Knowing Your Expected Value (EV)

I enjoy watching Spencer Cornelia’s channel. He specialises in exposing a lot of fake gurus and scam artists, and he’s really good at it.

This particular video above is a bit different though. He tracked down a legit professional sports betting outfit based in Denver, Colorado and talked to them in-depth about how they run their operations.

I particularly liked this part (timestamped above) where this guy Dave from that Denver outfit talks about their edge.

So Spencer asks him: “Do you have a specific number that you know, over enough bets, you’re gonna be up (say) 4% on the dollar?”

To which Dave confidently says “Yeah”.

Dave then goes on to explain in detail about his edge, and it is very clear that Dave understands that as long as he has a significant edge, in the long run, after placing a high number of bets, he will end up profitable.

In this respect, I think professional sports betting is no different from professional day trading.

You can’t be successful in sports betting if you don’t know your edge, or your expected value (EV).

Similarly, I believe that if you want to be a full-time day trader, you can’t possibly not know your EV per trade for your strategy.

It’s like going into an MMA fight against a professional MMA fighter and not knowing where your strengths lie, in which ways you have an advantage over him, and what your exact gameplan is going to be in order to defeat him.

To know your EV in trading, you basically need to know these four things:

1. Your expected win percentage
2. Your expected loss percentage
3. Your expected dollar profit per winning trade
4. Your expected dollar loss per losing trade

For example, if you expect to win 70% of your trades and lose 30% of them, and if each win is expected to give you $150 profit and each loss is expected to lose you $100, then your EV per trade would be:

(70% x $150) – (30% x $100) = $75

So once your EV is established – assuming it has been well-validated using backtest data – you can then confidently know that as long as you keep trading using this exact same edge, over a large enough number of trades you will become profitable in the long run, at an approximate rate of $75 profit per trade.

It may take 100, 1,000 or even 10,000 trades to get very close to this figure of $75 profit per trade, but over the long run, the law of large numbers will ensure that you get closer and closer to the theoretical EV of $75 profit per trade.

Of course, the important thing also is to not waver from your strategy, and not lose hope when you hit a run of losing trades.

It’s all math and probability. Theoretically, as long as you do it enough times, you will achieve your EV.

The biggest challenge is in:

1. Not blowing your account due to a series of losses.
2. Not losing heart and wavering from your strategy just because you hit a run of consecutive losses.

This is why day trading is so difficult.

But just remember that as long as you have a valid edge and you know your EV, you can be assured that you will be profitable in the long run provided you stick to your gameplan and manage your cash flow properly.