The R expectancy (or expected value of R) is a measure of the expected return of a trading system or strategy. It is calculated by multiplying the probability of a trade being successful by the potential profit of the trade, and then summing these values for all trades in the system or strategy. Here is the formula for calculating the R expectancy:
R Expectancy = Σ (Probability of Success * Potential Profit)
Where Σ represents the sum of the values, Probability of Success is the likelihood that a trade will be successful, and Potential Profit is the potential profit of the trade.
To calculate the R expectancy, you will need to gather data on the probability of success and potential profit for each trade in the system or strategy. You can then use this data to calculate the R expectancy using the formula above.
The R expectancy is a useful tool for evaluating the expected performance of a trading system or strategy and for comparing the expected returns of different systems or strategies. It can help traders to identify systems or strategies with a higher expected return and to make informed decisions about the level of risk they are willing to take in order to achieve those returns.
Example 1:
You have a trading system with the following trades:
Trade 1: Probability of Success = 60%, Potential Profit = $100
Trade 2: Probability of Success = 40%, Potential Profit = $200
Trade 3: Probability of Success = 50%, Potential Profit = $300
To calculate the R expectancy for this system, you would sum the products of the probability of success and potential profit for each trade:
R Expectancy = (0.60 $100) + (0.40 $200) + (0.50 * $300) = $180
This means that the expected return of the trading system is $180.
Example 2:
You have a trading strategy with the following trades:
Trade 1: Probability of Success = 70%, Potential Profit = $500
Trade 2: Probability of Success = 30%, Potential Profit = $1000
Trade 3: Probability of Success = 80%, Potential Profit = $2000
Trade 4: Probability of Success = 40%, Potential Profit = $3000
To calculate the R expectancy for this strategy, you would sum the products of the probability of success and potential profit for each trade:
R Expectancy = (0.70 $500) + (0.30 $1000) + (0.80 $2000) + (0.40 $3000) = $2300
This means that the expected return of the trading strategy is $2300.
I hope these examples help to illustrate how the R expectancy can be calculated for a trading system or strategy. Let me know if you have any questions or need further clarification.
