Tuesday, October 17, 2006

10-17-06 wrap up

An interesting thing happened with my trading statistics today... I finished the day with a negative R return... BUT I made money on the sum of today's trades. Just goes to show you that while R and Expectancy are useful statistics, they do not tell the whole story.

How did this happen? Simple... I had one trade where my risk capital (R) was much greater than the other trades of the day - AND on this trade I had a paltry return of 0.45R.... however the amount of dollars returned on this trade was much greater than any other trade I made today because I risked more dollars than usual.

This is how I end up getting $94 on a 0.36R return on one trade and $544 on a 0.45R return on another trade.

So is R really useful? Yes, because R tells us how much I win versus how much I'm willing to lose on any given trade... and over time (the total of all my trades up to this date) my average R had better be larger than 1. Why? Because if my total R doesn't stay above 1 then that means that I am more suseptible to losing my total winnings when a losing streak comes along.

For example if I have 10 trades that all are profitable but less than 1R return on average (say 0.5R), then all it takes is 5 losing trades of 1R to lose all my winnings.

Ok, with that thought... have a happy day.


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