The next step is to evaluate your trading system using PMO

Positive Mathematical Expectation

The definition of a positive mathematical expectation (ME) can be reduced to the statement that there exists a mathematically proven probability that the trader will end up with profits, not losses.

Technically speaking a system that returns any positive number is a system that we would expect to make money with. Clearly, and all things being equal, a trader would want to trade a system with as high of a mathematical expectation number as possible.

PMO - Method for evaluation your trading system

Average Profit from deal = Total Profit / Number of winning deals;

Average Loss from deal = Total Loss / Number of losing deals;

Average Risk Reward(RR) = Average Loss from deal / Average Profit from deal

Results = Number of winning deals / Total number of deals;

PMO = (1 + Average Profit / Average Loss) * (Number of winning deals / Total deals) - 1;

Important:

• 1. Do not include Zero deals
• 2. To Eliminate Money Management, Proits and Losses must be in pips, because we evaluate the system!
• 3. The minimum amount of deals must exceed 100 beacuse the ealuation is more accurat.
• 4. Minimum period of assessment - 6 months

Example:

• * Total Deals: 256
• * Zero Deals: 34
• => Total Deals for calculate = 256 - 34 = 222
• * Number of winning deals = 102
• * Nimber of losing deals = 120
• * Total Profit = 756 pips
• * Total Loss = 425 pips
•  
• -------------------------------------------------
•  
• * Average profit from deal = 756 / 102 = 7.411
• * Average loss from deal = 425 / 120 = 3.54
•  
• * Average Risk Reward(RR) = 3.54 / 7.411 = 1 / 2.09
• Results = 102 / 222 = 0.4594 = 46%
•  
• * PMO = (1 + 7.411 / 3.54) * (102 / 222) - 1 = 0.4199

Using this parameters, it comes between 30% and 60%.

The critical zone is 60%. All the systems above this zone are excellent. So our target is 60% mark. If your system is under 60% you have to modify it.