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Is it? I'm not sure.
Example:
A trader has a system with a 50/50 win/loss ratio. Starting with
$10,000, he has three losing trades in a row with each costing him
10% of his existing equity. Three losses, each 10%, $1,000, $900,
$810. Average loss -10%, or (1000+900+810)/3 = $903.33.
>From his current equity of $7290, he has three winning trades that
bring him back even to $10,000 (it's $9999.87, to be precise). Each
trade is a win of 11.111% of his existing equity,
(809.99+899.99+999.90)/3 = $903.29.
Using an expectancy formula calculated with percentage profit of
winning and losing trades would lead him to believe he had an edge of
1.111%, but he obviously doesn't since the average dollar amount of
his wins and losses are virtually the same.
Or if he took a larger hit of 30% on his first trade, bringing his
equity down from $10,000 to $7,000 and then had a big win of 42.85%
bringing him back even, he'd think he had a REALLY big edge when in
reality the dollar amount of both trades were the same.
Or am I looking at this the wrong way? I'm not exactly a bookie.:)
Luck,
Sebastian
--- In amibroker@xxxxxxxxxxxxxxx, "Fred" <ftonetti@xxxx> wrote:
> Using $ as opposed to % in formulas like this is really only good
for
> the futures traders who tend to trade the same number of contracts
or
> dollar amounts for awhile ...
>
> --- In amibroker@xxxxxxxxxxxxxxx, "sebastiandanconia"
> <sebastiandanconia@xxxx> wrote:
> > Sorry, I had to edit my first reply. Let's try this again.:)
> >
> > In your expectancy formula, are you calculating Avg Profit and Avg
> > Loss as % (as it appears in your formula)? Because expectancy
> > formulas quote the profits and losses in dollar amounts, like
this:
> >
> > (%Wins x Avg Profit $) - (%Losses x Avg Loss $)
> >
> > Could this account for the difference of opinion that you and
Tomasz
> > have? Expectancy tells you what dollar amount you can expect to
win
> > or lose per dollar amount risked. However, the dollar amount
> risked
> > doesn't vary with leverage. Buying $10,000 worth of a mutual
fund
> in
> > a cash account puts $10,000 at risk, but so does buying $10,000
of
> > that fund on margin with $5,000, it's just that you're borrowing
> the
> > other $5K. Same thing when buying $10,000 worth of a mutual fund
> > that uses 2X leverage, still the same $10K at risk. The amount
of
> > money risked is always the same, so the expectancy has to be the
> > same.
> >
> >
> > Luck,
> >
> > Sebastian
> >
> >
> >
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