Why are people who cannot calculate expectations in the market
Why would a person who cannot calculate expected value be in the market
If you cannot answer, it is no different from placing a gamble at dice and dragon bones.
Last time, I explained that the real number that decides win or loss is expected value. This time, I will go even further and be stricter.There are far too many people who do not grasp their own trading expected value.And they pour important money into the market without grasping it. This is an extremely dangerous situation.
In the business world, no one starts a venture without calculating whether it will be profitable. Yet in trading, many enter without calculating expected value. Continuing to trade without being able to calculate expected value is the same as endlessly placing bets when you don’t know whether you will win.
Not knowing the expected value = Not knowing the odds
Expected value is a number that tells you whether your trading method"is a profitable system or a losing one"is. If the expected value is positive, your capital will grow if you continue. If it is negative, it will decrease. Trading without knowing this crucial number is like entering a battle without knowing your odds.
Are you trading with a vague feeling like “seems like I’ll win” or “this method looks good”? Feelings are not reliable. When you actually record and calculate, it is not uncommon for the expected value to be negative.Even if your intuition says you’ll win, the numbers show a negative value— it is this gap that the expected value helps you notice.
Expected value can be calculated from records
Calculating the expected value is not difficult. What you need isyour own trading records. The records explained in Series 4 come into play here.
From past trading records, derive the following numbers: win rate (number of wins ÷ total trades). Average profit (average profit of winning trades). Average loss (average loss of losing trades). If you know these three, you can calculate the expected value.
① Win rate (wins ÷ total trades)
② Average profit (average profit of winning trades)
③ Average loss (average loss of losing trades)
Expected value = (average profit × win rate) − (average loss × loss rate)
If you have the records, you can calculate it with just a calculator.
※Costs must be considered separately.
All of these can be calculated as soon as you keep trading records. Conversely, if you don’t keep records, you cannot calculate the expected value. That is why records are important. Records serve as the foundation for knowing the most important number, the expected value.