## The Slings and Arrows of Outrageous Fortune

[dc]T[/dc]raders and investors are often unprepared for the variability of their trading results. This is difficult on many fronts. First, and most obviously, perhaps you won’t make as much money as you “should” from trading your system, or maybe you will make a lot more. Maybe your system will seem to stop working for a time. (And if so, how will you separate “for a time” from a more serious permanent breakdown in the methodology?) This variability can also make evaluation your results very difficult, and can hide the truth of your and your systems performance. Consider the following trading system.

• Risks a fixed amount R per trade. For the purposes of this discussion, R = \$2,000.
• Losses are always exactly -1.0R and wins are always +1.2R.
• The system wins 50% of the time, loses 50% of the time, and has no breakeven trades.
• The expectancy of this system is positive, and is 0.1. (Win percentage * Average win) – (Loss percentage * Average loss) = 1.2 * 0.5 – 1.0 * 0.5 = 0.1.
• This means that for every dollar risked, on average, we receive that dollar back, plus another \$0.10. Over a finite time span, results can be much more variable than this would suggest.

Now, assume that you have to trade the system and assume that you will trade it for 250 consecutive trades with a \$100,000 starting account, risking \$2,000 per trade. What results do you expect? On average you “should” end up with a total account value of \$150,000 at the end of 250 trades, but how sure are you? Could you lose money trading this positive expectancy system?