A successful trading system requires a "positive expectancy" or "H," which is achieved by consistently executing a strategy that yields profits over time, rather than relying on a complex setup or a single metric.
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You must have an H in the markets or
rather your trading system. Your trading
strategy must have an H. You might be
wondering, man, Rainer, what is an H? An
H is something that you do repeatedly
that yields a profit over time,
otherwise also known as a positive expectancy.
expectancy.
And by the way, if your age is using 19
indicators on your chart, you don't have
a strategy. You've got a Christmas tree.
Okay. So, how do you then define an age?
So, you can define an age using this
mathematical formula. Don't don't freak
out, right? Because it's simple that
even a 12-year-old can figure this one.
So, E, right? stands for either
expectancy or your age is equals to your
winning percentage multiply by your
average gain minus your losing
percentage multiply by your average
loss. I'll walk you through an example
so you can see how this this works.
So let's say you have a trading system
that has a 70% winning rate. Your
average gain is $80 and your losing rate
is 30%. Why 30%? Because you know 100%
minus 70% you'll get 30%. So that's your
losing rate. And let's say your average
loss is $100 per trade. So what you're
going to do is to plug in these numbers
into the formula I just shared with you
earlier. So this is your winning rate
multiply by your average gain, your
losing rate multiply by your average
loss, and you'll get $26 per trade. So
this means, right, what does this $26
means? This means that you can expect to
earn an average of $26 per trade. So
let's say you have taken 100 trades
using the using this trading system.
What you're going to find is that you
will have about $2600 right after taking
100 trades. So this is what it means to
have a positive expectancy and this is
what it means to have an H in the
markets. Your E right your expectancy
has to be positive. If it's negative
then clearly you don't have an H and the
more you trade the more you will lose.
Now a question for you. Which is more
important? Your winning rate or the
risk-to-reward ratio? I'll give you five
seconds. One, two, three, four, five.
Okay. The answer is this. The most
important metric is it's a trick
question. Actually both of them are
equally important because on its own
let's say on its own your winning rate
is meaningless because you can have a
90% winning rate a 95% winning rate but
let's say every time you win you win a
dollar but every time you lose you lose
$100. So despite having a very high
winning rate you still have a
unprofitable trading system. And
likewise it's true you can have a
amazing risk-to-reward ratio. Let's say,
let's say every time you risk a dollar,
you make $3 back, right? Quite a
favorable risk-to-reward ratio on your
trades. But what if your winning rate is
only 10%. Then what use is that? You
still have a unprofitable trading
system. So to know whether your trading
system has an age in the markets to know
whether you have a positive expectancy,
both your winning rate and
risk-to-reward ratio, they you must
combine them because both of them
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