Great poker players calculate the odds before every move. They determine the expected value based on their cards and their estimates of their opponents cards. If the number shows a positive expected value to call or raise then they follow the numbers. Great traders follow the same philosophy.

Expected Value Calculation

The essential calculation is the expected value. The probability calculation for expected value is below.

expected value=(prob of event1)(payoff of event 1)+ (prob of event2)(payoff of event 2)

The probability is the winning percentage of our trading

Event 1 in our equation is a profitable trade

Event 2 in our equation is an unprofitable trade

For example, If you average 50% winners and the winning trade is $1.0 and the losing trade is .50 then the expected value is below

.25=(.5)(1)+(.5)(-.5)

Goals

In order to maximize our expected value then we have three options

1. Raise our winning percentage
2. Raise our average win
3. Lower our average loss

Those are the goals. If you improve on any of those parameters then your results will improve.