Typically, a winning trade will have a positive expected value – i.e., the value of the probability of being right multiplied by the reward for being right exceeds the probability of being wrong multiplied by the reward for being wrong. And a losing trade will have a negative expected value. Traders want to maximize their expected value.
What does a positive expected value mean in trading?
A positive expected value in trading means that the chosen trading strategy is able to generate profits in the mediumterm and longterm perspective provided that the trader strictly follows its terms. To learn what the expected value of the trading strategy is, simply use the formula described above.
What is the best indicator for Forex trading?
The standard deviation indicator is perhaps the best indicator available to traders in terms of reliability. In markets with stable trends, with moderate volatility where the price action is concentrated around the middle of the range, the STD indicator is better than any other tool that you would find.
What is forecasting in forex trading?
Rather, this approach gives the investor a general sense of whether a currency is going to appreciate or depreciate and an overall feel for the strength of the movement. It is typically used in combination with other forecasting methods to produce a complete result.
How to calculate expected value?
In other words, how to calculate expected value can be explained as: Expected value = P (right) * R (right) – P (wrong) * R (wrong)
What is expected value?
Expected value is a crucial element of any speculative pursuit. It should form the basis of any risk based trade.
What is the expected value of the above upper bound?
For the “above upper bound” the expected value is simply the credit we get from selling the 54 calls.
What is a winning trade?
Typically, a winning trade will have a positive expected value – i.e., the value of the probability of being right multiplied by the reward for being right exceeds the probability of being wrong multiplied by the reward for being wrong. And a losing trade will have a negative expected value.
Why do traders like options?
Many traders like options because it enables them to capture a specific part of the distribution of potential outcomes. That means they can more carefully tailor trading ideas and investment theses to express certain viewpoints.
How much capital loss is there if you go below $54?
However, if we go below $54 we suffer capital losses on the shares. Being long the 52 puts caps the losses at $2 per share ($54 minus $52). At 1,000 shares, that $2,000.
What happens if your odds of being right are low but the upside is high?
On the other hand, if your odds of being right are low but the upside is high, and your odds of being wrong are high but the cost to being wrong is negligible, it could make sense to do it.
How to tabulate the expected values associated with “above upper bound” and “below lower bound” scenarios?
To tabulate the expected values associated with “above upper bound” and “below lower bound” scenarios, we simply take the cost of the options and relevant movement in the stock.
What does EV mean in sports betting?
EV shows how much you can expect to win (or lose) if you were to place the same bet on identical events, over and over again. It is used by sports bettors to calculate whether a bet has a positive or negative profit expectation. Positive EV (+EV) produces profit over time, while a negative value (EV) will result in longterm losses.
What is the key to betting success?
One of the keys to betting success is to know the math behind what you’re trying to achieve. An important principle to understand is expected value. “Positive EV” is a term you’ll hear used by many serious sports bettors, but what does it actually mean?
Questions about probabilities
The results of the suggested polls are quite curious, in our opinion. But first, let us list those questions and the possible answers below.
Probability questions explained
The first question was “What would you choose?” And the possible answers were: either a 99.9% chance to win $1,000 (one thousand) or a 5% chance to win $1,000,000 (one million). In currency trading, as well as in any other risktaking activity, a trader has to consider the probability of an outcome and the value of that outcome.
Results analysis
Based on the answers of the website visitors, the results were the following:
A Statistical Edge in Trading is a Strategy or System With Positive Expected Value
When people try to find or develop a statistical edge for trading stocks, options, futures, forex, cryptocurrencies, or whatever they prefer, they often latch onto win rates – immediately assuming that a 50%+ win rate automatically equates to a winning system.
The Law of Large Numbers – Thinking in Probabilities and Staying Resilient Through Streaks
One of the most difficult hurdles for new traders to overcome is changing from thinking in certainties to thinking in probabilities.
Conclusion – Your Statistical Edge and Trading Skills Are Essential For Durable Market Success
Once you find or develop a statistical edge, don’t assume that the work ends there. Market conditions can always change and render your current system ineffective. This is a mistake that many new traders make – failing to adequately adapt to the market.
What is positive expected value?
Positive expected value betting is a foundational method to sports betting, one that casual bettors, often referred to as “the public,” don’t use enough. A casual bettor is more like a roulette player hoping their color is called. A +EV bettor is a stockbroker looking to sell high and buy low. As much as most sports bettors overestimate their …
What is positive expected value in sports betting?
Positive expected value betting is a foundational method to sports betting, one that casual bettors, often referred to as “the public,” don’t use enough. A casual bettor is more like a roulette player hoping their color is called. A +EV bettor is a stockbroker looking to sell high and buy low.
Why weigh bets by expected value?
Weighing bets by expected value gives sharp bettors a fundamental advantage over most other bettors and one of the few edges they can take against a sportsbook.
What are the odds on a sports book?
sportsbooks exclusively use what are called American odds, with positive figures (such as +100, +222, etc.) assigned to the underdog and negative figures ( 120, 155, etc.) given to the favorite.
How long has the forex market evolved?
The forex market has evolved over centuries. For a summarized account of the most important developments shaping this $5 trillionaday market read more on the history of forex .
What does it mean to buy and sell forex?
What it means to buy and sell forex. Buying and selling forex pairs involves estimating the appreciation/depreciation in value of one currency against the other. This could involve fundamental or technical analysis as a foundation of the trade. Once a basis has been formed, the trader will look to other technical and fundamental aspects.
What do technical traders favor?
Technical traders tend to favor key price levels ( support & resistance ), trends and other indicators to form a basis for their forex trades.
What are some examples of political events that affect the value of a currency?
Government instability, corruption and changes in government can affect the value of a currency – for example, when president Donald Trump was elected the Dollar soared in value!
Is there a single way to trade forex?
This is because the forex market is one of the most liquid and largest in the world and as a result there is no one single way to trade.
What is expected value?
As the term implies, expected value is the number which we expect the results of repeated tests and trials to converge on over a period of time. If, for instance, there are 365 days in a week, and we know the expected value for the whole year, we would expect the mean price of any period during the year to approach the yearly mean as the number of trades, and the time period involved is increased.
What is ForexTime?
ForexTime (FXTM) is an awardwinning platform that certainly has the feeling of being set up by people who know what they are doing. The firm demonstrates an understanding of what helps traders make better returns, and its success can be measured by the fact that it’s doubled the number of clients it supports in recent years. The fact that the broker has grown to have more than two million accounts suggests it is getting things right for clients.
Which indicator is better for volatility?
The standard deviation indicator is perhaps the best indicator available to traders in terms of reliability. In markets with stable trends, with moderate volatility where the price action is concentrated around the middle of the range, the STD indicator is better than any other tool that you would find.
What is the meaning of moving averages in forex?
Forex traders are familiar with the concept of means and averages, since the popular and commonplace moving averages depend on the idea that the price oscillates around the center established by the mean. Moving averages sum up all the price values in a period and divide them by the number of time segments where the mean (albeit sometimes modified by additional choices) is the value of the MA.
How to find probability of each price?
Let’s also note here that the probability of of each price is simply the number of times it trades in a period, divided by the total number of price values in the series. In example, if the EURUSD market closes at 1.2 for 3 out of ten days that we desire to examine, the probability would be determined as 0.3 for the time in question. An important rule about probability is that it must always be positive, and its sum over all possible results, must be one.
How to forecast exchange rates?
Another common method used to forecast exchange rates involves gathering factors that might affect currency movements and creating a model that relates these variables to the exchange rate. The factors used in econometric models are typically based on economic theory, but any variable can be added if it is believed to significantly influence the exchange rate.
What variables are plugged into a forecast?
After the model is created, the variables INT, GDP and IGR can be plugged in to generate a forecast. The coefficients a, b, and c will determine how much a certain factor affects the exchange rate and direction of the effect (whether it is positive or negative). This method is probably the most complex and timeconsuming approach, but once the model is built, new data can be easily acquired and plugged in to generate quick forecasts.
What is PPP forecasting?
The purchasing power parity (PPP) is perhaps the most popular method due to its indoctrination in most economic textbooks. The PPP forecasting approach is based on the theoretical law of one price, which states that identical goods in different countries should have identical prices.
What are the factors used in econometric models?
The factors used in econometric models are typically based on economic theory, but any variable can be added if it is believed to significantly influence the exchange rate. As an example, suppose that a forecaster for a Canadian company has been tasked with forecasting the USD/CAD exchange rate over the next year.
Why is relative economic strength important?
As the name may suggest, the relative economic strength approach looks at the strength of economic growth in different countries in order to forecast the direction of exchange rates. The rationale behind this approach is based on the idea that a strong economic environment and potentially high growth are more likely to attract investments from foreign investors. And, in order to purchase investments in the desired country, an investor would have to purchase the country’s currency—creating increased demand that should cause the currency to appreciate.
What are the factors that affect the exchange rate?
From their research and analysis, they conclude the factors that are most influential are: the interest rate differential between the U.S. and Canada (INT), the difference in GDP growth rates (GDP), and income growth rate (IGR) differences between the two countries. The econometric model they come up with is shown as:
What factors attract investors to a certain country?
It takes a more general view and looks at all investment flows. For instance, another factor that can draw investors to a certain country is interest rates. High interest rates will attract investors looking for the highest yield on their investments, causing demand for the currency to increase, which again would result in an appreciation of the currency.
Expected Value in Options Trading
Other Factors in Expected Value Calculations

Transaction costsare especially important to include. This is not only the cost of the trade, it’s also the spread in what you’re trading and the quality of the execution. It also includes financing costs and/or borrow fees. Many securities and markets don’t have very liquid options markets, meaning the spread is often quite wide and there’s a lack…
Going from The Intuitive to The Explicit

Even if you don’t consciously make expected value calculations, you do them all the time intuitively. If you have a flight to catch, you’re likely to leave for the airport well ahead of time to give yourself a reasonable time cushion. This way you make it nearly impossible for you to miss your flight in case you have an issue with traveling to the airport, long lines, a security holdup, a …
Conclusion

If you are a trader or a professional gambleror any type of professional decisionmaker, it’s critical that you know the concept of expected value. Markets are similar to poker. You have to constantly assess your odds of being right, what your reward is for being right, the odds and penalty of being wrong, and how to assess this information with knowledge that is almost always imperfect. Mak…
in Conclusion

Expected value is a crucial element of any speculative pursuit. It should form the basis of any risk based trade.