He who knows he doesn’t know, knows!

The concept of expectancy is the key to understanding how big traders think in terms of developing a winning method. This issue is critically important if you want a real success as a trader or investor, it appears indifferent places and contexts of trading. One has to “grasp” this idea only once to really understand the immense benefits it comes with.

There are six key variables that you must understand to develop a successful trading method, the combination of which is the key to understanding the principles of profitable trading. These variables make up the expectancy of the trading method and are what determine its long-term effectiveness. Most traders often focus on just one of these factors in their day-to-day trading activity, focusing on the first factor, success rate, or the need to be right. The reason for this involves psychological biases that give people an uncontrollable desire to be right repeatedly, people are more obsessed with it than anything else.

You must understand how naive it is to focus only on being right. There are many components in developing a successful trading method, the “success rate” is the least important part of them. If you have a “quiet” psychology, a positive expectancy trading method, developed so that your losses are kept to a minimum, and you are trading at an excellent profit-to-loss ratio then the timing of your entry is not so important, you can enter the market randomly and still make money. This principle is the core of the trading profession!

The first key to understanding the expectancy and one of the real secrets of successful trading, is to think about trades in terms of their odds-to-risk ratio. Good traders first ask themselves, what is the risk of the trade? And is the potential profit worth the risk potential? Of course, they also need to know how to determine the risk potential of the trade, which is at what point they will go out of the deal to protect their capital.

People tend to ignore the idea of developing a trading method around “expectancy”, in fact most people do not possess a method with a long-term profit expectancy that has been tested at all. Most of them often have trading methods that are “right” and make money in the short term but empty their account in the long run.

Writer: Edo Harari, Chairman of Circle A Capital.