Risk & Money ManagementExpected Value per TradeTrading Edge
Expectancy
The average profit or loss a system produces per trade given its win rate and its average win and loss sizes.
What Expectancy means
Expectancy is calculated as (win rate x average win) minus (loss rate x average loss), where the rates are expressed as decimals and the averages in account currency or in multiples of the amount risked. A positive result means the system has an edge and should accumulate profit across a large number of trades; a negative result means the opposite, no matter how satisfying individual winners feel. Expressing the figure in R multiples, where one R is the planned risk, makes systems with different position sizes directly comparable.
Multiplying expectancy by the expected number of trades gives a rough projection of returns over a period, which is why frequency matters as much as edge size. Three caveats deserve attention. Estimates from small samples are unstable, and a hundred trades is a modest sample. Spread, commission and swap must be deducted before the numbers are computed. And expectancy describes the mean outcome only, saying nothing about the variance around it or the drawdowns encountered on the way.
Worked example
A system winning 40 percent of trades with an average win of 300 dollars and an average loss of 120 dollars has an expectancy of (0.40 x 300) minus (0.60 x 120), which is 120 minus 72, or 48 dollars per trade.
Related terms
- Win RateThe percentage of closed trades that finish in profit, calculated as winning trades divided by total trades.
- Profit FactorGross profit divided by gross loss across a set of trades; any value above 1.0 indicates a net profitable system.
- Risk-Reward RatioThe ratio between the distance from entry to stop loss and the distance from entry to profit target.
- Money ManagementThe set of rules governing how much capital is risked per trade, per day and across all open positions.
- Kelly CriterionA formula giving the fraction of capital to risk per trade that maximises the long-run growth rate, given a known edge.
Frequently asked questions
What does Expectancy mean in forex trading?
The average profit or loss a system produces per trade given its win rate and its average win and loss sizes.
How does Expectancy work in practice?
Multiplying expectancy by the expected number of trades gives a rough projection of returns over a period, which is why frequency matters as much as edge size. Three caveats deserve attention. Estimates from small samples are unstable, and a hundred trades is a modest sample. Spread, commission and swap must be deducted before the numbers are computed. And expectancy describes the mean outcome only, saying nothing about the variance around it or the drawdowns encountered on the way.
What is an example of Expectancy?
A system winning 40 percent of trades with an average win of 300 dollars and an average loss of 120 dollars has an expectancy of (0.40 x 300) minus (0.60 x 120), which is 120 minus 72, or 48 dollars per trade.
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