A common question
among traders,
new and
experienced,
is ‘how do
I know if I
have a good trading system?’.

One obvious answer is ‘are you making money?’. This answer is
very subjective though and a more scientific answer is really
required. Fortunately, one already exists and is called the
Expectancy Value of your trading system.

If you want to become a successful Forex Trader then you are
well advised to determine its value for a number of important
reasons which are:.

This number will tell you if your trading system is capable
of making you profits.

The Expectancy Value will provide you with a baseline against
which you can evaluate the effects on performance of any tweaks
and changes you make to your Forex trading system.

You will also be able to select the most effective money
management strategies through the use of this number.

Your expectancy value will tell you the average amount you can
expect to profit, over the long haul, for every $1 risked.

Negative expectancy values produce losses whilst positive ones
generate profits. 

 Once you have obtained a positive expectancy system, money
management will then be the biggest factor in how fast and
how large your bankroll grows. This topic was discussed
in next Hubs.

So, how do you Calculate the Expectancy Value of Your
Trading System? This is done using the following formula:

Expectancy = (%Win X Avg_Win) - (%Loss X Avg_Loss)

% Win = percentage of trades that are winners

% Loss = percentage of trades that are losers

Avg_Win = average size of a win

Avg_Loss = average size of a loss

For example, out of 100 trades, 80 trades were won with
an average win of $30 whilst 20 trades were lost with
an average loss of $60.

Avg_Win = $30

Avg_Loss = $60

%Win = 80%

%Loss = 20%

The expectancy Value would be:

Expectancy Value = [0.80 X $30] - [0.20 X $60]

Expectancy Value = $24 - $12

Expectancy Value = $12

This means that in the long run, our trading system is
capable of providing a return of $12 for every $1 at risk.

The expectancy of a trading system is calculated using actual
trading results taken directly from past trade history.

As such it is important to realise that that these results are
gained from actual trades that include all associated costs.

Good Luck with your Forex Trading.

If you have any queries, please leave a comment and
I will do my best to answer it.

Regards,

Terry Allen

Please be advised that Foreign Currency trading involves
substantial risk of monetary loss.

All information contained on this website is provided as general
commentary and must not be constituted as investment advice.

I will not accept liability for any loss or damage, including
without limitation to, any loss of profit, which may arise directly
or indirectly from use of or reliance on this information.