Who the Bleep Cares About Trade Expectancy

Source: http://trading-u.com/blog/2011/06/who-the-bleep-cares-about-trade-expectancy/

Quelling two of the five most common fears in trading: event risk, and trade expectancy, will go a long way in quieting the other three: fear of failure, fear of being wrong, and fear of no control. This is because event risk and trade expectancy are directly related to trading, while the other three are personal foibles. Event risk is not so hard to deal with using sound money management and stops, but fear of trade expectancy… well that is what proves the end of the road for most speculators.

Trade Expectancy is your anticipated win/loss ratio plus your risk to reward ratio. Without having a good idea what those numbers are, you will not be able to stomach the risk of executing a trading system through even reasonable draw-downs. It is essential that you understand how your method or system will perform overtime in all trading environments. The biggest road blocks to a high expectancy rate, i.e. success, is that markets have 2 different tendencies, which categories the speed and distance with which they move through time: the first is trending, and the 2nd counter-trending. It can be difficult to make money consistently with one method in both environments, particularly if you are on a higher time frame chart; difficult in a demo account, dangerous in a live account. Experienced traders understand that markets spent more time moving in counter-trending patterns than trending. This is because of #1: professional market makers – whose job it is to supply a constant bid, and a constant offer in a market, i.e.: buy and sell all day long as many times as they can which creates a sideways pattern– and #2: low event risk, a.k.a. lack of new news (significant incoming information) to move the markets from one level to another.


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