Thread by @InvesysCapital

#New Traders, Understand #Mathematics Of #Profit In Market Before You Put Hard #Earned Money On Risk.

Expectancy = Success Rate x Reward Risk Ratio

Lets Talk About Expectancy Of Short Term Directional Trading System.

Read On (1/n)

Success Rate = No Of Profitable Tades/ No Of Loss Making Trades

Reward Risk Ratio = Average Profit Per Trade / Average Loss Per Trade

If Success Rate is 0.5 and Reward Risk 2, Then

Expectancy = 2 x 0.5 =1

For Making Profit, Expectancy Should Be Positive Number (2/n)

To Calculate Expectancy, You Need Defined System With Rules To Get Success Rate and Reward Risk. If You Have No System To Take Decisions, You Are Hanging In Thin Air and Will Never No Whether You Will Keep Making Or Loosing Money In Future (3/n)

Success Rate Depends Upon Whether Trade Reverses Beyond Certain Limit After Entering In Trade. Success Rate Depends On
1. Stock Selection
2. Entry Point
3. Initial Stop Loss

1. Stock Selection- Understand Trend Based On Higher Timeframe Buy Strongest Stock, Sell Weakest. (4/n)

2. Entry Point - Buying When Stock Is Falling Reduces Success Rate. Wait Till Price Stabilises and Resumes In Direction Of Original Trend. Success Rate Will Improve.

3. Stop Loss - Too Tight Stop Loss Reduces Success Rate. Too Loose Will Lower Reward Risk. Balancing Act.(5/n)

Reward Risk Depends On:
1. Intital Stop Loss
2. Trailing Stop Loss
3. Profit Booking Exit

1. Initial Stop Loss - As Discussed
2. Trailing Stop Loss - Stop Loss Should Move In Favour Gradually, To Lockin Partial Profits In Case Of Sudden Reversal
(6/n)

3. Profit Booking Exit- Just Trailing Stop Loss Causes Significant Giving Back Of Profits When Trend Eventually Reverses. Have System to Capture As Much Profit as Possible Before Reversal

System Needs To Be BackTested and Put In Live Trading To Arrive at It's Expectancy (7/n)

Negative Expectancy System Will Lose Money No Matter What. Before You Put Money On System, Taste It Out With Small Risk Covering At Least 100 Trades. Once You Are Satisfied With System Performance & Expectancy, Then Only Put Full Capital To Use. (8/n)

Till Then , Put Your Capital In FD, Mutual Fund, Index Fund, Where ever You Feel Comfortable. It Takes Time To Have Positive Expectancy System and Execute It With Confidence. Be Willing To Give Yourself That Time. (9/n)

Remember The Old Stock Market Adage:

People Come To Market With Lot Of Capital and No Experience.
When They Leave, Most Have Lot Of Experience But No Capital (n/n)

#Correction
Success Rate = No Of Profitable Tades/ Total Trades

Expectancy = (Success Rate x Reward Risk )- (1 - Success Rate)

If Success Rate is 0.5 and Reward Risk 2, Then

Expectancy = (0.5x2)-(1-0.5)
=1-0.5
=0.5

Losses Can't Be Avoided. They Are Part Of The Game. Depending On You Style, Success Rate and Reward Risk Will Vary. Make Sure, Irrespective Of Losses, You Have Positive Expectancy System.