We  know how the stock market works and how trading systems should operate. The same methdologies can be used to manage your PPC campaigns and increase ROI. Below is some information for you.

1) Expectancy - In simple terms, expectancy is the average amount you can expect to win (or lose) per dollar at risk. Here's the formula for expectancy:

Expectancy = (Probability of Win * Average Win) - (Probability of Loss * Average Loss)

As an example let's say that a trader has a system that produces winning trades 30% of the time. That trader's average winning trade nets 10% while losing trades lose 3%. So if he were trading $10,000 positions his expectancy would be:

(0.3 * $1,000) - (0.7 * $300) = $90

So even though that system produces losing trades 70% of the time the expectancy is still positive and thus the trader can make money over time. You can also see how you could have a system that produces winning trades the majority of the time but would have a negative expectancy if the average loss was larger than the average win:

(0.6 * $400) - (0.4 * $650) = -$20

In fact, you could come up with any number of scenarios that would give you a positive, or negative, expectancy. The interesting thing is that most of us would feel better with a system that produced more winning trades than losers. The vast majority of people would have a lot of trouble with the first system above because of our natural tendency to want to be right all of the time. Yet we can see just by those two examples that the percentage of winning trades is not the most important factor in building a system. So imagine each keyword being a stock and each stock has a certain price associated with it. If you payout is going to be $10 you know what you should be bidding and what your return will be. Make sure you always measure your campaigns.

2) Position sizing - A position sizing model simply tells you 'how much' or 'how big' of a position to take. Position sizing can be the key factor in whether or not you stay in the game or whether your gains are huge or minimal. Dr. Van K. Tharp did an experiment which shows the importance position sizing. In his book “Trade Your Way to Financial Freedom" Van gives the results of his testing of four different position sizing models. He tested the models on the same trading system, so the only variable was the position sizing. The simulations were run with an initial equity of $1,000,000 and took 595 trades over a 5.5 year period. The models produced drastically different results:

• The worst was the baseline model which just bought 100 shares of stock whenever a signal was given. That model returned $32,567 or 0.58% annualized.
• Fixed-amount model: This method traded 100 shares per $100,000 in equity. It returned $237,457 or 5.75% annualized.
• Equal leverage model: Each position in this model was 3% of the account equity. So at the start of the trial each position was $30,000. This method returned $231,121.
• Percent risk model: According to this model positions were sized such that the initial risk exposure was 1% of the account equity. So with $1,000,000 equity the initial risk would be $10,000. So if the initial stop on a trade was $1 the system would trade 10,000 shares. For an initial stop of 50 cents the system would trade 20,000 shares, etc. This model returned $1,840,493 or 20.92% annualized.
• Percent Volatility model: Positions were sized based on each stock's volatility. The more volatile the stock the fewer shares are traded. For this trial positions were pegged at 0.5% volatility (initially $5,000 per position) - so if a stock's average true range was $5 the system would trade 1,000 shares. This model returned $2,109,266 or 22.93% annualized.

You can see how important position sizing is by that simple experiment. Remember that's the same trading system with the only difference being the size of the positions. Imagine if you used these techniques in your keyword campaigns. Better yet, imagine this being automated for you.  Imagine something that would try out different types of campaigns, ad groups, keywords, bid prices, positions and ad text. It would measure everything and automatically adjust it to where your most profitable point is!

We have a spreadsheet that we made that did this for us just by plugging in some Google AdWords data.  We'll be releasing that to you within a couple weeks.  We want it to be a little easier than the explanation above.