What Is Expectancy?
Expectancy is the mathematical expected value of a trading system per trade. Formula: (Win Rate × Average Win) − (Loss Rate × Average Loss).
A positive expectancy system makes money over a sufficient number of trades. A negative expectancy system loses money, no matter how many trades you run or how lucky you get in the short term. The number — not the win rate alone — determines whether a strategy is profitable.
This matters because high win-rate systems with poor R-multiples can have negative expectancy. A 70% win rate with average win 0.5% and average loss 3% produces expectancy of (0.7×0.5) − (0.3×3) = -0.55%. Meanwhile, a 40% win rate with average win 3% and average loss 1% produces expectancy of (0.4×3) − (0.6×1) = +0.6%. The second system, with much lower win rate, is dramatically more profitable. Always optimise for expectancy, not win rate alone.
Related terms
- Win Rate — The percentage of trades that close profitably out of total trades taken.
- Risk/Reward Ratio — The ratio of potential profit to potential loss on a trade.
- Sharpe Ratio — Risk-adjusted return — the excess return per unit of volatility.