What is meant by positive expectation?

System rules that can be shown to generally produce a profit over a period of time, are said to have a positive expectation.

We say generally because there is no guarantee -and there is no mathematical probability as such. There is nothing in commodity trading that says that ultimately, this or that probability will be seen. The markets are unpredictable in every way – although from time to time we come across traders who insist they can predict what the markets will do.

We can all predict the markets but there is no way of knowing if our predictions will materialise. Successful commodity traders set no store by predictive trading systems, which are figments of the imagination. Their systems are based on stronger material than prediction.

Newcomers to trading are often confused and sometimes disappointed when they learn that there is no predictive element in trading commodities.

But the lack of mathematical certainty surrounding commodity trading does not mean there cannot be techniques and systematic ways of ‘improving the odds’ or limiting the risks. Quite the reverse – professional traders understand all sorts of techniques that give them the edge over the majority.

Also there are sound principles and best practices that must be applied if you are to have any chance of success. Although no trader needs to become involved with it, sound mathematics underlies many aspects of systems trading.

One of these aspects is positive expectation – without which your system will not be able to produce profitable results.

There is a straightforward way of calculating ‘expectation’.

All that is needed is a complete list of trade results for the period in question, containing:

• The percentage of winning trades to total trades.
• The average $ amount of each winning trade.
• The average $ amount of each losing trade.

By applying a simple formula you can tell if a positive expectation is indicated.

Ironically, although positive expectation is essential, most systems traders pay little regard to it because their evaluation methods completely bypass any need for its calculation.

However, if you would like to know more about positive expectation and its calculation, please click here

 

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