Use the formula above to calculate the expectancy of your system. Refine it until you have overwhelming evidence that it has a positive expectancy. Now that we understand the basics behind positive expectancy and know how to calculate this number for our trading system we can focus our attention to position sizing. After all, it now becomes a matter of making sure that we allocate our money wisely so that the system can realize its expectancy. Position sizing Position sizing tells you how much to risk on each position in your portfolio.
Lets start with an example that explains how position sizing and expectancy go together.
Lets assume that we are playing a positive expectancy game in which you win three times your bet size when you draw a black card and you loose your bet when you draw a red card from a full card deck. You end up drawing a red card and you loose all your money. In this example your position size was too large relative to your equity and therefore you are unable to realize the positive expectancy. It shows that you can still loose money with a positive expectancy system. The lesson we learned here is that your position size has to be small enough to realize the long-term positive expectancy of your system over many trades.