Expectancy in trading
Family III · Risk
Not to be confused with expectancy in trading.
Expectancy in trading quantifies the average outcome of a trading system per trade, expressed in currency or percentage terms. It combines the win rate and the average win/loss sizes into a single figure that represents the system's long-term profitability per trade. A positive expectancy indicates a profitable system over many trades, while a negative expectancy indicates a losing one.
Calculation
Expectancy is computed as:
Expectancy = (Win rate × Average win) − (Loss rate × Average loss)
where Loss rate = 1 − Win rate. The result is the average amount expected per trade. For example, a system with a 60% win rate, an average win of $500, and an average loss of $400 has an expectancy of (0.60 × 500) − (0.40 × 400) = 300 − 160 = $140 per trade.
Worked example
Interpretation and limitations
A positive expectancy does not guarantee profits over a small number of trades; it is a long-term average. The figure depends on the accuracy of the estimated win rate and average win/loss, which can vary with market conditions. Expectancy is often expressed as a percentage of the average trade or account equity to facilitate comparison across systems.
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.