Expectancy
What one trade brings on average. If the number is below zero, luck is not the problem.
Expectancy — what it is?
Expectancy is the average result of a single trade over a long run, accounting for the share of winning trades and the average size of wins and losses.
It is the only figure that answers whether the system makes money. Neither the win rate nor a lucky streak answers that.
The formula is short: win rate × average win minus share of losers × average loss. If the result is negative, no amount of discipline and no position size will make the system profitable.
Expectancy — how it is built?
It is computed from the trade journal, not from a feeling. Costs — spread, commission, swap — are subtracted before the calculation, otherwise the number will be pretty and wrong. A sensible minimum sample is several dozen trades.
Expectancy — common mistakes
Judging the system by the last five trades.
Calculating expectancy without costs.
Changing the rules after every losing run, resetting the sample.
Confusing positive expectancy with a guarantee of profit over a short stretch.
Related to
Glossary
- long
- buying in expectation of a rise.
- win rate
- the share of profitable trades. On its own it says nothing about the result without the R:R.
- short
- selling in expectation of a fall. You sell what you do not own and buy it back cheaper.
- Discipline
- following your own plan regardless of your current state. It shows up in numbers, not in intentions.
- position size
- the size calculated so that the stop being hit costs a set percentage of the account.
- spread
- the difference between bid and ask. Your cost of entering a trade.