EXPECTANCY

What is Expectancy?

In trading, expectancy is the average amount of money you can expect to win or lose per trade, based on your past performance. It’s a crucial metric that tells you if your trading system is profitable over the long run.

A positive expectancy means your system is profitable.1 A negative expectancy means you are statistically likely to lose money over time, even if you have some winning trades.2

The Formula

The formula for expectancy is:

Expectancy = (Win Rate x Average Win) - (Loss Rate x Average Loss)3

Where:

• Win Rate: The percentage of your trades that are winners.

• Average Win: The average amount of money you make on your winning trades.4

• Loss Rate: The percentage of your trades that are losers.

• Average Loss: The average amount of money you lose on your losing trades.

How to Use Expectancy as a Beginner

As a beginner, calculating your expectancy is one of the most important things you can do. It moves you from hopeful guessing to data-driven trading.5

Step 1: Track Your Trades

You can’t calculate expectancy without data. For at least your next 20-30 trades, log everything in a simple journal:

• Entry Price

• Exit Price

• Position Size

• Profit or Loss ($)

Step 2: Calculate the Components

After a series of trades, calculate your four key metrics:

1. Win Rate: (Number of Winning Trades / Total Trades)

2. Loss Rate: (Number of Losing Trades / Total Trades)

3. Average Win: (Total Profit from Winners / Number of Winning Trades)

4. Average Loss: (Total Loss from Losers / Number of Losing Trades)

Step 3: Calculate Your Expectancy

Let’s use a simple example:

You made 20 trades.

• You won on 10 trades (50% Win Rate).

• You lost on 10 trades (50% Loss Rate).

• Your total profit from winners was $1,500,soyour\ast \ast AverageWin\ast \ast is$150 ($1500 / 10).

• Your total loss from losers was $500,soyour\ast \ast AverageLoss\ast \ast is$50 ($500 / 10).

Now, plug it into the formula:

Expectancy = (0.50 x $150)-(0.50x$50)

Expectancy = $75-$25

Expectancy = $50

This positive result of $50meansthatonaverage,foreverytradeyoutakewiththissystem,youcanexpecttomake$50.

Why It’s Crucial for Beginners

• It Tells You if Your Strategy Works: Expectancy is the ultimate proof. If it’s negative, you must stop trading with real money and fix your strategy.

• It Focuses You on What Matters: You don’t need to win every trade. The example above shows you can be profitable winning only 50% of the time if your winning trades are significantly larger than your losing trades. This teaches the importance of cutting losses and letting winners run.

• It Builds Confidence: Knowing you have a system with a positive expectancy allows you to trade with discipline and confidence, even during a losing streak, because you know the odds are in your favor over time.