What Is Expectancy?
Expectancy is the average profit or loss per trade that a strategy produces over time. Formula: Expectancy = (Win Rate × Average Win) - (Loss Rate × Average Loss). A positive expectancy means the strategy makes money over a large sample of trades; negative expectancy means it loses money regardless of individual wins.
How Expectancy Works
For example: a strategy with 40% win rate, $300 average win, and $100 average loss has an expectancy of (0.40 × $300) - (0.60 × $100) = $120 - $60 = +$60 per trade. Despite losing more often than winning, the strategy is profitable because wins are larger than losses. Conversely, an 80% win rate strategy with $50 average wins and $300 average losses has negative expectancy.
Why It Matters for Traders
Expectancy is the single most important metric for evaluating any trading strategy. A strategy must have positive expectancy over a statistically significant sample (minimum 100+ trades) to be viable. Tracking expectancy in your trading journal reveals whether your edge is real or illusory, and how changes in market conditions affect your strategy's viability.
