The single worst trade in a record, which tells you more about a strategy's real risk than its average loss does.
Averages hide the thing that kills accounts. A system with a $200 average loss and a $4,300 largest loss is not a $200-risk system; it is a system with a tail that your sizing has to survive.
Read it as a ratio. Largest loss divided by average loss should be in the region of 2-4x for a well-controlled discretionary book. Above 10x, either the stop regime is not being honoured or the strategy has embedded gap exposure. Either way, sizing methods calibrated on averages - optimal-f especially - will be badly overstated, because they are extremely sensitive to this one number.
Assume the worst trade in your record is not the worst trade you will have. The next sample almost always contains something larger, which is the practical meaning of fat-tails.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Expectancy: the average trade. Forty trades sorted by outcome: 24 small losses and 16 larger wins. Weighting each side by how often it happens gives the average result per trade, marked here by the dashed line at +$120.Working out a position size. Three numbers decide how big a trade is: the account, the share of it put at risk, and the distance from entry to stop. One percent of $25,000 is a $250 budget, and a $0.50 stop divides into that 500 times.
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