2016issue C0323-24
Construct expectancy by bounding losses and winner size
Across a series of trades, expectancy combines how often winners and losers occur with the average size of each group. Average winner size and average loser size can be controlled independently of reliability, including through an average-loss bound and winner scale-in.
- Across a series of trades, expectancy is the combined effect of how often winners and losers occur and how large each group is on average.
- From an expectancy view of a sequence of trades, selection and timing matter less than they do when judging a single trade.
- An average-loss bound can keep the typical losing trade from exceeding a chosen size, and the exit itself is enough without predictive analysis.
- Winner scale-in can raise average winner size independently of how many winners or losers occur.
Expectancy across a series of trades
Across a series of trades, net result can be expressed with two parts: how often winners and losers occur, and the average size of each group. Expectancy is that combined effect.
From an expectancy view of a sequence of trades, selection and timing matter less than they do when judging a single trade.
Reliability and independent size control
The share of winners versus losers is called reliability. Raising the share of winning trades becomes harder at higher levels, with a move from 40% to 50% described as much more difficult than a move from 30% to 40%.
Average winner size and average loser size can be controlled independently of how many winners or losers occur.
An average-loss bound before entry
If every losing trade is exited at a maximum loss of 3%, the average loss cannot exceed that bound, and the exit itself is enough without predictive analysis.
An average-loss bound is a pre-set exit that keeps the typical losing trade from exceeding a chosen size.
Winner scale-in after confirmation
Average winner size can be increased by adding to positions that continue to confirm they are larger winners.
Winner scale-in means adding exposure only after a position continues to confirm it is becoming a larger winner.
All readings on this track · 22 readings
- 1995A pre-trade checklist that bounds loss before the order
- 1998Ledger audit of exits, payoff, and overlap
- 1998A return-to-loss filter for drawdown-aware evaluation
- 2000Pair historical volatility with return-to-loss filters
- 2001Credit-spread construction that can fail before any order is sent
- 2002Evaluating mechanical systems in a traders market
- 2002Profitability as a bound implied by RWL and commission
- 2004A day-trading breakeven matrix for size and win rate
- 2006Sit out, size and expectancy as one procedure
- 2006A testable intraday procedure from setup to stand-down
- 2007A planned liquidity offer at the inflection point
- 2011A style-neutral expectancy filter for system evaluation
- 2011Separate buying power from posted risk capital
- 2012Design before you trade: testing mechanical systems
- 2014Ideal trader hindsight as a pretrade filter
- 2014When expectancy and drawdown limits disagree
- 2015Signal, confirm, and invalidate before the trade
- 2015Price the win, stall, and loss before a stock entry
- 2016Construct expectancy by bounding losses and winner size
- 2017Estimate expectancy before you accept the trade
- 2017Size ladder tests for drawdown caps and expected value
- 2017Evaluate a high-yield correlation break as one locked procedure