What Is Expectancy?
Expectancy is the mean result of a trade, taken from a large enough sample of real or backtested trades. A positive expectancy means the process makes money over time. A negative expectancy means it leaks, even if a short run looks profitable.
How Expectancy Is Calculated
A standard form is:
Expectancy = (Win rate × Average win) − (Loss rate × Average loss)
You can express it in cash or in R-multiples (units of initial risk). If you win 40% of trades, average win is 2R, and average loss is 1R, expectancy is (0.40 × 2) − (0.60 × 1) = 0.20R per trade.
Win rate alone is not expectancy. A high win rate with small wins and large losses can still have negative expectancy.
Why It Matters for Traders
Journaling and review exist to estimate expectancy on your actual book, not on a remembered highlight reel. Position size, whether a playbook deserves capital, and whether a change helped should all come back to expectancy after costs, fees, and funding.
Formula and Worked Example
Example numbers only (not a live result).
40 trades: 16 wins averaging $150, 24 losses averaging $80. Expectancy = (16/40 × 150) − (24/40 × 80) = 60 − 48 = $12 per trade, before asking whether the sample is large enough to trust.
Common Mistakes
- Computing expectancy on a tiny sample, then changing the system after a handful of trades.
- Leaving out fees, slippage, and funding, which can flip a small edge to negative.
- Mixing setups together and hiding a losing playbook inside a winning one.
