1. What is Expected Rate of Return?

The Expected Rate of Return (E[RoR]) in stock trading is a statistical measure that calculates the anticipated amount of profit or loss on an investment. It considers the probability of different outcomes to give traders a single expected value.

2. How Does the Calculator Work?

The calculator uses the Expected Rate of Return formula:

Where:

• \( Trade_{prob} \) — Probability of the trade being successful (0 to 1)
• \( Gain \) — Potential gain percentage if the trade is successful
• \( Loss \) — Potential loss percentage if the trade fails

Explanation: The formula calculates the weighted average of all possible returns, accounting for both winning and losing scenarios.

3. Importance of Expected Rate of Return

Details: Expected Rate of Return helps traders evaluate potential trades objectively, compare different trading strategies, and maintain positive expectancy over multiple trades.

4. Using the Calculator

Tips: Enter the probability as a decimal between 0 and 1 (e.g., 0.65 for 65%). Gain and loss should be entered as percentages (e.g., 20 for 20%).

5. Frequently Asked Questions (FAQ)

Q1: What is a good Expected Rate of Return?
A: A positive E[RoR] indicates a potentially profitable strategy. The higher the value, the better the expected performance.

Q2: How accurate is this calculation?
A: The accuracy depends on your probability and gain/loss estimates. It assumes these values are known precisely.

Q3: Should I only take trades with positive E[RoR]?
A: While positive E[RoR] is ideal, also consider other factors like risk tolerance and portfolio diversification.

Q4: How does this relate to risk management?
A: E[RoR] helps quantify risk-reward ratios. Even with high probability, large potential losses can make E[RoR] negative.

Q5: Can I use this for options trading?
A: Yes, this formula works for any trading where you can estimate probabilities and potential outcomes.