So.......What's Your EDGE???

Once you are on the road to trading, there will be a time, when you will need to ask your self this question “What’s Your Edge?” Infact you even need to ask this question to anyone whose services you have subscribed to or would want to subscribe in the near future or when buying a trading system.

So what’s the Edge? Edge or as some say Expectancy is mathematically calculated using the following formula;

E= (PW*AW) – (PL*AL)

Where:

E= Expectation or THE EDGE

PW= Winning Percent

Aw= Average Winner

PL= Losing Percent

AL= Average Loser

To make it more lucid, let us assume that you have a trading system which has 50 percent winning trades and average winning trade is for Rs 500 and the average losing trade is for Rs 350. Then using the above formula we can calculate your Edge;

E= (PW*AW) – (PL*AL)

Edge= (.50*500) – (.50*350),

Edge= 250-175,

Edge= Rs 75 on an average per gain per trade.

This means over a time you would expect to earn Rs 75 for each trade placed. Now assuming that you are approached by an analyst or a system vendor, who offers you his services for a fee, but has a system, which has only 40 percent winners, with an average win of 900 bucks and an average loser of 350 bucks. What would be his Edge be? Again using the above formula we get;

Edge= (.40*900) – (.60*350),

Edge= 360 – 210,

Edge= Rs 150 on an average per gain per trade.

So it seems your so called analyst has almost 2 times the Edge and you would be better off trading with him or at least would agree that his system is better placed even though his winning percent is much lower!

Therefore next time you see someone screaming that they give “90 percent or for that matter 99 percent winning trades” don’t get excited, but very quietly ask the gentleman “So What’s Your Edge?”