Question: I have the book Trade Your Way to Financial Freedom, and am trying to use the concepts as part of a trading business plan that I am putting together.
I can’t figure out how to apply expectancy in the percent volatility position sizing model. Can you please clarify?
Answer: Expectancy is the average reward-to-risk ratio for a set of trades. Expectancy tells you how well those trades performed and how well you might expect similar trades to perform in the future—regardless of the position size for those trades. You want to trade only positive expectancy systems and you also want to keep track of a system’s expectancy.
Position sizing tells you how much to risk on a trade in dollars and also the likely result in dollars. You don’t need an expectancy figure to apply the percent volatility position sizing model. However, to come up with a percent volatility position size you will need the average true range (ATR) for the instrument you would like to trade.