Expectancy is defined as "How much money gained for every $1 risked".
What is the expectancy for this particular series of trades?
- Risked €1, won €2
- Risked €2, won €1
- Risked €3, won €6
- Risked €3, won €6
Expectancy is defined as "How much money gained for every $1 risked".
What is the expectancy for this particular series of trades?
Van Tharp addresses expectancy in his book, Trade Your Way to Financial Freedom. Here is his definition of expectancy.
$\frac{winPct * winAmt - losePct * loseAmt}{trades}$
I would recast your trades as follows:
Your winning percentage is 75%. Your losing percentage is 25%. Your winning amount is €7. Your losing amount is €1.
So your expectancy would be $\frac{.75* €7 - .25 * €1}{4}$
Your expectancy, by Tharp's reckoning, would be €1,25. Tharp does not directly use the amount at risk. Rather, his definition takes into account that the trader or quant may choose a larger bet size when the odds are in his favor.
Lets see if I have this right:
Expectancy = average win / average loss.
Thus:
Thus, average win = €7 / 2 = €3.50, average loss €1 / 1 = €1, so expectancy is 3.50 for this series of trades?