Direct from the desk of Dane Williams.
Expectancy in forex is a crucial concept that any trader worth their salt needs to get a grasp of.
While it can seem that way, I assure you that it's not just some buzzword thrown around in elite financial circles.
Actually, it holds the key to understanding the potential profitability of your entire trading strategy.
So, what exactly is expectancy in forex?
Well, in simple terms, expectancy is a mathematical formula that helps forex traders assess the likelihood of making profits based on their trading system.
Now, you’re probably wondering why expectancy matters so much.
The answer lies in its ability to provide a realistic picture of the overall performance of your forex trading strategy.
Instead of fixating solely on individual wins or losses, expectancy takes a, let’s say more holistic approach.
It considers both your proportion of winning trades, as well as the average size of those wins, up against the losing trades' average size.
In essence, it cuts through the noise and gives you a more accurate measure of your forex strategy's effectiveness.
This brings us to the relationship between expectancy and win percentage.
While a high win percentage might seem like a surefire sign of success, it's not the whole story.
Expectancy adds depth to this narrative by factoring in the size of the wins and losses.
You could have a strategy with a 70% win rate, but if the losses are consistently larger than the gains, your overall expectancy might still be in the negative.
See what I mean?
So now comes the $64 million question.
Which is more important, a high win percentage or a positive expectancy?
This is where the psychological nuances of forex trading come into play.
While a higher win percentage can boost your confidence on the surface, it's the expectancy that truly reveals your strategy's long term viability.
It lets you view the bigger picture, ensuring that not only are you winning more often than not.
But that the wins are sufficient to overall outweigh the losses.
Let me break it down further. Imagine you have a trading strategy with a 60% win rate and on average, your winning trades are twice the size of your losing trades.
The expectancy, in this case, would be positive.
Indicating that, over the long run, your strategy is expected to be profitable.
On the flip side, a strategy with an 80% win rate might still be unprofitable if the winning trades are consistently smaller than the losing ones.
To conclude, while a high win percentage can be psychologically satisfying, it's the expectancy that truly gauges the effectiveness of your forex trading strategy.
It's the integrated view that considers both the frequency and size of wins and losses.
So, as you delve deeper into your own trading, keep in mind that the real measure of success lies not just in how often you win.
But in the overall expectancy of your forex trading strategy.
Best of probabilities to you.