**Expectancy**
Mayfly said:

PKF,

Take a look at the attached spreadsheet, it should help to explain the points about money management the others are making?

HTH

Cheers

Mayfly

The spreadsheet is very interesting. But a simpler way may be to apply the expectancy formula that was mentioned by others in this thread. Because there are three independent variables (stop loss, target, win%) the area of interest needs to be looked at in three dimensions. The clearest way to do this is to run sensitivities of the capital growth to: (a) different combinations of gain and loss percentages on winning and losing trades respectively, holding constant the win/loss ratio; and (b) different combinations of gain percentage with different win ratios, holding the stop loss percentage constant.

It becomes clear, as people have said, that the different combinations make available whole families of winning and losing styles. And the winning styles definitely include styles where a majority of trades are losses, but also completely different styles where the trader aims for a high win ratio and accepts lower levels of profit. Taking 20 trades as the basis for comparison of the compounded returns, someone who set a stop loss of 10% and made 2*risk would do quite well on the basis that 40% of the trades were winners: before costs, the overall return would be 49%. The same return would be achieved, with the same stop loss, by someone who aimed to make 1*risk on 60% of his trades.

The analysis does not, of course, take any account of the influence of the chosen combinations of stop and target on the probability of winning. That is another story.