What Is Expectancy in Trading?

Expectancy is the average result of a trade over many trades. If you could place your strategy a thousand times, expectancy is what the average trade would be worth. Positive means the approach pays on average before costs you have not included, and negative means it loses, however it feels to trade it.

The reason it matters is that the two numbers traders usually quote, win rate and profit per winner, each tell half the story. A high win rate with small wins and large losses can lose money. A low win rate with large wins can make it. Expectancy combines them: the win rate times the average win, minus the loss rate times the average loss.

Here is an example. Suppose you win 42% of the time, with an average win of 90 and an average loss of 50. Expectancy is 0.42 times 90, which is 37.8, minus 0.58 times 50, which is 29, giving 8.8 per trade. Over a hundred trades you would expect about 880. If the average loss were 70 instead, the same win rate would give a negative figure, and the strategy would lose.

It is often easier to think of it in R, with one R being the typical amount you lose on a losing trade. An expectancy of +0.18 R means the average trade earns about a fifth of what you risk. In R, strategies of any size can be compared, and you see at a glance how much slack there is before fees turn the result negative.

Expectancy is only as reliable as its inputs. A win rate and averages from twenty trades can be far from the truth, and a few unusual trades can swing them. That is why the number of trades behind it matters as much as the figure itself, and why a fresh strategy deserves skepticism until it has a long record.