Sign in     Like us on Facebook Follow us on Twitter Watch us on YouTube

News and Blog

Join 5000 other sharemarket traders for regular blog updates!

Browse to a category

Blog Search

This Wont Work

Whilst it does not qualify for email of the week status an email received last week at blog central does provide an interesting talking point. The gist of the email was that this individual had $40,000 to trade, was risking $600 per trade in the hope of making $250.

So I am risking $600 to make $250 – think about that for a moment. Each time I am wrong I need to be right the next 2.4 times to get back to where I started. The flaw in this should be apparent to everyone – the system will have a negative expectancy over most ranges of trading outcomes. It will on average lose money each time it trades unless I am correct more than 70% of the time. The chances of that occurring are minimal.

To give you a sense of this I have generated the following table of returns based upon the numbers above.

As you can see the system is a dud and it is a dud based simply upon the money management system being used. The system has larger losses than wins and this brings the system undone. In this situation it doesn’t matter what magic indicator system you use or have been sold. If your losses are larger than you gains then the system is stuffed and will eventually send you broke.

The interesting thing about this email was apparently this person had a trading mentor who had not spotted this most basic of flaws in the system.



  1. Natalie Murray says:

    Hi CT, I’ve just found this and I don’t get it.if he is risking $600 per trade and getting an average return of $250, then is this not an expectancy of 0.4?

    • Hello Nat

      Assume the system is right 50% of the time, Its wins $250 and losses $650. Plug these numbers into the expectancy formual and see what you get.

  2. Natalie Murray says:

    Yes I get that if he is losing $600 with each losing trade, but he says he is risking $600, not losing $600.

    • You can assume that he is losing $650 each time. The moment I see a system with a risk higher than projected profit target I know its a dud. Its not different to risking $1000 to make $500 – unless the system is right much more often than it is wrong it will lose money.

Speak Your Mind


General Advice Warning

The Trading Game Pty Ltd (ACN: 099 576 253) is an AFSL holder (Licence no: 468163). This information is correct at the time of publishing and may not be reproduced without formal permission. It is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs.