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PR Newswire
02-11-2023, 08:21 AM
Although I am a long-term investor, I find that the trading concepts regarding expectancy can give some insights in managing a stock portfolio.
Trading expectancy is a calculation that shows what the typical profit is for each trade placed. If it’s negative, the strategy is a loser. If it’s positive, the strategy is a winner.
Expectancy can be represented by the following formula.
Expectancy = (Win % x Win Size) – (Loss % x Loss Size)
We can improve the amount we make by improving the chances of winning or improving the win-loss ratio. The chart below illustrates this concept.
![[Image: Trading-expectancy.png]](https://i.postimg.cc/dtX1Tq2W/Trading-expectancy.png)
The top chart (grey colour) shows the calculation for one set of win/loss ratio and the average gain and loss. You are expected to gain $ 50.
The bottom chart (orange colour) shows the impact if there in improvement in the win/loss ratio and better average gain. You can see the better expectancy with better win/loss ratio and average gain/loss ratio.
What does this mean for the fundamental investor? If you develop your investing skills, you can improve your win/loss ratio. If you have the appropriate risk mitigation strategies, you can improve your average gain compared to the average loss.
If you want to know more, go to “Baby steps in constructing a stock portfolio”
Trading expectancy is a calculation that shows what the typical profit is for each trade placed. If it’s negative, the strategy is a loser. If it’s positive, the strategy is a winner.
Expectancy can be represented by the following formula.
Expectancy = (Win % x Win Size) – (Loss % x Loss Size)
We can improve the amount we make by improving the chances of winning or improving the win-loss ratio. The chart below illustrates this concept.
The top chart (grey colour) shows the calculation for one set of win/loss ratio and the average gain and loss. You are expected to gain $ 50.
The bottom chart (orange colour) shows the impact if there in improvement in the win/loss ratio and better average gain. You can see the better expectancy with better win/loss ratio and average gain/loss ratio.
What does this mean for the fundamental investor? If you develop your investing skills, you can improve your win/loss ratio. If you have the appropriate risk mitigation strategies, you can improve your average gain compared to the average loss.
If you want to know more, go to “Baby steps in constructing a stock portfolio”