Hi Mat,

to me the idea behind that formula is the following:

I will keep trading if, in the last N trades, my net profit is not only positive (in this case you would need no normalization) but sufficiently big when compared to the average loss (here is where you need the normalization).

For example, if in the last 10 trades you Won $10 and your average loss was 100$, the ratio of what you won ($10) over your average risk ($100) is too small and maybe you want to pull out.

Depending on the number of trades and their distribution, your E[Win] could still be statistically significant. Let's not try to dig into this. I think the formula is heuristic, let's keep it there.

I think that the bonus of that formula is that it allows to pull you out before your E[Win] drops below zero: you would get out when you are still winning, but your wins are too small compared to your risk.

That's why I would use it with a threshold positive and big enough, maybe close to 1.


ciao
Luigi