Before you can figure out how to manage your day trading, you need to figure out how much money you can expect to make. This is your *expected return*, although some traders prefer the word *expectancy*.* *You start by laying out your trading system and testing it. You are looking for four numbers:

How many of your trades are losers?

What’s the typical percentage loss on a losing trade?

How many of your trades are winners?

What’s the typical percentage gain on a winning trade?

Let’s say you determine that 40 percent of the time, a trade loses, and it loses 1 percent. Sixty percent of the time, the trade wins, and winning trades are up 1.5 percent. With these numbers, you can calculate your per-trade expected return, like this:

% of losing trades x loss on losing trades + % of winning trades x gain on winning trades = expected return

Which in this example, works out to be:

.40 x –.01 + .60 x .015 = –.004 + .009 = .005

On average, then, you would expect to earn half a percent on every trade you make. Make enough trades with enough money, and it adds up.

You are more likely to make more money if you have a high expectation of winning trades and if those winners are expected to perform well. As long as there is some probability of loss, you stand to lose money.