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Hello All,
I haven't been able to check in lately but wanted to post my update.
I think I've got a handle on this expectancy calculation now. I
calculate my 1R risk based upon my stoploss. I then measure any gain
or loss against the 1R risk and calculate expectancy off of that.
This does not take position sizing into effect.
Al, as far as my system goes, it was only a volatility
breakout test on MSFT. It needs alot more work as I saw when I
tested it on a sample
period on a bigger stock group.
Thanks for the help everyone,
Rob
--- In amibroker@xxxx, "Avcinci" <avcinci@xxxx> wrote:
> Silvarius is right. Rob, if you are risking 1% of capital, you can
easily calculate expectancy in the following way: suppose your
capital is $100,000, and your risk per trade is 1% of $100,000 or
$1,000. Your risk in terms of R-multiples is 1R, where 1R is defined
as $1,000 risked per trade. According to Tharp, the easiest way to
calculate expectancy is simply to add up all your R-multiples and net
them out by subtracting the negative R-multiples from the positive
ones, then divide by the no. of trades. This gives you your
expectancy per trade. In Rob's case, his average winning trade was
$3,413 or 3.4 R with 13 winners. His total positive R-multiple earned
was 3.4 * 13 or +44.2 R. His average losing trade was $811 or -0.8 R
with 18 losers. His total R-multiple lost was -0.8 * 18 or -14.4 R.
So, his total net R-multiple return was 44.2 - 14.4 = 29.8 R per
trade. He had 31 trades, so his expectancy per trade is 29.8/31 or
0.96 R per trade. This means for every dollar risked, he makes his
dollar back plus an additional $0.96. Not a bad return or expectancy.
Rob, care to share your system with the board?
>
> Regarding what Silvarius said about accounting for position sizing,
that's why you can't directly use Amibroker's avg win/avg loss ratio
if you used position sizing in your backtesting. For example, in
Rob's case, his W/L ratio was 3412/811 = 4.21. The fraction of
winners is 13/31 = 0.42. If you use Tharp's formula for calculating
expectancy, it would be 0.42*4.21 - 0.58*1 = 1.19. The expectancy is
too high (1.19 vs. the correct 0.96) because you didn't take into
consideration the weighting of winners and losers due to position
sizing.
>
> Al Venosa
>
> ----- Original Message -----
> From: Silvarius
> To: amibroker@xxxx
> Sent: Friday, June 21, 2002 1:30 PM
> Subject: RE: [amibroker] Re: Tharp's Expectancy Calculation
>
>
> Hi Rob,
>
> Your calculation of expectency is not correct. Hereafter are a
few considerations that may help you :
>
> 1) You cannot calculate expentency after applying position
sizing. If you do so, just imagine your first trade is made with 100
shares, and your last with 300 shares (the system is good and your
equity si growing :-)), with an identical result in term of
percentage (let's say a gain of 15%), the last trade will "weight" 3
times as much as the first one. So calculate your expentency BEFORE
applying position sizing, or express every trade on a one share basis
by dividing every single trade by the number of shares you risked in
it.
>
> 2) The expectency can be expressed in different unit of risk. If
you apply the formula : "average gain * perc gain - average loss *
perc loss", you express the expectency in dollars for one share
invested if the basis of your test is one share (once again, it works
only if your test is made before applying position sizing). You can
also calculate : "win/loss ratio * perc gain - perc loss". Here, you
express your expectency for one unit of average loss. You can also
express your expectency for $ 100 invested by expressing the results
of your trades in term of percentage (a 15% gain is $ 15 for $ 100
invested). And you can also express your results in term of stop if
you consider your risk is determined by your stop (by dividing the
result of each of your trades in dollars by the amount of your stop).
There, the expectency is expressed for one dollar risked (but of
course, if you change the amount of your stop, the expectency is
different and must be recalculated).
>
> As you can see, you can have different value of expectency for
one system according to the unit in which you express it. It up to
you to choose the one that you understand best. One thing that
doesn't change nevertheless, is that a system that shows a positive
expectency will remain positive whatever unit you choose.
>
> Well, I could have given you a formula "ready to use", but I
think it wouldn't have been a good solution, as a figure that is not
understood is useless. Or so is my belief. The final point is : you
must be able to say, after having calculated your expectency : "if I
invest/risk 1 unit on one trade, I get 1 unit + gain as a result on
the long term".
>
> Best regards, Jerome ULRICH
> -----Message d'origine-----
> De : bowbie89 [mailto:robm@x...]
> Envoyé : vendredi 21 juin 2002 15:01
> À : amibroker@xxxx
> Objet : [amibroker] Re: Tharp's Expectancy Calculation
>
>
> Hello Jerome,
>
> This was a test just on one stock(MSFT). I'm still not seeing
this
> clearly. My overall system expectancy is $937 by taking my net
> profit and dividing it by the # of trades(31). I am risking 1%
of my
> equity as you can see in the code below -
> Capital=100000;
> risk=.01*Capital;
> shares=risk/Max(2*ATR(10),2*ATR(3) );
> PositionSize=shares*Ep;
>
> Total profits on winning trades(13) = 44,366
> Total losses on losing trades(18) = 15,322
>
> From the statistics printout my Avg Win/Avg Loss = 3.86
> So Avg Win X Pct. Win - Avg. Loss X Pct. Loss = 1.04
>
> Yet it seems when I try to eliminate the position sizing effect
to
> get down to a per share basis, it seems to give me a negative
> expectancy. It just seems like I should setup my probability
matrix
> and leave my gains & losses as is.
>
> Any more thoughts on this?
>
> Rob
>
>
>
> --- In amibroker@xxxx, "Silvarius" <silvarius@xxxx> wrote:
> > Hello Rob,
> >
> > The method to divide your results by the number of shares is
the
> right one
> > only if you test a system on a single security. If you test
it on
> multiple
> > securities, you must make it on a basis that is commun to
every
> securities
> > (money, percentage, indices etc ...).
> >
> > Best regards, Jerome ULRICH
> > -----Message d'origine-----
> > De : bowbie89 [mailto:robm@x...]
> > Envoye : vendredi 21 juin 2002 05:15
> > A : amibroker@xxxx
> > Objet : [amibroker] Tharp's Expectancy Calculation
> >
> >
> > Hello All,
> >
> > I was wondering if someone could help me out. I'm having
trouble
> > calculating expectancy based upon Tharp's book. I know
> > I can calculate the expectancy from the statistic report
using avg
> > win/avg loss but I wanted to follow Tharp's procedure.
> > I just did a simple backtest on Microsoft and was trying to
figure
> > out the expectancy based upon Tharp's "Trade Your
> > Way To Financial Freedom" book. On page 158, his second
step is
> to
> > eliminate the effect of position sizing by only
> > considering single units or 100 share blocks. I think this
is
> where
> > I'm having my problems. Am I supposed to divide my
> > gains and losses by the number of shares and then times it
by
> 100? I
> > did this but it just doesn't seem right. I wanted to
> > attach my excel file but I don't think I have the rights to
> upload it
> > or I'm not seeing how to do it.
> >
> > Thanks for any help,
> >
> > Rob
> >
> >
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