This formula for profitable trading was shared in my Facebook trading group by professional trader and money manager Richard Weissman author of Trade like a Casino.

What is positive expectancy? Here’s a .xlsx friendly formula: Expectancy = ((PW*AW) – (PL*AL))*F
Where PW = % Win; AW = Average Win; PL = %Losses; AL = Average Loss; F = Frequency

Trader A: Negative Expectancy despite 80% wins!
PW = 80%; P:L ratio = 0.1 (+100:-1,000); Frequency = 250 per year

Trader B: Negative Expectancy despite AP:AL ratio of 2:1
W% = 30%; P:L ratio = 2:1 (+1,000:-500); Frequency = 150

Trader C: Best per trade expectancy
W% = 45%; P:L ratio = 2.5:1 (2,500:-1,000); Frequency = 35 (would we have confidence if Frequency was 2 per annum?)

Trader D: Best Annualized expectancy
W% = 43%; P:L ratio = 2.4:1 (2,400:-1,000); Frequency = 250

Be sure to read the formula plus Richard’s examples A, B, C and D… everyone wants A in the beginning because they’re afraid to lose. Later, they imagine key is big wins, small losses so they want B. Then they realize they need to look at %W and avg P:avg L ratio so they choose C. Finally the mature trader understands the math and chooses the correct answer, D.

The Formula for Profitable Trading

By Steve Burns

After a lifelong fascination with financial markets, Steve began investing in 1993 and trading his accounts in 1995. It was love at first trade. After more than 30 successful years in the markets, Steve now dedicates his time to helping traders improve their psychology and profitability. New Trader U offers an extensive blog resource with more than 4,000 original articles, online courses, and best-selling books covering various topics.