Cleo.finance:Trader’s goal: A strategy with positive expectancy

[thecryptogandalf]

Hey everyone, today I wanted to check what is the most important goal of a trading strategy.The source: blog.cleo.finance


Why do I need a trading strategy?

Creating a trading strategy is like plotting a course on a map before setting sail. A trader needs a well-defined trading strategy because it provides a roadmap for decision-making and helps to navigate the complexities of the market.

Without a clear plan or direction, traders may make impulsive or emotional decisions that put their capital at risk.

A well-defined trading strategy allows traders to approach the market with a structured and disciplined approach. This makes it easier to make informed and consistent decisions based on the strategy's rules and guidelines. This helps traders to:

• Navigate the market effectively
• Increasing their chances of success
• Maximizing their potential profits

Most traders don’t fail at trading because it is hard. They fail because they are not willing to put in the work to create a detailed plan, test the plan, and then follow the plan.



The most important goal is to develop a strategy with positive expectancy. In other words, a trading strategy should have a higher probability of making a profit than a loss.

Without a well-researched and tested strategy, trading can feel like gambling, with unpredictable and potentially costly results (looking at you WSB!).

In other words: You should not enter the competitive world of financial markets unless you have a trading strategy that produces positive expectancy!

You need to know 3 things to determine if your strategy has a chance to be profitable:

• Win rate – the percentage of trades that are profitable
• Risk-reward ratio (RRR) – the ratio of the average potential profit to the average potential loss on a trade
• Transaction costs – commissions, fees, and other expenses associated with executing a trade

EXAMPLE:

Trades: 100

Win rate: 50%

RRR: 1:2

Transaction costs in total: 5% of balance for the 100 trades

Expectancy = (Win rate x Win Size) – (Loss rate x Loss size) – TC = Expectancy per trade

Expectancy = (0,5 x 2) – (0,5 x 1) – 0,05 = 0,45 R per trade



Over the course of hundred trades, you would win half of them (50). But because you can win twice as much as you’re risking (1:2 RRR), throughout the 100 trades you would on average win half of what you’re risking (avg. profit of 0,5R). If you deduct the transaction costs, this comes down to 0,45R of profit for every open position*.*

If you risked 100 USD per trade (R = 100 USD), on average you could expect to win 45 USD for every trade you open.



The more data you have in hand the better the prediction can be, but these three data points should be enough to tell if the trading strategy is likely to be profitable over the long term or not.

The confidence gained from knowing your trading strategy has a positive expectancy is why you’re spending hours building and testing it. You don’t have to decide on the spot, you just mechanically execute what your system tells you.

[1714680323]

1714680323

[1714680323]

1714680323

[1714680323]

1714680323

[sheenshane]

You need to know 3 things to determine if your strategy has a chance to be profitable:

• Win rate – the percentage of trades that are profitable
• Risk-reward ratio (RRR) – the ratio of the average potential profit to the average potential loss on a trade
• Transaction costs – commissions, fees, and other expenses associated with executing a trade

EXAMPLE:

Trades: 100

Win rate: 50%

RRR: 1:2

Transaction costs in total: 5% of balance for the 100 trades

Expectancy = (Win rate x Win Size) – (Loss rate x Loss size) – TC = Expectancy per trade

Expectancy = (0,5 x 2) – (0,5 x 1) – 0,05 = 0,45 R per trade

Considering the outcome, you shouldn't forget the Stop-loss as your plan B or exit plan. 
Don't stick to one strategy, quickly switch to another one if you have consistent losses because that's not a good strategy.

The strategies that you're talking about are just a tool in trading but don't give a guarantee that you'll have an accurate win rate, there's no assurance for that in how good you are in trading.

The more data you have in hand the better the prediction can be, but these three data points should be enough to tell if the trading strategy is likely to be profitable over the long term or not.

No, it made you confused, stick to one strategy and switch if it isn't working.

The confidence gained from knowing your trading strategy has a positive expectancy is why you’re spending hours building and testing it. You don’t have to decide on the spot, you just mechanically execute what your system tells you.

You have positive expectancy but don't expect to have an accurate results.

[palle11]

Most traders don’t fail at trading because it is hard. They fail because they are not willing to put in the work to create a detailed plan, test the plan, and then follow the plan.

I don't agree that traders fail because they don't put work or create detailed plan, they do but because it doesn't work out doesn't mean they don't but what I believe is that it is a process of learning and mastering of trade takes time. Trading is not about detailed plan but you must have the confidence and emotion required for trading and if you don't have control over your emotions then you will struggle for more longer time.

[wxa7115]

Most traders don’t fail at trading because it is hard. They fail because they are not willing to put in the work to create a detailed plan, test the plan, and then follow the plan.

I don't agree that traders fail because they don't put work or create detailed plan, they do but because it doesn't work out doesn't mean they don't but what I believe is that it is a process of learning and mastering of trade takes time. Trading is not about detailed plan but you must have the confidence and emotion required for trading and if you don't have control over your emotions then you will struggle for more longer time.

Different traders will fail for different reasons, a newbie which has not read a single book about trading will lose their money because of their ignorance about the risks they are taking, while a trader which has read several books and created a good strategy most likely will lose because of their inability to follow their own strategy no matter what.

As such depending on the reason of their failure the actions needed to correct those outcomes will be different, however taking into account what I see in the forum with those which are newbies, I really think the majority of them do in fact lose their money due to a lack of understanding about the markets, as they believe they can make a lot of money without the need to invest their time and effort to understand what trading is really about.

[palle11]

As such depending on the reason of their failure the actions needed to correct those outcomes will be different, however taking into account what I see in the forum with those which are newbies, I really think the majority of them do in fact lose their money due to a lack of understanding about the markets, as they believe they can make a lot of money without the need to invest their time and effort to understand what trading is really about.

I agree to this because greed is a major problem not only for newbie trader but for the trader who thinks he is experienced. If a trader of any standard get greedy, he will be tempted to chase profit and leave out the important trading strategy which will guide them. This is a serious thing for traders, greed makes a trader to increase leverage and sometimes trade in martingale style.

[Charles-Tim]

I don't agree that traders fail because they don't put work or create detailed plan, they do but because it doesn't work out doesn't mean they don't but what I believe is that it is a process of learning and mastering of trade takes time. Trading is not about detailed plan but you must have the confidence and emotion required for trading and if you don't have control over your emotions then you will struggle for more longer time.

Trading takes time, you can be a trader within few days, but it takes months or years before you will understand how to use trading to make profit consistently. The mistakes of the new traders are emotion, using high margin ratio, quiting open trade because they do not risk low and not having a backup plan in case of losses (a kind of plan to minimize the loss or that can finally result to profit).

But some people will trade and later realized that trading is not for them as they will continue losing and if they do not stop, loss will continue. Some people just have to prefer holding than trading as they are still losing after many years of experience.

[GeorgeJohn]

As such depending on the reason of their failure the actions needed to correct those outcomes will be different, however taking into account what I see in the forum with those which are newbies, I really think the majority of them do in fact lose their money due to a lack of understanding about the markets, as they believe they can make a lot of money without the need to invest their time and effort to understand what trading is really about.

I agree to this because greed is a major problem not only for newbie trader but for the trader who thinks he is experienced. If a trader of any standard get greedy, he will be tempted to chase profit and leave out the important trading strategy which will guide them. This is a serious thing for traders, greed makes a trader to increase leverage and sometimes trade in martingale style.

We need to understand that greediness is one of the major factors that makes traders and investors of cryptocurrency to venture into lost, but since advertisement or people campaigning of greediness in cryptocurrency investment many people have subdue or redress from being greedy in cryptocurrency trading or any other of digital trading, so people i will assume that don't know how to overcome come greediness now in trading is the the newbies who are curious to gain everything.

[Fatunad]

As such depending on the reason of their failure the actions needed to correct those outcomes will be different, however taking into account what I see in the forum with those which are newbies, I really think the majority of them do in fact lose their money due to a lack of understanding about the markets, as they believe they can make a lot of money without the need to invest their time and effort to understand what trading is really about.

I agree to this because greed is a major problem not only for newbie trader but for the trader who thinks he is experienced. If a trader of any standard get greedy, he will be tempted to chase profit and leave out the important trading strategy which will guide them. This is a serious thing for traders, greed makes a trader to increase leverage and sometimes trade in martingale style.

We need to understand that greediness is one of the major factors that makes traders and investors of cryptocurrency to venture into lost, but since advertisement or people campaigning of greediness in cryptocurrency investment many people have subdue or redress from being greedy in cryptocurrency trading or any other of digital trading, so people i will assume that don't know how to overcome come greediness now in trading is the the newbies who are curious to gain everything.

Just let people do be able to realize for themselves because providing them with some real life experiences or trying out to give some advises then most of the time it would really be just
ignored and they would rather follow into those things that they do have in mind until they would be facing up some losses and disaster.This is where self learning would be starting
and making out those kind of murmuring that they should have listened nor read up and get serious with those things where other people had been able to experience.
Greed is a common point on which it isnt really that shocking anymore on most people do able to pass this kind of emotion and completely affects our trading or any decisions ahead.

[GreatArkansas]

(....)
Most traders don’t fail at trading because it is hard. They fail because they are not willing to put in the work to create a detailed plan, test the plan, and then follow the plan.

These traders for sure are just people who are thinking that trading is easy money or like a get-rich-quick scheme.
Strategy comes with work and time. You need to build your own strategy, practice it, and master it.

Capital preservation is the best also here because as long as you have the capital, you still can trade, and you can still apply your strategy.
That's why risk management strategy is important, like what OP explained with risk: reward ratio, that is working.

[wxa7115]

(....)
Most traders don’t fail at trading because it is hard. They fail because they are not willing to put in the work to create a detailed plan, test the plan, and then follow the plan.

These traders for sure are just people who are thinking that trading is easy money or like a get-rich-quick scheme.
Strategy comes with work and time. You need to build your own strategy, practice it, and master it.

Capital preservation is the best also here because as long as you have the capital, you still can trade, and you can still apply your strategy.
That's why risk management strategy is important, like what OP explained with risk: reward ratio, that is working.

And risk management is probably the skill that less interest gets from traders, since those interested in this market want to learn to identify the top and the bottom and nothing else.

However even if someone was an expert at identifying the tops and bottoms of the market if they do not know how to reduce the risk they are taking then sooner or later they will lose several times in a row to the point that it will be impossible for them to recover from the losses they have accrued during those trades.

[thecryptogandalf]

(....)
Most traders don’t fail at trading because it is hard. They fail because they are not willing to put in the work to create a detailed plan, test the plan, and then follow the plan.

These traders for sure are just people who are thinking that trading is easy money or like a get-rich-quick scheme.
Strategy comes with work and time. You need to build your own strategy, practice it, and master it.

Capital preservation is the best also here because as long as you have the capital, you still can trade, and you can still apply your strategy.
That's why risk management strategy is important, like what OP explained with risk: reward ratio, that is working.

Precisely, I agree with your comment. It requires a lot of effort work, time, patience, and experience. If I would like to cover it all here it would take pages and pages. So I wanted to put just one of the perspectives on being successful in trading. And just having positive expectancy is not the magic formula but a crucial one.