Forex

Apr 1

Today, we will discuss mathematical expectations in trading. Mathematical expectation refers to the average outcome of a trading strategy over many trades, taking into account both profits and losses. It’s a statistical concept that helps traders assess the potential profitability of their strategies.

There is a simple formula for calculating the mathematical expectation of a strategy:

Math Expectation = (Pw * Aw) – (Pl * Al)

Pw (Probability of Win): The percentage of trades that result in a profit.

Aw (Average Win): The average profit per winning trade.

Pl (Probability of Loss): The percentage of trades that result in a loss.

Al (Average Loss): The average loss per losing trade.

You can apply this formula both for an existing trading strategy and when backtesting new ones without the risk of losing real money.

To calculate the mathematical expectation of a trading strategy, you need to follow these steps:

1. Define Your Trading Strategy: Clearly define your trading strategy’s roles, including entry and exit criteria, position sizing, stop-loss levels, and profit targets.
2. Collect Data: Gather historical data for your trading assets. This coold include price data, volume data, and any other relevant information needed to backtest your strategy.