Come upon this nice concept in money management
Simply said, it is the measurement of gain vs lost in trades.
Expectancy = (Probability of Win * Average Win) - (Probability of Loss * Average Loss)
Natural enough, traders focus on making a "winning" entry. We hate losing trade, so much so that we're happy as long the trade closed positive even if it is a very small win. Many small wins doesn't really make one money in the long run.
Lets look at the equation, we can have 70% winning trade of 1% average gain. But if the average of 30% losing trade is 3%, we're going to lose money at the end of the day.
Expectancy = 0.70X1 - 0.30X3 = 70 - 90 = -0.20
On the other hand, we could have a low percentage of winning trade and still make money in long run. ie. 30% winning trades of 3% average gain, couple with 70% losing trades of 1% average lost.
Expectancy = 0.30X3 - 0.70X1 = 70 - 90 = +0.20
Knowing this formular help us better focus our attention - on making money - rather then winning the trade.
More links on Expectancy
Postive Expectancy in Trading
