There are many ways that people claim on how to be profitable in stocks but very few of them are actually true. In this article, we will discover something different and something that is not usually taught in any other stocks classes. This blog will be a series to spread out the technicalities of the topic. In this first blog of the series, we will first talk about risk and expectancy.

R = Risk

When you first enter a trade or an investment you should have a point where you decide the maximum loss. R or risk is your worst case risk, theoretically. You want most of your risk to be 1R but most of the people have 20R because they do not have a limit for a loss.

Example:

If R = $3 and Market is up $40

You have a 10R gain

If R = $3 and Market is down $9

You have a 3R loss

If you divide your total profit or loss on a trade by your initial risk or “R”, then you’ve just expressed that gain or loss as an R-Multiple.

Expectancy

Expectancy tells you how good your system is in terms of R. This is just the average of all of your R’s.

Formula: ∑Rmultiple / N of Rmultiple

Example 1 :

Expectancy = 0.5

This is a system that giver you 0.5R per trade on the average over many trades

Example 2 :

Expectancy=2.0

This is a system that gives you 2.0R per trade on the average over many trades

Conclusion: The second example is 4x better than the first example.

Marble game

Winning Marbles

10 Blue = Win 1-1

6 White = Win 2-1

2 Red = Win 5-1

1 Red = Win 10-1

Losing Marbles

20 Black = Lose 1-1

5 Red/Yellow Center  = Lose 2-1

20 Black = Lose 1-1

1 White Center = Lose 5-1

Expectancy of the marble bag

10 Blue (1R) = 10R

6 White (2R) = 12R

2 Red (5R) = 10R

1 Pearl (10R) = 10R

20 Blue (-1R) = -20R

5 Red/Yellow (-2R) = -10R

1 White Center (-5R) = -5R

Total = 7R

Expectancy = 7R/45 Marbles = .16R

 

1 Comment
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