How to Improve Your Trading System: Expected Value, Position Sizing and the Trade Journal

Most developing traders measure their progress in the wrong currency. They look at profit and loss in dollars and ask "am I making money?" The more productive question — and the one that actually accelerates improvement — is "what does my data tell me about my system?"

In this episode of Joe's Trading Journey, we sit down with Joe, a real trader with over two years of experience, to review his live trading statistics and work through three of the most common hurdles developing traders face: understanding expected value, establishing consistent position sizing, and building a trade journal that generates genuine insight. Joe's numbers are real. His challenges will be familiar to any trader at a similar stage.

For traders newer to the systematic approach that underpins this kind of analysis, the Complete VCP Trading Guide for ASX Markets provides the foundational framework that informs the concepts discussed throughout this conversation.

Written by Christopher Hall, AdvDipFP | Authorised Representative, AFSL 526688 | Interview with Joe, March 2026

What Does Joe's Trading Data Actually Show?

Before the conversation began, Joe had done the work. His current statistics: a win rate of 36%, an average win of 0.04R, an average loss of 1.2R, producing an expected value of −1.4% per trade — or expressed in R-multiples, a −7.5R loss expectancy.

These are confronting numbers. But they are also exactly the kind of numbers that make improvement possible — because they are precise, they are honest, and they point directly to what needs to change.

The first thing those numbers reveal is the asymmetry between wins and losses. A 36% win rate is workable. Many professional traders win fewer than half their trades. But an average win of 0.04R against an average loss of 1.2R is a system where the losses are dramatically outweighing the gains. The maths will not resolve in the trader's favour until that ratio improves.

https://www.youtube.com/watch?v=QBUEWMY-a3o

How to Calculate Your Expected Value as a Trader

Expected value (EV) answers a fundamental question: if I take this type of trade one hundred times, what is my average outcome per trade?

The formula:

EV = (Win Rate × Average Win in R) − (Loss Rate × Average Loss in R)

Using Joe's current numbers:

(0.36 × 0.04R) − (0.64 × 1.2R) = 0.014R − 0.768R = −0.754R per trade

A negative expected value means the system, as currently configured, loses money over a sufficient sample of trades — regardless of any individual outcome. No amount of stock selection skill or market timing can overcome a structurally negative EV applied consistently.

The good news is that identifying negative EV is not failure. It is diagnosis. And diagnosis precedes improvement.

Why Inconsistent Position Sizing Distorts Every Metric You Track

One of the key issues surfacing in Joe's data is variable position sizing. When asked how his sizing had changed since the previous conversation, Joe explained:

"Given the market at the moment is very loose and also considering my recent losses, I have had to claw back the position size. So instead of for example putting down AU$20,000 per stock, that would be half or in some cases quartered where I've only put down AU$5,000."

Reducing position size in response to adverse market conditions is the right instinct — and Joe deserves credit for it. But the underlying issue is deeper: when position sizes vary widely across trades, the R-multiple calculations that reveal your system's true EV become unreliable.

A AU$20,000 position in one trade and a AU$5,000 position in the next are not directly comparable in dollar terms. Expressed in R-multiples, with a consistent percentage of capital at risk per trade, they become comparable — and the picture your data paints becomes accurate.

As noted in the conversation, professionals trade with data and punters do not. Inconsistent sizing is one of the primary reasons developing traders cannot extract reliable insight from their own results. This principle sits at the core of VCP Trade Execution on ASX: Minervini's Entry, Position Sizing and Exit Strategies, which covers in detail how position sizing integrates with a systematic entry framework.

How to Size a Position Using Your Stop Loss (Not a Dollar Amount)

The conventional approach to position sizing starts with a dollar amount — "I'll put AU$10,000 into this trade." The professional approach reverses that logic entirely.

The correct method:

1. Identify the natural stop loss for the setup — below a swing low, below a key moving average, or at a technically significant level

2. Calculate the distance in percentage terms between your entry price and that stop

3. Determine how much of your portfolio you are prepared to risk on this trade (e.g. 1%)

4. Divide your risk amount by the stop distance to arrive at the correct position size in shares

Example: AU$100,000 portfolio, 1% risk = AU$1,000. Stop loss distance = 5%. Position size = AU$1,000 ÷ 0.05 = AU$20,000 in shares.

This method means the trade dictates the stop and the stop dictates the size — not the other way around. The position size becomes the final variable, not the starting point.

Joe acknowledged he was not yet calculating this way, adding:

"I probably should have a section in my spreadsheet where it looks at what that total is and how that impacts the profitability on my portfolio."

That addition to his spreadsheet is exactly the right next step.

Why a 4% Stop Loss Can Work Against You in Certain Setups

Joe has been using a fixed 4% stop loss across his positions. When asked about this, he explained his reasoning:

"I'm still sticking to the general rule of one to three risk reward. Although in some instances I've gone back to a previous mindset where I've just locked it in at 4% just given the market has been a bit sporadic. So 4% is quite tight and it means I've been stopped out of some positions."

The tension here is real. A tighter stop preserves capital — and embracing the small loss is one of the foundational principles of momentum trading. Research into Mark Minervini's SEPA Methodology suggests that stop losses beyond 7.5–8% begin to compromise a system's mathematical viability.

But a stop placed at an arbitrary 4% — rather than at a technically significant level — creates a different problem: it increases the frequency of being stopped out before the trade has had room to develop. When the stop is above a natural swing low or a critical moving average rather than just below it, the share price can probe that level, trigger the stop, and then rally — creating what traders call a whipsaw, and inflating the loss frequency in the journal.

The solution is not a wider fixed stop. It is a technically-placed stop, with the position size adjusted to ensure the total capital at risk remains within the trader's predetermined limit.

Joe acknowledged the tension directly:

"I think 4% could be tight in this instance but the reason I'm going for that now is just mindful of my very heavy previous loss."

That caution is understandable and appropriate at this stage of the journey.

How Trailing Your Stop to Break Even Protects Winning Trades

One of the most encouraging moments in this conversation was Joe describing a position he is currently holding — his largest position at approximately AU$37,000. When asked about his risk on that trade, he shared:

"I recently adjusted my trading stops. So I moved it up to AU$50 and that's just above break even. And I did that because there's a rule that Minervini discusses — when the stock has either doubled or tripled its reward, it's always best to shift the trading stop to at least break even."

This is textbook trade management, and it connects directly to a broader principle: recognising when a stock's price action has entered an extended phase. Traders who understand how accelerating trend lines behave and eventually break are better positioned to manage trailing stops as the move matures — trailing to break even being one of the most important early steps in that process.

Once a trade has moved sufficiently in your favour, moving the stop to break even eliminates the downside risk entirely on that position. The worst outcome becomes a scratch trade rather than a loss.

The practical rule: once a trade reaches 2–3R in profit, trail the stop to your entry price. The trade is now, at minimum, risk-free. The full framework behind this approach is detailed in What is Mark Minervini's Trading Strategy? The Complete SEPA and VCP Guide.

How to Build a Trade Journal That Actually Improves Your System

Joe's trade journal is a work in progress. When asked for an update, his response was candid:

"Not too good. Still a work in progress. I've had a bit of a think about it, although yeah, it is a bit lagging on my end just with getting on top of that."

It is the honest answer most developing traders would give. Journalling feels administrative. The temptation is to focus on the next trade rather than analysing the last one. But the journal is not administrative — it is the mechanism through which experience converts into genuine skill.

A trading journal at the minimum should capture: entry price, stop loss level, initial position size, risk in R, outcome in R, and the reason for taking the trade. But the more powerful addition — and the homework assigned to Joe at the end of this session — is the addition of trades not taken.

Every time a setup met the criteria and was passed on, that is a data point. If the trade subsequently worked, that is critical information about where execution is breaking down versus where the criteria themselves need refinement. As noted in the conversation: even if five new trades do not materialise in the coming month, the homework is to find five trades that were not taken and note the reason.

Understanding which stocks to include in that watchlist in the first place is a separate but related skill — How to Identify ASX Momentum Leaders: Why Beach Energy Failed While Paladin Rallied 40% provides a practical framework for that selection process.

Why Celebrating Process Over Profit Accelerates Development

One of the more important reframes in this conversation was around how Joe evaluates his trading month. At this stage of development, looking at the month's profit and loss is the wrong lens. A better question is: did I execute my plan correctly?

When Joe confirmed that he had stuck to his 4% stops and followed his system, the response was unambiguous:

"Phenomenal. Then that's got to be celebrated and that is a huge gain from when we last spoke."

The logic is sound. A trader who executes their system correctly — who places technically sound stops, sizes positions consistently, and follows their criteria — but experiences a losing month has not had a bad month. They have generated reliable data. A trader who breaks their rules and happens to profit has learned nothing and potentially reinforced poor habits.

This philosophy — that the process is the performance metric, not the outcome — is explored in depth in Why Gary Glover's Trading Philosophy Emphasises Process Over Market Opinions, which makes the same argument from a different angle and provides a useful companion read for traders at exactly Joe's stage.

The wins will follow a correctly executed process. Trying to force wins from an incorrectly executed one is not trading. It is gambling.

The Practical Improvement Framework: Joe's Next Steps

Based on this conversation, the clearest path forward for Joe — and for any developing trader at a similar stage — involves four specific actions:

First, add R-multiple tracking to the trading spreadsheet so that every trade is expressed in consistent risk units rather than variable dollar amounts.

Second, pilot the stop-loss-first position sizing method on the next two or three trades — identify the natural stop, calculate the correct share quantity from there, and note whether the resulting position size feels different to the previous approach.

Third, begin the trade journal in earnest — not just for trades taken, but for trades identified and not taken. Even three to five entries per month generates useful data over time.

Fourth, trail stops to break even on any position that reaches 2–3R in profit, using the principle Joe has already applied successfully to his current largest holding.

None of these steps require a new strategy or different stock picks. They require better infrastructure — and infrastructure is what separates traders who improve from those who simply accumulate experience.

Frequently Asked Questions

What is expected value in trading? Expected value (EV) is the average outcome per trade a system produces over a large sample, expressed in R-multiples. It is calculated by multiplying win rate by average win in R, then subtracting loss rate multiplied by average loss in R. A positive EV system can be profitable over time even with a sub-50% win rate, provided the average win is sufficiently larger than the average loss and other real-world factors such as brokerage costs and market conditions are accounted for.

What is a good win rate for a momentum trader? A win rate of 35–50% is common among momentum traders using systematic approaches. Win rate alone does not determine profitability — the ratio of average win to average loss (reward-to-risk) is equally important. A 36% win rate with a 3:1 reward-to-risk ratio produces a positive expected value over a sufficient sample of trades.

How should a beginner trader size their positions? Position sizing should be calculated from the stop loss outward, not from a fixed dollar amount. Determine how much capital you are prepared to lose on the trade (as a percentage of your portfolio — this will vary based on your individual circumstances and risk tolerance), identify the technically appropriate stop loss level, then divide your risk amount by the stop distance to arrive at the correct number of shares. Consider seeking professional advice to determine an appropriate risk level for your personal situation.

When should you move a stop loss to break even? A widely discussed protocol — consistent with Mark Minervini's published methodology — is to trail the stop to break even once a trade has returned 2–3 times the initial risk (2–3R). This eliminates downside risk on the position while allowing further upside participation.

What should a trading journal include? At minimum: entry price, stop loss level, position size, risk in R, outcome in R, and reason for entry. The most underused addition is a record of trades identified but not taken — reviewing their subsequent outcomes reveals whether the issue is criteria selection or execution.

Why does inconsistent position sizing distort trading results? When position sizes vary significantly across trades, dollar-based profit and loss figures cannot be reliably compared. A AU$500 loss on a AU$5,000 position and a AU$500 loss on a AU$20,000 position represent very different proportions of capital at risk. R-multiple tracking removes this distortion by expressing all outcomes relative to the initial risk taken.

What stop loss percentage does Mark Minervini reference in his published work? In his published work on momentum trading methodology, Minervini discusses thresholds around 7.5–8% as the point where stop losses begin to compromise a system's mathematical viability. Tighter stops of 4–6% are generally preferable, provided they are placed at technically significant levels rather than arbitrary fixed percentages.

Joe's Trading Journey is an ongoing educational series documenting a real trader's development in real time. New episodes are published monthly.

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Educational Disclaimer: This content is for educational purposes only and does not constitute financial advice. Past performance is no guarantee of future results. Consider your financial situation and seek professional advice before making investment decisions.

Finer Market Points Pty Ltd, CAR 1304002, AFSL 526688, ABN 87 645 284 680. This general information is educational only and not financial advice, recommendation, forecast or solicitation. Consider your objectives, financial situation and needs before acting. Seek appropriate professional advice. We accept no liability for any loss or damages arising from use.

Authors and presenters may hold positions in discussed companies and investment products.