Expectancy - the key to success in trading

Many beginner traders focus on the wrong metrics, such as the win rate, instead of actual profits. Let's say you have a 70% win rate. Sounds good, right? But what if each of those winning trades makes you 100 PLN, while a losing trade costs you 500 PLN? Even with a high win rate, you are at a loss. Another mistake is ignoring slippage. You assume you will buy shares at 100 PLN, but the actual price is 102 PLN, which changes your profits and losses to a completely different picture. Not to mention spreads, which can reach several PLN per share, significantly reducing your financial results with a larger number of trades.

Focusing on the wrong metrics leads to a false sense of security. You may have more winning trades than losing ones, but if you don't keep track of how much you earn or lose on each of them, the final result may surprise you unpleasantly. By concentrating on expectancy, you will understand that even a smaller number of winning trades can be profitable, as long as the profit-to-loss ratio is appropriate. Therefore, it is worth focusing on the average profit per trade, rather than just the number of wins.

Assume that your trading account is 15,000 PLN. If your incorrect approach to metrics causes you to lose 5% of your capital monthly, that is a loss of 750 PLN. Slippage, unfilled stop losses, and unfavorable spreads can accumulate these losses to even 1,000 PLN monthly. Over the course of a year, that amounts to 12,000 PLN, which is 80% of the initial capital. This perspective clearly shows how important it is to monitor expectancy.

Here are some steps you can take to improve your strategy:

• Calculate expectancy: (Percentage of winning trades x average profit per trade) - (Percentage of losing trades x average loss per trade).
• Analyze your trades for slippage and spread, taking them into account when planning each trade.
• Set realistic stop losses and take profits that consider market realities, including price volatility.
• With each trade, ensure that the potential profit is at least 2-3 times greater than the potential loss.
• Regularly review and modify your trading plan based on the achieved expectancy.

Every day, spend 15 minutes analyzing the expectancy of your trades.