Long & Wrong

I have become fixated with expectancy, I have forgotten about the number of trades per unit time.

I’ve been agonising over my foray into FX trading in recent months. The only thing outstanding about my performance is its mediocrity. But, to some degree, I have been looking at it in the wrong way.

I have been comparing my expectancy in this market, and individually for each of the pairs I trade, to that which I achieve with the indices.  But that of course isn’t the whole picture, what actually matters is the expectancy multiplied by the number of available trades (=P/L).  I might only see a few of these per day with the indices but with FX the greater number of markets and the longer hours offers a greater wealth of candidate trades.

Graphically, it looks something like the following (highly schematic) chart, which shows a decreasing average expectancy as the number of trades taken increase.

Maximising profit....P/L (left axis), Expectancy (right axis).

So the aim is not to maximise expectancy but to find the maximum on the orange line above (I’m assuming margin isn’t a problem for all these additional trades).

More fundamentally, any trade with a positive expectancy is, all other thing being equal, a good trade.  So if the (probability of the trade being profitable multiplied by the size of the win) is greater than (probability of it losing multiplied by the size of the loss) then this is a good trade.  Which also makes the point (funny where these trains of thought take you!) that it is not about achieving a certain win-rate or R:R, but about the above bold text.

Some simple maths shows that my return from FX, as a percentage per month, would be about a third that of my index trades.  This surprises me, and means that I should plug away at FX with real money (not 50p/pip as currently), but I’m not exactly looking forward to doing this when I feel that my entries are poor, my exits are worse and it often feels more like gambling than trading. Early results though seem to confirm the maths.