What does 'Expectation' actually mean?

[chops_a_must]

Given the recent heated debate over mechanical trading I thought I would ask what this word means.

So what does the word "expectation" and its associated terms actually mean?

What is the history of this word, or if you like, the etymology?

What words do you think it has links to?

What does it mean to you specifically?

What does it mean in your trading?

And how much do you rely on your usage of it?

Discuss.

Cheers.

 

[tech/a]

Re: What Does Expectation Actually Mean?

In a trading sence if thats your implication its actually the combination of 2 words.
Positive expectancy.
Therin lies the key.

 

[chops_a_must]

Re: What Does Expectation Actually Mean?

In a trading sence if thats your implication its actually the combination of 2 words.
Positive expectancy.
Therin lies the key.

Expectancy/ expectation does not mean positive expectancy. Because you can have a negative expectancy/ expectation, or neutral.

Without using the word expectancy or expectation, what does expectation actually mean?

It is all so easy to be seduced by language we do not understand.

 

[MichaelD]

Re: What Does Expectation Actually Mean?

What the heck, I'll nibble.

Referring to trading/trading systems:

Expectation/expectancy = range of returns believed to be available from a given trading schema.

 

[Wysiwyg]

What words do you think it has links to?

Demanding

What does it mean to you specifically?

This expectation is what will happen.

What does it mean in your trading?

I don`t have expectancy, just await the outcome, mainly due to people perceiving expectation as a demand.

For example

Trader 1 :- i expect this share to be $2.55 (perceived demand,wants it to happen)
Trader 2 :- here`s this bloke telling us how it`s gonna be again.Out. (dislikes being told how it`s going to be, not a follower, likes to deny others their expectations)

 

[brty]

Hi,

Expectation in terms of trading.

It is not a single event, but the sum of probabilities over a series of events.

Any one trade does not have an expectancy/expectation.

The system traded will have a range of probabilities based on some history. There could be a% chance of x% gain. b% chance of a flat result y% loss and a c% chance of a z% loss.

Add up x,y and z and after costs (slippage/commissions) your left with the probability or expectation of your system.

bye

 

[howardbandy]

Hi Chops --

Expectancy is a well defined term. I'll answer assuming that is what you are asking about. If not, sorry for wasting the bandwidth.

Expectancy is the amount or the percentage that is gained on the average trade. The calculation can be done for either dollar amount or for percentage.

To compute expectancy as a percentage (which is most useful to me). For a list of trades, compute the percentage of trades that result in profit and the average profit in percent; and the percentage of trades that result in loss and the average percentage loss (as a negative number).

Let winners be the percentage of winning trades, losers the percentage of losing trades, pctwon the percentage won by the average winning trade, pctlost the percentage lost by the average losing trade.

Expectancy = winners * pctwon + losers * pctlost.

For example, 40% winners, the average winner gaining 1.5%, 60% losers, the average loser -0.5%.

Expectancy = 0.40 * 0.015 + 0.60 * (-0.005) = 0.003 = 0.3%

The terminal relative wealth (TRW) of a trading account is the final value of the account for every one unit of equity at the start. An account that goes from $10000 to $25000 over some period of time has a terminal relative wealth of 2.5.

TRW = (1+e)^n

where e is the expectancy as a decimal number (0.003 in the example above) and n is the number of closed trades during the period.

In order for a trading system to be profitable, expectancy must be positive. No money management scheme will turn a system that has a negative expectancy into a winning system.

But -- poor money management can turn any system, including one that has a positive expectancy, into a losing system.

Thanks,
Howard

 

[chops_a_must]

Hi,

Expectation in terms of trading.

It is not a single event, but the sum of probabilities over a series of events.

The best two posts in terms of one dimension of this question. Thanks Howard and Brty.

The problem I have with the mathematical explanation of expectation, in terms of trading, is that the market may come up with an infinitely large amount of results.

This explanation of expectation, comes from gaming theory, and certain earlier theories, where the odds of the outcome are fixed. I doubt anyone, even if not a randomist, would declare the market to have fixed odds however.

Which leads to the question: does gaming theory, and formulas and strategies from this, lead us to the best trading strategies? Even though the market may have a larger set of potential odds?

I'd say so. At least in terms of money management. Pro Blackjack players seem to do well as pro traders for instance.

But in terms of the decision side of the coin? Perhaps not.

Which again brings us back to the original meaning of the word. :

 

[prawn_86]

Expectation = What you expect to happen, not what WILL happen.

Like footy tipping. I could expect a team to win, doesnt mean they will...

 

[freddy2]

Expectation is the sum of probability multiplied by payoff for all possible outcomes. It can be given as expected gain/loss (subtract initial investment) or as expected result (leave in initial investment).

Example
Take the case of tossing a unbiased coin where the "investment" is $1, heads returns $0.5 and tails returns $1.5
Outcome | Prob | Payout | Prob * Payout
Head 0.5 0.5 0.25
Tail 0.5 1.5 .75
Total 1 * 1

Expected gain/loss = 0 (1 - 1)
Expected result = 1

 

[chops_a_must]

Expectation = What you expect to happen, not what WILL happen.

Does black mean black?

 

[howardbandy]

Pro Blackjack players seem to do well as pro traders for instance.

:

Hi Chops --

In the US, casinos have changed the rules so that pro blackjack players no long have a positive expectancy under any circumstances.

There are a few single deck, hand dealt, games, but the rules have been change to be very much in the house's favor. Blackjack pays even money, you may only double down on 10 or 11, you are limited to what you can split and how many times, you may not increase your bet more than 20 to 1 from one hand to the next, you must bet every hand, the dealer will reshuffle whenever a new player sits down, and so forth.

Many casinos are now using "continuous shufflers". The shuffler is loaded with four to six decks, the shuffler shuffles, and hands are dealt. As soon as the discards are collected from players who bust, and at the end of every round, the cards used for that round are put into the shuffler, which shuffles again. Those cards can appear in the next hand.

And so forth.

Thanks,
Howard