An Expectancy Calculator to Monitor Forex Trading Strategies
A forex trading system is a strategy implemented to help determine the timing and price levels at which to open and close forex trades. Most trading systems leverage signals that are generated by fundamental or technical analysis. The trader evaluates and acts on these signals to decide whether they should buy or sell a specific currency. Used properly, a forex trading system will filter for just those signals that offer relevant information to the trader. The trader should evaluate the level of success or failure of their trading system on an ongoing basis and make strategy changes if necessary.
Types of Trading Systems
Generally speaking, there are two types of trading systems:
Discretionary: Discretionary trading systems rely on the judgment of the trader to properly interpret signals and take appropriate actions. For this reason, the use of discretionary trading systems is typically recommended for only for professional forex traders.
Mechanical: Mechanical trading systems can offer less experienced forex traders an automated way to interpret signals and execute a trading strategy. The development of these mechanical systems requires the creativity of professional traders to monitor a fixed number of fundamental or technical signals and generate triggers to the system user.
Calculating Expectancy
Expectancy is a formula used by forex traders to assess the reliability of their trading system. To calculate expectancy, the trader will collect data regarding winning and losing trades to determine how profitable winning trades were versus losses taken on unsuccessful trades.
The formula for expectancy can be written as:
E = [1 + (W/L)] x P-1
Where:
W= Average winning trade
L= Average losing trade
P= Percentage win ratio
A positive expectancy of 20%, for example, would mean that your trading system will (over the long-term) return 20 cents for every dollar.
The Value of Knowing the Expectancy
Expectancy offers forex traders a good way to analyze and compare systems and revisions. Any system that brings a negative expectancy ratio should not be used.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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