A positive expectation system is simply a system that over enough time will generate a positive result, a profit.  You may be trading a system that produces huge winners, but is still a negative expectancy system.  You may also be trading a system that produces significantly more losers than winners and has a very high positive expectancy.  One of the biggest challenges a trader faces is that even if they are trading a positive expectancy system they still lose money.  How can this be?  A good way to illustrate this concept is to compare it to blackjack.

Most people have been to a casino, and most casino's have the table game blackjack.  Now if you have been to Vegas lately you might have concluded that they don't build those mega resorts from the people that win. 

These casino's play the game of black jack exactly the way a trader should trade his trading system.  The dealer is completely, unemotional,  he or she knows in advance what to do regardless of what happens, practices strict money management, and knows that their system has a positive expectancy.  

The dealer knows well in advance that they are not going to win every hand.  They don't care, because they know that over a long enough period of time, the way they are playing (their system) they have a very small edge over the player.  In fact this edge is only slightly above 50/50.  This razor thin edge is all they need in order to put money in the bank year after year.  

Notice I said year after year, and not week after week or hour after hour.  like any system they too will have periods of up's and downs, but have you ever tried to sit down at a blackjack table and the dealer told you, "I'm sorry Sir, but this table has been on a losing streak for the past couple days and the owners are getting nervous, we are going to sit it out for a while and see if our system is still working before we risk any more money."  OF COURSE NOT!!  

The house knows that they have a system with a very small advantage and in order for that advantage to play out they cannot pass up a single play!  In fact the more they are able to get people to sit down and play the better their edge will play out.  There biggest advantage is they have someone who is completely unemotional and detached from both the big wins and losses that is naturally part of the game, so the system never get's interrupted. 

However when the trader is behind the screen it usually a VERY different situation.  The trader is not operating from a clear set of plans, each outcome directly effects their personal bank account creating additional stress, and the worst part is they are making everything up as they go.  

It becomes very hard to improve upon something when it is constantly changing.  Imagine that you are trying to learn how to play the piano.  But the piano you are learning on is a very emotional piano, this piano decides to figure out how to sound the notes as you play.  What's worse is every time you play the song incorrectly, it then changes the notes again because it is unsure of itself and trying to adapt itself to the previous situation.  Although it might sound crazy, this is how many traders approach the markets, and the worst part is they are putting their hard earned money on the line while doing so.

Most Traders:

1. Don't have a solid, black and white trading plan covering every imaginable situation
2. They don't incorporate solid money management systems and therefore become even more emotionally involved
3. Are changing their trading system so often that it is impossible to evaluate it
4. Even if they do stick to a solid trading plan, don't know how to figure out if their system has a positive expectation

We will cover exactly how to calculate you systems expectancy and discuss different way of evaluating it in the Key Concept  'Expectancy.'

To Fully Understand this Key Concept read Trade Your Way to Financial Freedom