diff --git a/docs/edge.md b/docs/edge.md index 40ecedc55..cab2de748 100644 --- a/docs/edge.md +++ b/docs/edge.md @@ -17,6 +17,30 @@ The answer comes to two factors: - Win Rate - Risk Reward Ratio -Win rate means over X trades what is the perctange of winning trades to total number of trades (note that we don't consider how much you gained but only If you won or not). - \ No newline at end of file +### Win Rate +Means over X trades what is the perctange of winning trades to total number of trades (note that we don't consider how much you gained but only If you won or not). + + + + +### Risk Reward Ratio +Risk Reward Ratio is a formula used to measure the expected gains of a given investment against the risk of loss. it is basically what you potentially win divided by what you potentially lose: + + + +Over time, on many trades, you can calculate your risk reward by dividing your average profit on winning trades by your average loss on losing trades: + + + +### Expectancy + +At this point we can combine W and R to create an expectancy ratio. This is a simple process of multiplying the risk reward ratio by the percentage of winning trades, and subtracting the percentage of losing trades, which is calculated as follows: + +Expectancy Ratio = (Risk Reward Ratio x Win Rate) – Loss Rate + +Superficially, this means that on average you expect this strategy’s trades to return .68 times the size of your losers. This is important for two reasons: First, it may seem obvious, but you know right away that you have a positive return. Second, you now have a number you can compare to other candidate systems to make decisions about which ones you employ. + +It is important to remember that any system with an expectancy greater than 0 is profitable using past data. The key is finding one that will be profitable in the future. + +You can also use this number to evaluate the effectiveness of modifications to this system.