Those 2 measures are:

1. Win percentage (W)

2. Gain vs loss ratio (R)
The win percentage (W) is the probability that a trade will have a positive return.

W is calculated by taking the total number of winning trades and dividing it by the total number
of trades.
For instance, let’s say you took 50 trades last year and 25 of those trades are winners, then your
W would be 50% (25 / 50).

The win to loss ratio (R) is equal to your total trading profits divided by your total trading losses.
It is calculated by taking the total amount gained by winning trades and dividing it by total
amount lost by losing trades.

So if your total profit last year was $27,500 and your total losses were $15,000 then your R
would be 1.83 ($27,500 / $15,000).

As it pertains to risk management, using these 2 measures one can go on to calculate a ratio that
is commonly tracked by traders and investors called the Kelly Criterion.

The formula for the Kelly percentage looks like this:

Kelly % = W – [(1 – W) / R]

 Kelly % = Kelly percentage

 W = Win percentage probability (total number of winning trades/total number of
trades)
 R = Gain to loss ratio (total amount gained by winning trades/total amount lost by losing
trades)
Many traders and investors use the Kelly Criterion as a guide to what percentage of their trading
account is the maximum amount they should risk on any given trade.

Please note that you can only get a good idea of your system’s expectancy when you need to
have gathered a large enough sample size to analyze. In order to really get a clear picture of the
system’s expectancy, you should actually have somewhere between 100 and 200 trades.