Strategy and performance
Expectancy
The average result of a trade over a large sample, combining win rate and average win and loss. A positive expectancy is necessary for a strategy to work and not sufficient for it to pass an evaluation.
GFN’s figure
A GFN 1 Step evaluation needs 10% of net gain against 8% of room. At 0.5% risk per trade, an expectancy of +0.2R per trade reaches the target in roughly 100 trades.
In detail
Expectancy,explained
Expectancy says nothing about the order trades arrive in, and order is what decides whether a fixed drawdown is breached. A positive-expectancy strategy that opens with eight losses fails an account it would have passed a month later.
It is also a small-sample trap. Twenty trades is not enough to estimate expectancy, and an evaluation is often decided inside twenty trades.
Related
Terms thatcome with it
Most rules only make sense next to the ones they interact with. These are the entries this one depends on.
R-multiple
A trade's result expressed in units of its initial risk. Risking $200 and making $600 is +3R; hitting the stop is -1R. It makes results comparable across account sizes and position sizes.
Win rate
The proportion of trades that finish profitable. On its own it says nothing useful - a 90% win rate with one outsized loss and a 35% win rate with large winners can produce the same result.
Profit factor
Gross profit divided by gross loss across a sample of trades. A profit factor above 1 means the strategy made money; below 1 means it lost, whatever the win rate suggests.
Risk of ruin
The probability that a sequence of trades takes an account to its breach level before it reaches its target, given a win rate, a reward-to-risk ratio and a risk per trade. It is driven mostly by position size.
Backtesting
Running a strategy over historical data to estimate how it would have performed. Useful for rejecting ideas, weak as evidence for accepting them, because the result is fitted to data already seen.
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