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Understand the difference

For many traders, risk / reward is the only trade management tool that matters. If the risk / reward is not greater than 1, do not take the trade. If the risk / reward (RR here) is low, say 0.5, you should never accept the trade. Don’t risk £ 10,000 to win £ 5,000, it never makes sense.

However, you may have found yourself taking a trade where the RR is low, but you have high expectations that the trade will work. Then you have to use something called hope. Expectation is how you calculate if a trade is worth taking. The way to calculate is to sit down with a coffee and about 30 uninterrupted minutes. Therefore, I made a little video explaining how to do it which you can see here.

Here is the look of my spreadsheet below

Here are the formulas to use

What would you like to know!

Expectation allows you to calculate whether a trade is worth taking even when the risk / reward is negative. The key to this is to get the probabilities of an event. You can see from the table above that the risk reward is negative for the trade (only doing 3000 for a risk of 10,000). However, because the probability is high (90%) then the overall expectation is positive at 17%. So take 10 trades like this and you will be in the money overall.

This is why some traders sometimes trade with a negative RR. It’s all about waiting.


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