When reviewing your trading performance, do you focus mainly in your win ratio or expectancy?

Win ratio simply looks at how over and over you’ve won versus the quantity of trades you’ve taken.

How often did you make the suitable call?

It’d seem to be a very important query, but when you have a look at the larger picture, it doesn’t really matter.

“Dr. Pipslow, how are you going to say that? Surely, you may’t earn a living when you aren’t right in at the very least many of the trades that you just take!”

In trading, you could realize that earning profits and being all the time right aren’t mutually inclusive. What this principally means is that one CAN exist without the opposite.

That is where the “reward-to-risk ratio” is available in.

Let’s say at the tip of the 12 months 80% of your 50 trades were losers. After making some computations, you could have came upon that your average loss was roughly $100.

At first glance, you would possibly seem to be a terrible trader–you lost 40 of your trades, which translates to about $4000 in losses.

Upon closer inspection, nevertheless, you saw that the opposite ten trades had an enormous reward-to-risk ratio.

Your average winning trade was $500. You principally find yourself making $5,000 in your winning trades and losing only $4,000 in your losing trades.

At the tip of the 12 months, you might be still profitable though you were right only 20% of the time.

Now let’s take a have a look at the alternative scenario. What if, as a substitute of being incorrect 80% of the time, you were right 80% of the time?

This happened because you’ll close your trades immediately after they went a couple of pips in your direction.

As for the losing trades, you’d just allow them to run because you only cannot handle the considered losing.

The 40 winning trades had a median gain of $50. Your losing trades, nevertheless, averaged $500. By the tip of the 12 months, you could have won $2,000 but lost $5,000.

This just goes to indicate that you shouldn’t focus just on being correct. You could have to take into accounts the expectancy of all of your trades.

Expectancy is some of the crucial facets of any trading strategy. Unfortunately, most individuals are likely to overlook this aspect and follow specializing in the profits of every trade.

For those of you who’re unfamiliar with this term, it’s time to get some forex education!

Expectancy is largely the quantity you stand to realize (or lose) for every dollar of risk.

The formula for expectancy is that this:

Expectancy = (average gain X win %) – (average loss X loss %)

Let me provide you with an example to make clear this.

Let’s say that Ryan has a trading account with a balance of $10,000. Through the years, Ryan has realized that he wins about 40% of the time, and that he makes about $250 per trade.

When he loses (which happens 60% of the time), he loses a median of $100 per trade.

So what’s Ryan’s expectancy?

Expectancy = ($250 X .40) – ($100 x .60)
Expectancy = $100 – $60
Expectancy = $40

Which means that Ryan can expect to earn $40 per trade in the long term. Notice how Ryan was in a position to generate a positive expectancy despite losing more trades than he wins.

So after 100 trades, Ryan should stand to realize $4,000 ($40 x 100).

On the flip side, if Ryan had a much higher probability of winning but his average gain was smaller than his average loss, he would actually see his account slowly get depleted in the long term.

Here’s an example.

Let’s say that Ryan’s average gain per trade was $100 per trade and his probability of gain was 60%.

His average loss is about $200 and his probability of loss is 40%.

This offers him an expectancy of ($100 x .60) – ($200 x .40) = ($60 – $80) =-$20.

Which means that for each trade, Ryan can expect to lose $20.

It’d take a extremely very long time, but his account will eventually be emptied if he maintains this level of expectancy.

The purpose is, don’t be suckered into believing that traders who win 90% of all their trades find yourself profitable in the long term.

When trading within the forex market, being right more often than not isn’t as glamorous as you’ll think it might be.

To be profitable, all that you must have is a positive expectancy.