What is expectancy in trading systems?
Expectancy is the average profit (or loss) you can expect per trade from a trading system over the long run.
Simple Formula:Expectancy = (Win Rate × Average Win) – (Loss Rate × Average Loss)
- Win Rate: % of trades that win (e.g., 60%).
- Loss Rate: % of trades that lose (e.g., 40%).
- Average Win: Average profit on winning trades.
- Average Loss: Average loss on losing trades (use positive number).
- Win rate = 55%
- Average win = $200
- Average loss = $100
- Loss rate = 45%
Expectancy = (0.55 × 200) – (0.45 × 100) = 110 – 45 = +$65 per trade
This means, on average, you make $65 every time you take a trade even though you lose 45% of the time.
- Positive expectancy (> 0) = Profitable system over time.
- Negative expectancy (< 0) = Losing system, no matter how good it "feels."
- A high win rate with small wins and big losses can still give negative expectancy.
- A lower win rate with big wins and small losses can give strong positive expectancy.
Keep losses small and winners big
That's just the secret