I have calculated the expected value and standard deviation for a trading strategy for the financial markets, but think that my standard deviation is too low.
Assume the following:
A trading strategy has the folllowing possible outcome:
probability of winning trade = 50%, win will be $1,500
probability of losing trade = 50%, loss will be -$1,000
EV = 0.5 x $1,500 + 0.5 x -$1,000 = $750 + -$500 = $250
Is the standard deviation equal to $883.88? I used the =STDEVA formula in MS Excel i.e.=STDEVA( 750, -500) - is this correct?
If I then put the trade on 100 times will my EV and SD be as follows?
EV = $250 x 100 = $25,000
SD = sqrt(100) x $883.88 = $8,839
hi mathaddict, thanks for your quick response. Your explanation is very helpful and it also makes sense. After one trial the SD should be $1,250 (the difference between -$500 and +$750). I couldn't make sense of the meaning of my $883.88 figure!