How many times have you been asked

Whats your Win / Loss ratio?

I get asked this question a lot and my response is often met with a confusing look.

I don't care what my Win / Loss ratio is. All I care about is whether my strategies make me money

Expectancy - The Secret of the Casinos

Here is why Las Vegas Casinos make so much money. Lets take a look at the parameters of the game of roulette (based on a single $1 bet on a single number)

  • The Win / Loss ratio is 1/38 = 0.026 (or a 2.6% chance of winning vs a 97.4% chance of losing)
  • The Average Losing bet is $1
  • The Average Winning bet is $35 (odds of 35 to 1 against winning)

The expectancy of this system is [0.026*35] - [0.974 * 1] = 0.91 - 0.974 = -0.064 For every bet placed the Expectancy is a Negative $0.064 (for the punter) and so by having a small edge, the casino will always make money. Now obviously a trading system that had similar parameters to that of a game of roulette would be pretty hard to trade (imagine losing 97.4% of the time), but the concept remains the same.

A trading system does not need to have a great Win /Loss ratio in order to make money, it simply needs to have a Positive Expectancy.

Expectancy - The ONLY number EVERY trader MUST know

Put simply - If your system has a Positive Expectancy, then you can expect to make money with it. If it has a negative expectancy, then expect to lose. The formula for expectancy is;

[W/L ratio * Ave Profit per trade] – [(1- W/L ratio) * Abs(Ave Loss per trade)]


How to calculate your systems Expectancy

Your current trading system has the following metrics

  • Number of winners = 60
  • Number of Losers = 73
  • Average Profit per Trade = $200 (Total value of winning trades / number of winners)
  • Average Loss per Trade = -$120 (Total value of losing trades / number of losers)

Expectancy can be calculated as follows

  1. Calculate Win / Loss ratio
    • 60/(60+73) =0 .45 (Only 45% of trades are winning trades)
  2. System Expectancy is
    • [0.45 * 200] - [(1-0.45] * Abs(-120)] = $24

So even for a trading system that has a Win / Loss ratio…

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