Expectancy in trading
Family III · Risk
Not to be confused with expectancy in trading.
Expectancy in trading is a statistical measure of a trading strategy's profitability per trade. It combines the win rate with the average size of winning and losing trades to produce a single figure representing the mean outcome of the system. A positive expectancy indicates a profitable edge over many trades, while a negative expectancy indicates a losing one.
Calculation
Expectancy is calculated as:
Expectancy = (Win rate × Average win) − (Loss rate × Average loss)
Win rate and loss rate are expressed as decimals that sum to 1. Average win and average loss are positive monetary amounts. The result is the expected profit or loss per trade in the same currency.
For example, a system with a 50% win rate, an average win of $200, and an average loss of $100 has an expectancy of (0.5 × 200) − (0.5 × 100) = $50 per trade.
Worked example
Consider a strategy with the following statistics over 100 trades:
The positive expectancy of $50 per trade means that, on average, each trade is expected to yield a $50 profit. Over 100 trades, the total expected profit is $5,000.
Interpretation and limitations
Expectancy is a forward-looking estimate based on historical performance. It assumes that the win rate and average win/loss sizes remain stable, which may not hold in changing market conditions. A positive expectancy does not guarantee profits in any given period; it only indicates an edge over a large number of trades.
Expectancy is sensitive to outliers and can be distorted by a few unusually large wins or losses. Traders often complement it with other metrics such as profit factor and maximum drawdown to assess risk.
Often confused with
- expectancy in trading
- Expectancy in trading is the average amount a trading system is expected to gain or lose per trade, calculated by weighting the average win and average loss by their respective probabilities.