Expectancy
a.k.a. Expected value
The average amount you can expect to win or lose per trade, based on your win rate and the size of your wins and losses.
Expectancy combines how often you win with how much you win and lose. The formula: (win rate × average win) − (loss rate × average loss).
A positive number means the method made money on average over the trades you measured. You can have a 40% win rate and positive expectancy if your wins are much bigger than your losses. Past results are no guarantee, and small samples lie.
Working out expectancy
- Win rate 40%, average win $150.
- Loss rate 60%, average loss $60.
- (0.40 × 150) − (0.60 × 60) = 60 − 36 = $24.
Bottom line: On average, about $24 per trade across that sample, before you ask whether the sample is big enough.
Judging a strategy by win rate alone.
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