The Subtle Aspects Of Expectancy by Norman J. Brown
What exactly is it, when is it applicable, and when isnt it? Here we remove the confusion surrounding this often-misunderstood term.
In my December 2014 STOCKS & COMMODITIES article, "Effects Of Volatility On Trading," I pointed out that in roulette gambling, there is a big difference in the scalper approach (that is, betting with high odds such as 35:1) and that of the more conservative gambler betting with a more trending approach (1:1 odds). Even though the expectancy of profit is the same in both cases (actually, a loss of -5.26%), there is a considerable difference in maximum drawdown (Mdd) of equity, largely determined by the input standard deviation, a direct measure of volatility (see equation 6 in the sidebar "Glossary Of Terms And Equations")...