All language subtitles for 4. developing a strategy with postive expectancy

are right and how much you lose
when you are wrong. When you

doesn't matter whatsoever in
trading. It's pretty

irrelevant. It's all about how
much money you make when you

after 10 trades you would
actually make a net profit of

can truly grasp this concept,
the psychology of trading will

trades play out over time
you're going to have that 50/

that to try and squeeze out as
much sort of maximum as we can

that a little bit obviously as
we go on to actually learn the

you know if you just put this
on anywhere and you just let

so yeah that's pretty much it
it's it's very very simple you

obviously even so we're
going to have that risk reward

you know having that high
rewards really is powerful. So

two R so what this means is
with a 3-1 risk reward ratio

more money we will make on our
winners and then that form

compact stats mode just because
you know it's just a little bit

box here is our risk right so
obviously the aim of the game

like on the charts we're
obviously like I said trying to

essentially the the the grey
here is our reward and our blue

within trading and the methods
that we can use to increase our

get this as small as possible
whilst trying to get the trade

you can be wrong up to 75% of
the time and still break even

you guys need to know for now
but yeah we'll we'll get into

you an average reward to risk
ratio of 3 to1, then on average

kind of an inverse
relationships between strike

your average wins and size of
your average losses right to

your long position and your
short position and then just

of your average loser is only
minus one R then that will give

you have a pretty low strike
rate of 30%, then on average

at the actual technical side of
the strategy so let's say that

this in a lot more detail when
we actually start to look yeah

of one and then you know that
would just be your 50-50% edge

50 edge right so what we
want to try and do is reduce

your heads is just that
relationship which is typically

this case I've just changed it
to a blue box you know changes

and your risk rewards you
achieve right so the size of

minus one hour loss right we
always keep our Rick's fist

rate and risk reward and then
how that translates onto on the

to run enough further as long
as possible and and the more

pip target and then a you know
20 per stop loss that's

to your rewards so your ratio
is getting smaller and smaller

and obviously as you decrease
your stop loss size your reward

Right, so we've essentially
looked at the sort of basic

because your risk is bigger and
bigger you know in comparison

a high reward to risk ratio
strategy where it really no

is double click to open up the
stats because I have it on

this save down to your favorite
toolbars up here if you have a

make your stop loss bigger
right and your reward stays the

know if you can you can open
this up again and play around

risk management lessons on
position sizing right we know

that means we can afford to
have a lower strike rate right

get away with and still break
even you know at a bare minimum

the higher this number is the
lower the strike rate you can

this box as big as possible
here so that we increase our

same that means that your risk
reward is going to fall right

your reward to risk but
displayed as a number so if you

means you know as long as our
losses you know that strict

is going to get bigger right
hopefully that is kind of self

you need in order to break even
depending on what your average

R multiple is so if you are
multiple it's essentially just

profits too early out of fear
or maybe letting your losses

that's when you have a really
powerful combo and you can

denotes your risk rewards so
what I'm actually going to do

that when you open this up so
hopefully you guys should have

save those down so yeah it's
really really simple

essentially where you know this
is a long position the line in

the risk reward tool that we
very briefly looked at in the

whatever you want it's kind of
irrelevant the color but yeah

the middle is where you enter
gives you the price on your

mathematical relationship
between both your strike rate

higher strike rate. So
hopefully you've watched the

70% of their traders lost money
despite having a reasonably

maintaining an extremely high
strike rate which is not easy

of the masses of traders make
you know such as taking your

give you your average risk
reward okay great but how does

your losers are say double the
size of your winners then your

then you can find it on the
left hand side where you have

charts and see what this
actually looks like on there.

you gain more and more
experience and knowledge and

you're hoping that it's turn
around in your favor then

trying to consistently hit the
you know the huge home run wins

high strike rate of 62 percent.
And it's all because those

quite a few losses or break
evens or you know maybe very

go for that higher strike rate
approach but they struggle to

isn't going to trend that far
and it will often pull back to

either stop you out and you
know despite you being in a

fail? And you may remember the
the trading data that was

you should now have a pretty
good idea of what expectancy is

longer matters if you take many
losing trades as long as you

start to make some serious
money. So, let's hop on the

even however if you can get
your average winners to be

winning trade then you need a
67% strike rate just to break

you try and increase your
average reward risk ratio by

reward to risk ratio is one to
2 if you divide one by two you

off and a bit of a balancing
act between both your strike

decent amount of running profit
beforehand. So you can take

rate and your average reward to
risk ratio because they

easier. Now, if you're new to
trading, you may have some

tiny wins before you hit and
bank that big winning trade. So

still break even it's really
showed the true power of having

Now this presents a
psychological barrier. Because

they often require traders to
lose more often than they win.

education companies they'll
market high strike rate

healthy net profit. Now
although high reward risk

difficulty trying to accept
that you could spend, you know,

through the threshold of
trading a consistency. Now,

completely numb to losing
trades and you will break

probability really works. I
know that if you persist

edge and that being right or
wrong, you know, it really

run because you just can't
stomach locking the loss in and

reward to risk and strike rate
comes into play and the higher

you're going to have a low
average reward to risk ratio so

are over the long term now
there are two profitability

to do now here's a table that
shows a required strike rate

achieve the reward to risk
ratio required to make money

short and let your profits run
so that your winning positions

you can expect to win three
trades out of every 10 right,

charts we're actually sizing up
oppositions and yeah that's all

losses but then once we're in
the trade how we try and manage

but if the size of your average
winner is plus VR and the size

how we actually can get away
with extremely tight stop

with it and just put in the
pips so let's say we have a 20

that we can do that the bigger
our risk rewards will be the

much time working on your
psychology and showing you how

a trade over the long run. It's
impossible to always be right

trades on average had a
negative reward to risk ratio.

and it all comes back to the
human psychology of avoiding

technical aspect of the
strategy you're going to learn

much relevant too. So when it
comes to analyzing your

but for now all you need to
really kind of get around in

trading, combining these stats
together to calculate your

more than cover your losing
trades and leave you with a

whereby we are consistently
losing. So this is why most

profit expectancy will give you
a much more accurate

typically an inverse
relationship. So the more that

analyzed from the popular
retail broker FXCM where over

what this can mean is that your
strike rate will be a bit lower

with those two profitability
models, it is generally a trade

have it on the default mode
there and as you can see as you

Ricks are at risk fixed right
with that small stop loss then

clearer but essentially that
would explain it there if you

through any of the hard times,
you will soon just become

explanatory so yeah this is
pretty much what an edge looks

which is simply those that win
more times than they lose and

overall profit expectancy is
just zero dollars so he's

averaging $200 profit per trade
even though he's losing and

risk reward so as you can see
this number here in the middle

right hand side and then this
represents your risk right in

is to get this box as small as
possible and we want to get

when trading Forex however
calculating your expectancy it

be right on each individual
trade to instead how right you

time but when he did he won big
with $3, 000 on average and

his loss rate which was only
25% and we can see that his

can really help you to shift
your focus away from trying to

know we are managing then those
positions well going back to

strategies that win big but not
necessarily often as they

that actually look kind of in
reality you know when we are

trading on the charts and we're
sizing up positions and you

ratio but also start to slowly
increase your strike rate as

and important it is to focus on
the metrics as a whole that

strategies because the masses
follow that concept much

your loss rate. So in one's
case he had a high win rate of

average loss on your losing
trades and you multiply that by

his average loss which is a
whopping $3, 000 multiplied by

reward to risk strategies are
essentially to cut your losses

models in trading the first is
a high strike rate strategy

your win rate. And then you add
this figure to the size of your

representation of your true
trading performance. So you can

usually have a much lower
strike rate so the idea high

essentially think of your
expectancy in the market as the

irrelevant metric. Your average
P and L on its own is pretty

three times the size of your
average losers so you have an R

he's wrong 70% of the time his
high reward to risk strategy

get no. 5 so that is your R
multiple so in that case if

your average losing trade is
double the size of your average

keep your loser small then your
winners will for your loses and

multiple of three then you can
be wrong 75% of the time and

more. Now, when you can
maintain a high reward to risk

which means he had a healthy
positive profit expectancy of

formula to calculate this now.
So you take the size of your

needs to win even more often or
improve his average reward to

that we risk in the market. So
you should already know the

in that case your only hope of
becoming profitable is by

have a negatively skewed reward
to risk ratio like Quan and

your average reward to risk
ratio then the less often you

actually need to win so if you
make all the mistakes that most

then if we add this to his lost
rate which is quite high at 70%

but he only lost $1000 on
average on his losing trades

still make a net profit overall
so hopefully now see how clear

winners are three times larger
than his losers so this gives

expectancy which then gave him
a profitable edge in a 50/ 50

us a lot more insight into the
traders and we can see that

average. Now when Steve is
right he makes three thousand

wrong he makes an average three
grand loss. So this means that

then a lot of the time when
you're in those trades price

coin flip game so going back to
our two traders batting out we

dollars on average per trade
and when he's wrong on average

in comparison to a trader who
aims for a much lower lower

overall so that's where the
inverse relationship between

pain and wanting to be and
that's why most traders try to

Now you can see their losers
were bigger than their winners

first episode in this module
called are you destined to

so you multiply those together
and add that to the number to

a lot of your time losing and
this is why we have spent so

risk ratios over their 100
trades. So when one wins he

strategies are more common and
preferred by more professionals

much we stand to gain or lose
as a trader for every dollar

so for Juan's strategy to
become profitable he either

his losers are three times
bigger than his riders on

the second is a high reward to
risk ratio strategy which are

it's against our nature to
continue doing something right

two hundred so what does this
actually mean well despite

winning 75% of the time Huan is
a break even trader because the

75% and he made $1, 000 on
average on his winning trades

reward to risk ratio and they
can typically have a slightly

trade so in other words to
calculate the traders reward to

wins a trade as well as the
amount lost when they lose a

ratio improves, right? Now, in
the previous lesson where we

matter because strike rate on
its own is a completely

gain in any one trade where
Steve is looking for a much

traders strategies stack up
against each other we need to

bigger payoff but he's not
willing to risk as much as Quan

their win rate and that's one
way in which the casino

average P and L increases and
our average reward to risk

amount that you theoretically
get paid on average to execute

breaking even now when looking
at Steve he only won 30% of the

size of his losses far outweigh
the size of his winning trades

calculate the profit expectancy
so this essentially tells us

pence when he lost and for Seb
to pay him a full one pounds

only know the first two
ornaments so their win and

average profit on winning
trades and you multiply that by

when he won this is the fourth
method right because he

means that he can be wrong much
more frequently than Juan but

of our winners and or decrease
the of our losers so that our

risk ratio now Steve's profit
expectancy it tells that he's

example, where Sam negotiated
with Sarah to only pay her 90

improved their expectancy. Now,
if you also remember the

Quan is willing to risk three
times more than he stands to

size of your loss on your
losing trades so to improve our

per trade now to really
understand how each of our

he has a negative reward to
risk ratio of one to three as

need to know the amount of
profit made when each trader

he only loses a thousand
dollars. So means he has a

their lost rate but to know who
is the better overall trader we

Juan is right a lot more often
than Steve is when trading but

win or how often you lose and
or we need to increase the size

positive reward to risk ratio
of 3to1 as on average his

by altering these four elements
so we can either improve our

profit expectancy and there are
only four elements that

decreases losses so that his
winners were then bigger than

his losses which finally gave
him a positive profit

missing some key pieces of
information having an edge in

determine your edge in the
market your win rate your loss

makes an average profit of $1
000 dollars per trade and when

strike rate which is the first
two elements so how often you

the market essentially just
means that you hold a positive

rate of 75 percent. Steve on
the other hand he managed only

strike rate of just 30 percent.
So who is the better trader?

to truly determine who is the
better overall trader we are

green zero to the roulette
wheel which stacked the odds in

their favor ever so slightly to
give them an edge by increasing

30 wins and therefore booked
seventy losses giving him a

discussed how casinos make
money, we saw that they added a

Well based on just these stats
alone we can clearly see that

edge in the markets we need to
increase our profit expectancy

75 wins and just 25 losses
giving him an incredible strike

rate the average profit on your
winning trades and the average

which may actually surprise
some of you so let's look at

started with the same amount of
trading capital. Now Juan took

these two traders Juan and
Steve who are battling it out

develop a trading strategy that
also has a positive expectancy

mathematical edge is and we
have looked at how casinos are

positive edge so now we're
going to look at how we can

just like a casino does and
we're also going to look at how

important it actually is to be
right in trading the answer to

By now you should have a pretty
clear understanding on what a

in the markets both of them
have 100 trades each and

the masters of the world at
exploiting their slight

become vastly easier on your
psyche.