What is Expectancy?
Expectancy is the average dollar amount you expect to make per trade based on your historical win rate, average win size, and average loss size. Positive expectancy means you have a profitable edge.
Expectancy Explained
Expectancy is the mathematical formula that determines whether a trading strategy is profitable over time: (Win Rate × Average Win) - (Loss Rate × Average Loss). If this number is positive, your strategy has an edge. The goal isn't just positive expectancy per trade but also per unit of time and risk. A strategy with $50 expectancy per trade that only triggers once a month may not be worth the effort.
Real-World Example
Your strategy has a 45% win rate, with average wins of $400 and average losses of $150. Expectancy = (0.45 × $400) - (0.55 × $150) = $180 - $82.50 = $97.50 per trade. Over 100 trades, you'd expect to make $9,750.
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