Hello all, I’m just learning about expectancy and am about to calculate it for my system, but I am struggling with the idea. What I trade is discretionary, a definite system but not mechanical, so if I calculate my expectancy can I trust the results? So much of the system depends on my performance and analysis, so if I calculate the expectancy it is not for the system but me…? any thoughts would be appreciated
In discretionary trading, you (the trader) are an integral part of your “system”. You can’t separate yourself from your system.
And it doesn’t make sense to ask whether results depend on your system, or on you.
Let’s compare a totally automated system with a typical discretionary system.
[B]1.[/B] In a totally automated system — one in which a robot does everything — results depend entirely on the code (the system) written for the robot. The robot will perform flawless execution, based on the rules of the system, and is therefore not responsible for the expectancy of the system.
In this case, expectancy is entirely dependent on the quality of the coded instructions which the robot is following.
[B]2.[/B] In a discretionary system, results depend on B[/B] the methodology and rules guiding the trader, but also on B[/B] the trader’s interpretation of trading conditions and opportunities, and on the trader’s consistent execution of the system’s rules. What you are calling your “system” is really only half a system — you are the other half of your system.
If your methodology is flawed, or your rules are vague, then the expectancy which you calculate will be pretty useless.
Similarly, if your interpretation of trading conditions and opportunities is inconsistent, or if your execution is hesitant or erratic, then the expectancy which you calculate will, likewise, be pretty useless.
So, expectancy, in this case, suggests the likely result of your consistent execution of your system.
Expectancy has meaning only if you and your system, functioning together as a unit, do the same thing again and again, consistently.
Expectancy, in any case, uses a working assumption that the future will be pretty close to the past - at least that part of the past used in the calculations. If the markets change, for example, even the expectancy of a mechanical system will be of dubious value. For a discretionary trader, expectancy can be of some value, but only so long as the trader maintains a steady state. If you go through some kind of mental shift which alters the way you approach your analysis and/or execution, then all bets are off.
This is very insightful! I have been mentored by experts and am looking to be a hybrid trader! I still make a ton of mistakes!