I have been reading money management stuffs from Van Tharp and other web blogs. Thanks to TraderMike who has a well written entry on Position sizing. I am practising R-Multiples as introduced by Dr.Van Tharp for position sizing and evaluate my system expectancy.
Basically, the idea is to express all of my profits and losses in terms of my initial risk(R).
For example, if my risk for each trade is $300, then if I made $3000, then I have 10R gain. On the other hand, if I closed my trade with $150 loss, then I will have an 0.5R loss.
I learnt about the concept of expectancy. To make it simple, expectancy is the average amount you can expect to win(or to lose) per dollar at risk. Here is the formula:
More on this topic in my future posting.