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Direct Answer

Expectancy in trading is the average amount a trader can expect to win or lose per trade over time, based on win rate, average win, and average loss.

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In Simple Terms

Expectancy tells you whether your trading system makes or loses money on average when repeated many times.

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Quick Breakdown

  • Measures profitability per trade
  • Combines win rate and risk/reward
  • Determines if a system has an edge

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The Expectancy Formula

E=(Pw×Aw)−(Pl×Al)E = (P_w \times A_w) - (P_l \times A_l)E=(Pw​×Aw​)−(Pl​×Al​) Where:
  • PwP_wPw​ = probability of winning
  • AwA_wAw​ = average win
  • PlP_lPl​ = probability of losing
  • AlA_lAl​ = average loss

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Example

  • Win rate: 50%
  • Average win: $200
  • Average loss: $100
Expectancy:
= (0.5 × 200) − (0.5 × 100)
= 100 − 50
= +$50 per trade This means that, over time, each trade is worth +$50 on average.

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Why Expectancy Matters

Expectancy shows whether a system is actually profitable. It helps answer:
“If I repeat this system 100 times, what happens?”
A positive expectancy means:
  • The system has a statistical edge
A negative expectancy means:
  • Losses will accumulate over time

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Expectancy vs Win Rate

A high win rate does not guarantee profitability. Example:
  • Win rate: 80%
  • Risk-to-reward: 1:3
A few losses can erase many small wins. Expectancy reveals the true performance of the system.

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What Affects Expectancy

  • Win rate
  • Size of wins vs losses
  • Risk per trade
  • Consistency of execution
Even a strong system can fail if risk is applied inconsistently.

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Common Mistakes

  • Focusing only on win rate
  • Ignoring average loss size
  • Overestimating performance
  • Changing strategy too often

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Key Insight

Expectancy is what defines a trading edge.
If expectancy is positive and risk is controlled, a system can be profitable over time.

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Next Step

To understand how risk impacts long-term survival: → What Is Risk of Ruin?