The Three Numbers

An edge has three moving parts, and you cannot manage what you do not measure.

• Win rate: how often the setup wins.
• Average win: how much you make on the winners.
• Average loss: how much you give back on the losers.

Most traders can guess at the first and have no idea about the other two. That is the gap this lesson closes. When you know all three from a real log, you can calculate expectancy, and you can see exactly which lever to pull when the number is too low.

Dollars are noisy because your position size changes. R-multiples fix that. R is the amount you risked on a trade, defined by your entry and your stop. Every outcome is then measured in units of that risk.

• Risk 150 dollars, make 300 dollars. That is a +2R trade.
• Risk 150 dollars, lose 150 dollars. That is a -1R trade.
• Risk 150 dollars, get stopped for 75 dollars. That is a -0.5R trade.

This idea comes from Van Tharp, and it is the cleanest way to compare trades of different sizes. Expectancy expressed in R is just the average R-multiple across all your trades. An expectancy of +0.3R means you make, on average, three tenths of your risk per trade. Grow your sample and that number is what compounds.

Once you track the three numbers, weak expectancy becomes a diagnosis instead of a mystery.

• Win rate fine, expectancy poor: your losers are too big or your winners too small. Look at exits and stop placement.
• Big average win, low win rate, still negative: you may be cutting winners or your setup fires too rarely to overcome the misses.
• Everything looks fine but the account drifts down: check costs, and check whether you are actually following the setup you are measuring.

The three numbers do not just describe your edge. They tell you where it is leaking.