I've been going over old posts on positive expectancy and risk/reward ratios to get a deeper understanding of what, undoubtedly, is the most important criteria prior to begin trading any system.
However, throughout the posts I have seen 2 sets of calculations on how to determine expectancy. And they don't give the same result so, obviously, one is incorrect.
In wayneL's very information article (http://www.aussiestockforums.com/for...8&postcount=25)
he uses the following formula:
Expectancy = ((1 + reward/risk ratio) * win/loss ratio) - 1
In numerous other articles and posts I've read, the following is used:
Expectancy = (Win % * Average Win) - (Loss % * Average Loss)
So, which is it?
I would think that using actual $ figures about the returns of a system would be more inclined to give a better reflection on the state of that system.