Last Update: August 2021

≈ Combining Probability with Profits and Losses ≈

Traders,

Yesterday we introduced the following profit formula:

Sum of winners > sum of losers

Today we’re upping the complexity a notch by unveiling the expectancy formula:

(probability of profit x average gain) – (probability of loss x average loss)

It’s a handy metric for calculating the average outcome per trade. If it’s a positive number, your trading system should yield profits over time. If it’s a negative number, well, then your system will generate losses over time.

Here’s a stock trading example. Let’s pretend this is for a bull retracement pattern that you’ve traded 1,000 times and discovered you win 55% of the time. Further, suppose your average gain is $200, and your average loss is $190. Here’s how your expectancy formula would look:

(0.55 x $200) – (0.45 x $190) = $24.50

Now, for a few takeaways.

1. First, this is a profitable system with an average outcome of scoring $24.50 per trade.
2. Second, even though your average gain isn’t substantially higher than your average loss ($200 vs. $190), you are still printing gains over time due to the slight edge on your probability of profit.

#TeamTackle

---

Chart of the Day: Equity Curve

Here’s the equity curve for the trades included in yesterday’s chart of the day. There were 368 trades. The average gain was $70.29, and the average loss was $74.44. The probability of profit was 61%. Even though the average loss was higher than the average gain, the percent profitable was high enough to create an upward sloping equity curve.

---

Video of the day: Understanding The Equity Curve

In this video tutorial, Coach Tyler Craig teaches how to fully understand the different types of equity curves.

---

Financial freedom is a journey

Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.

---

Legal Disclaimer

Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.

All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.