically tangible.

Expectancy as defined above in your quote is not quantifiable. So perhaps a better question may have been: "What parameters do you use to calculate your expectancy in your trading?"
More...

You are correct... expectancy as mentioned is not quantifiable, but the probability of the expectancy is. For example, let's use a simple bear flag chart pattern. Mind you this an example, I am not sharing actual probabilities or expectancies.

If a bear flag has a minimum of 5 bars, but less than 12 bars, when/if the low of the bear flag is breached, there is an 86% probability that an ensuing move down will be a measured move down, at least. Hence, the measured move is an un-quantified expectancy.

Since a measured move is unique, based on a specific slice of price and/or time, the expectancy is not nominally quantified ahead of time.

As a trader, YOU must determine if the expectancy is worth trading. One hour you might see a bear flag, an 86% probability if broken, to attain a 40 tic measured move in the YM... later in the day you see a bear flag with an 86% probability if broken, to attain a 12 tic measured move. Same basis, but completely different nominal expectancy. Yet the expectancy remains and is 100% valid.

If you want to quantify the expectancy, you are free to make YOUR own analysis ... perhaps there is a 99% probability to attain a 2 tic move irregardless of measurement. I don't know. That becomes YOUR edge, AND contains YOUR "quantified" expectancy. If you need to ask how that would/could be determined, I can not help.

Yes, you are being thick!
Osorico
 
Quote from osorico:

You are correct... expectancy as mentioned is not quantifiable, but the probability of the expectancy is.


Yes, you are being thick!

Osorico
More...


"probability of the expectancy?" LOL OK thanks professor.

Actually, when I said I was being thick, I was just being humble and polite. When you challenge people that produce vague "guru-ish" statements as if it is ironclad empirical fact, their egos tend to get bruised. That was my effort to avoid ruffling your feathers. And I certainly wouldn't ask you about my trading edges.

Back to the point. The topic of the thread is the value of R/R metrics in trading profitability. Your defintion of expectancy doesn't seem to fit the specific topic, as you are referring to setup probabilities and edge - a far cry from mathematical risk management vs. reward ratio - which is the question that the OP posed.

In other words, expectancy is like the whole car, which only runs as well as the sum of its parts - including R/R, setup probablility, win ratio, etc. - all have to come together correctly for real-world profitability. The OP was trying to determine if an R/R adjustment would help that goal.
 
Quote from slapshot:

"probability of the expectancy?" LOL OK thanks professor.

Actually, when I said I was being thick, I was just being humble and polite. When you challenge people that produce vague "guru-ish" statements as if it is ironclad empirical fact, their egos tend to get bruised. That was my effort to avoid ruffling your feathers. And I certainly wouldn't ask you about my trading edges.

Back to the point. The topic of the thread is the value of R/R metrics in trading profitability. Your defintion of expectancy doesn't seem to fit the specific topic, as you are referring to setup probabilities and edge - a far cry from mathematical risk management vs. reward ratio - which is the question that the OP posed.

In other words, expectancy is like the whole car, which only runs as well as the sum of its parts - including R/R, setup probablility, win ratio, etc. - all have to come together correctly for real-world profitability. The OP was trying to determine if an R/R adjustment would help that goal.
More...


Mathematical risk management and risk ratio. LOL!! You have identified the exact cause of the economic (credit) crisis and you want to trade based on the same. LOL!!

Go read your fairy tale...
Juana Bee Blows Up
The story of a pedant.

Osorico
 
Quote from slapshot:

Please excuse me for being thick in the head.

I understand (and had previously understood) this definition of expectancy. It is a simple concept.

What is still unclear to me (as before) was how you would quantify your "expectancy" in trading and express it as math, which is ultimately what trading (and all of life, actually) comes down to.

I am asking this because in general the statement has been made that "expectancy is the most important trading measure" (paraphrased)

A person can expect a lot of things but if the math is flawed, therefore the resulting analysis you mentioned is also flawed. It is a real "garbage in, garbage out" calculation.

R/R, win ratio%, avg. ticks per trade, time per trade - these parameters are all quantifiable, adjustable and mathematically tangible.

Expectancy as defined above in your quote is not quantifiable. So perhaps a better question may have been: "What parameters do you use to calculate your expectancy in your trading?"
More...

Your analysis of what osorico said about expectancy is way off. Seeing what you have to say about it I would be very surprised if you actually traded price action. I don't care about what positive or negative words you have about R:R, ticks per trade or time per trade.

What we are talking about here is expectancy. Here is a simple example of what osorico was talking about. A trader will study the market for a while and he will see that sometime the market can be predicted. The person than zero's in on this predictable aspect and formulates a so called strategy or edge.

Now lets say that over the last two months there has been a total of 200 specific and different times when the trader felt his strategy would be profitable because he felt he was in a predictable situation. Lets say out of the 200 times he decided to execute a trade he was right 150 times. That means his strategy has a positive expectancy to be profitable.

Expectancy comes from judging the profitability of a trader's strategy. The math needed is just extremely simple percentages.

If you disagree with this basic statement and thought process of expectancy than you are either a pissed off TA trader mad at the world or you aren't a technical trader at all who is still spewing nonsense on threads that don't relate at all to your expertise.
 
Quote from slapshot:

"probability of the expectancy?" LOL OK thanks professor.

Actually, when I said I was being thick, I was just being humble and polite. When you challenge people that produce vague "guru-ish" statements as if it is ironclad empirical fact, their egos tend to get bruised. That was my effort to avoid ruffling your feathers. And I certainly wouldn't ask you about my trading edges.

Back to the point. The topic of the thread is the value of R/R metrics in trading profitability. Your defintion of expectancy doesn't seem to fit the specific topic, as you are referring to setup probabilities and edge - a far cry from mathematical risk management vs. reward ratio - which is the question that the OP posed.

In other words, expectancy is like the whole car, which only runs as well as the sum of its parts - including R/R, setup probablility, win ratio, etc. - all have to come together correctly for real-world profitability. The OP was trying to determine if an R/R adjustment would help that goal.
More...

Expectancy means if you take X number of trades, you "expect" to book Y number of points, percent or whatever in profit.

A system with 10% accuracy and a high R:R can have the same expectancy as one with 90% accuracy and a low R:R.
 
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