Free Forex Education

# Two Important Things to be Considered

Now you have come this far so we would like to consider two more things before going on to take the quiz, or have a cup of coffee and a doughnut.

### Risk-reward Ratio

The first important thing you need to consider is the risk-reward ratio.

This refers to how much we are risking and willing to make on each trade. On the examples before, we used a 3:1, meaning that for every dollar you are risking in any trade, you are willing to make three dollars. But we will talk about this in the following lesson.

### Expectation

The second thing you should have in mind is the expectation of a given system. MM makes sure you are going to be able to trade tomorrow and allows your profits to grow geometrically. It is not a magic wand though so it cannot turn a losing system into a winning system (or a system with a negative expectancy into a system with a positive expectancy)

The formula to calculate the expectancy of any system is:

[Image 1]

where,

AW = Average winning trade in terms of \$

AL = Average losing trade in terms of \$

P = is the probability to win any given trade.

Take for instance the following system

System based on MA crossovers. In a sample of 100 trades, the following information is obtained:

The expectancy of this system is as follows:

[Image 2]

This system has a positive expectancy: the greater the number, the better the system is.

A negative result would mean that the system has a negative expectancy and no MM can turn this system into a winning system, the only thing it could do for the system is to limit the losses.

• Eric Aroh

Raul,
Great lessons. The Expectancy formula should be corrected. The “-1” should be outside of the bracket (with P). Including it in a bracket makes all Expectancy calculations/results negative. Thanks. Eric

• Raul Lopez

Thanks Eric, will update!