If you’re serious about making a consistent income trading the markets, you’re going to need the positive expectancy formula.
This year, I have already given you trading strategies, money management rules and high profitable trades you can use when you trade.
But no matter how many tools, rules and strategies I give you, without this one formula you won’t succeed as a trader.
The Positive Expectancy Formula
It’s a myth that you need a high win rate to be a profitable trader.
You can have a 99% win rate but that 1% could be such a big losing trade it could bankrupt your portfolio.
That’s why you need the Positive Expectancy Formula.
I first came across this concept through one of the world’s most popular trading books called “Trade Your Way to Financial Freedom” by Van Tharp.
He explained in one line that the expectancy is the amount you stand to gain (or lose) for each rand you risk.
And that when you calculate the expectancy, the result will need to be positive to ensure you have a successful trading strategy.
Positive Expectancy Formula: What you need to succeed as a trader
Here are four values you’ll need to calculate your expectancy.
Value #1: Your average winning trade (Rands) (AW)
Value #2: Your winning percentage on all of your trades (win rate)
Value #3: Your average losing trade (Rands) (AL)
Value #4: Your losing percentage on all of your trades (losing rate)
Once you have those four values then you can plug them into the Positive Expectancy Formula:
Positive expectancy= (AW X Win rate) – (AL X Losing rate)
You’ll need to have at least 30 trades back-tested or forward tested to show an accurate result of the expectancy of your trading strategy.
And if you have a positive number in your expectancy over that set of data, you’re bound to have a successful strategy which will bring you consistent income.
Let’s use my Red Hot Storm Trader service’s results over the past six years, so you can see whether it has a positive expectancy.
We’ll use an average trader’s portfolio of R10,000.
Average winning trade = R400
Win rate = 62%
Average losing trade = R400
Losing rate = 38%
We simply plug in those values into the Positive Expectancy Formula…
Expectancy= (AW X Win rate) – (AL X Losing rate)
= (R400 X 62%) – (R200 X 38%)
= R248 – R76
We have a Positive Expectancy, which means the strategy should remain profitable in the future.
If you have a portfolio of R10,000, you can expect to earn R172 per trade.
And after 100 trades, you should bank R17,200.
However, it’s all relative to the portfolio you have. Say you have a portfolio value of R100,000.
After 100 trades you’d bank up to R172,000.
The bottom line is:
When you use the Positive Expectancy Formula, the result must be positive if you want to make a profit over time.
Never use a system with a zero or negative expectancy. You will not win.
If you’d like to speed up your trading success, then join Red Hot Storm Trader where we use our already successful 20 year trading strategy to help you build your portfolio in 2024… YES! Sign me up!