Going Back To School At 35 To Major In Math Automated Forex System Trading – Maintaining Positive Expectancy

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Automated Forex System Trading – Maintaining Positive Expectancy

What is positive expectation?

Positive hope sounds like something a motivational speaker or psychiatrist would talk about. In fact, there are some people who use the term for these reasons. This article is about the use of the term in the context of forex trading strategies, STATISTICS and MATHEMATICS. One of the main advantages of using an automatic forex trading system is based on a discipline that maintains a high POSITIVE EXPECTATION that can generate huge profits. Positive expectation defined in its simplest form is that, on average, there is a probability that you will win more money than you will lose.

If the forex trader gets nothing else from this article, the MOST IMPORTANT POINT to understand is that WITHOUT POSITIVE EXPECTATION in any forex trading system automated or not, there are no money management procedures or trading techniques that prevent you from losing all your money. .

Most traders confuse positive expectation with probability of winning. Forex traders and especially Forex system developers love to brag that their system “picks winners 97.3% of the time” and fall for the easy but incorrect logic and the “feeling” that a high winning percentage means a high profit. Unfortunately, this is NOT TRUE! Winning 97.3% of the time will not generate any forex gains if 2.7% of losing trades wipe out your account. confused probability of winning with positive hope it is what ultimately leads to the Merchant’s Ruin.

The trader’s bane is the mathematical certainty that over time the trader will lose all his money in the market if he trades without positive hope. Many highly successful traders and automated forex trading systems have a winning probability of around 40%, with a high positive expectation that returns huge profits.

If a forex auto trading program wins 9 out of 10 times (90% win!), and the average win is $10, but the average loss is $100, that system has a negative expectation and will lose money !

If an automated forex trading system wins once every 20 trades (5% profit!), losing an average of $5 for each losing trade, but makes an average of $100 for each winning trade, that system has a positive hope and in the long run it will make money.

Did that tie your brain in a knot? Let’s explain a little more.

Being able to say that an auto forex trader, or any system, has a positive expectation means that, on average, the system will make more money than it loses. On any given trade, you may win or lose, but averaging over time and many trades is profitable. This should include costs and slippage and be measured at an absolute minimum of 30-100 trades, preferably many more.

This analysis assumes that the forex trader and the forex trading tool are properly capitalized and the trades are adequately sized to reasonably ensure that the system survives the inevitable periods of loss.

“Properly capitalized” means that you have enough money in your account to make trades of the right size and survive long enough for average returns to grow your account. If the account is too small, it is much more likely that a series of losses will wipe you out before you have time to turn a profit.

“Adequately sized” trades means that the average expected profit size of any trade is large enough to cover the average expected losses plus trading costs and still have a positive expectation.

“Exit Loss” will be defined for this article as the amount that the trade will be allowed to move against us before our stop loss setting “stops” and we exit the trade. This applies to both winning and losing trades.

“Costs” in forex trading are usually in the form of “bid/ask” spreads, commissions or forex brokerage fees are usually small or non-existent. There are still real costs that figure into the system expectation.

“Slip” is defined as the difference between the price a trader expects to pay when a trade is ordered and the actual price paid. The forex market is always moving and if the market moves against our trade, the time between our contract order and when it is executed in the market can allow the price to change. A good automated forex trading system also has a known moving average value in the system.

To make this easier to understand, let’s put some numbers on it. These are simplified examples to illustrate the concept and the numbers may or may not match actual forex trading strategies.

If my auto forex trading system follows a set of rules that allow an exit loss of $10 before it stops, and my costs are $10, and my “slip” averages $5 , my average loss will be: $10 exit loss + $10 costs + $5 average slippage = $25 average loss per losing trade. These trades are generally trades that move immediately against the trader.

If the trader executes each trade at $1000 per trade and if my forex trading system has an average winning trade of $50 (which includes the $10 exit loss), after costs and slippage we have $50 – $10 – $5 = $35 profit.

Now all we need to figure out our expectation is to know our probability of a winning trade. Let’s start with a system that has a 50% chance of winning. So this system has the same average winnings over time as flipping a coin.

The expectation equation

Pp = Probability of profit

Ap = average profit

Pl = Probability of loss

Al = Average loss

Hope = (P x Ap) – (P x H)

In our first case:

Pp = 0.5

App = $35

Pl = 0.5

At = $25

Hope = (0.5 X $35) – (0.5 X $25)

= ($17.5) – ($12.5) = $5

So this system that trades at $1000 per trade has a positive expectation of $5 per trade when trading with many trades. The $5 profit is 0.5% of the $1,000 that is at risk during the trade.

Now let’s examine how our forex trading techniques, rules and behavior can affect our profits. First, let’s imagine that we have experienced a series of losses and are short on money because we are not properly capitalized. What if we reduce the amount of money at risk and only trade $500 per trade? This cuts our profits in half, but does not affect costs and slippage. An average winning trade is now $25, after costs and slippage we have $25 – $10 – $5 = $10 profit. That’s a big hit for profit, but it’s still profit… right?

If we examine our expectations, our numbers look like this:

Pp = 0.5

App = $10

Pl = 0.5

At = $25

Hope = (0.5 X $10) – (0.5 X $25)

= ($5) – ($12.5) = -$7.5 !!!

This system trading at $500 per trade can be expected to lose money on average $7.50 per trade.

NEGATIVE EXPECTATION! By trying to save money, we have ensured that we will lose money! This illustrates the importance of having a well capitalized account for our trade size, and the importance of watching the effect of costs and slippage. Trading many small trades can push a good forex trading system into a negative expectation with costs and slippage.

Let’s make a different assumption, double our trade size and start trading at $2,000 per trade (assuming our account is well capitalized to do so). An average winning trade is now $100, after costs and slippage we have $100 – $10 – $5 = $85 profit.

Pp = 0.5

App = $85

Pl = 0.5

At = $25

Expectation = (0.5 X $85) – (0.5 X $25)

= ($42.5) – ($12.5) = $30

We’ve doubled the amount of capital at risk, but increased our average net profit per trade by SIX TIMES! The percentage gain is also increased to 1.5%, a THREE TIMES increase in profit per dollar risked. This is a very good result.

Let’s look at one more case and double our trade amount again to $4,000 per trade (assuming again that our account is well capitalized to do so). An average winning trade is now $200, assuming the costs of this remain the same as one lot traded, after costs and slippage we have $200 – $10 – $5 = $185 profit .

Pp = 0.5

App = $185

Pl = 0.5

At = $25

Hope = (0.5 X $185) – (0.5 X $25)

= ($92.5) – ($12.5) = $80

Another average profit per trade. We doubled the amount of venture capital again, but this time it only increased our average net profits by 2.67 times. The percentage gain is also increased to 2.0%, an increase in profit per dollar risked of only 1/3 of the previous increase. From this point on, increasing our trade size, assuming rates and slippage remain the same, has only a small, gradually diminishing effect on our trade efficiency as we get larger and larger. Gross and net profits will increase, but the average percentage return on our capital at risk will remain roughly the same.

The above examples are simplified to make the arithmetic easier and to illustrate the concepts. Lot size, leverage, and many other factors complicate the equations in real-world trading, but the basics remain the same. Without positive hope, the trader is sure to lose his money.

This shows that the small forex trader must carefully examine his trading techniques and exercise an “iron will discipline” in his business to ensure that he can effectively “stay in the game”. Trying to do forex training “on the job” while making small timid trades with an account that is “too small” is not a way to “grow or protect your money”, in fact it can be the sure path to ruin merchant

The joy of automated forex trading systems and mechanical trading software is that it imposes a trading discipline that keeps losses small and allows winning positions to run with built-in positive hope. It’s Forex made easy. There are websites that give online reviews of various automated systems that have the ability to make simulated forex trades online, on a Forex demo account, so that the average trader can try them out for 60 days risk-free and each has a 100% refund. guarantee Many offer suggestions for the best forex broker compatible with their online forex trading platform and provide full support for setting up your forex demo account.

The beginner trader, who is just learning forex trading, can learn a lot just by running demo accounts and can know which is the best forex system trading software for their goals. Instead of spending money on forex training, a forex trading seminar, or trying to create your own forex trading strategies and implement them, the astute trader can let the experts do it and test their work for results profitable Then sit back and watch Forex auto trading robots make you money while you relax and reap the benefits.

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