Expectancy: The Only Number That Matters
Win rate times average win minus loss rate times average loss. The formula that decides everything.
ExpectancyThe average profit or loss you can expect per trade. is the single number that tells you whether a strategy makes money over the long run. It’s the average profit or loss you can expect per trade, combining how often you win with how much you win versus lose.
The formula is simple but it overturns the beginner obsession with win rateThe percentage of trades that are profitable.: **ExpectancyThe average profit or loss you can expect per trade. = (Win% × Average Win) − (Loss% × Average Loss).* What matters is the whole equation, not any single term. A strategy can win only 30% of the time and be hugely profitable if its winners dwarf its losers; a strategy can win 80% of the time and lose money if its rare losses are enormous. Positive expectancyThe average profit or loss you can expect per trade. = profitable over many trades; negative = a guaranteed slow death, no matter how good it feels.* This one number is the verdict on any system — and it’s why win rateThe percentage of trades that are profitable. alone is almost meaningless (a comforting but misleading statistic). Optimise for positive expectancy, and accept that getting there often means accepting a low win rate with big winners.
- Formula — ExpectancyThe average profit or loss you can expect per trade. = (Win% × Avg Win) − (Loss% × Avg Loss); positive means profitable over time.
- Win rateThe percentage of trades that are profitable. is not enough — a high win rateThe percentage of trades that are profitable. with fat occasional losses can still be negative expectancyThe average profit or loss you can expect per trade..
- The big lever — reward-to-risk (avg win vs avg loss) often matters more than win rateThe percentage of trades that are profitable.; a low win rateThe percentage of trades that are profitable. can win big.
ExampleStrategy A: wins 40% of the time, avg win ₹3, avg loss ₹1 → (0.4 × 3) − (0.6 × 1) = +₹0.60 per trade. Strategy B: wins 80%, avg win ₹1, avg loss ₹5 → (0.8 × 1) − (0.2 × 5) = −₹0.20 per trade. B feels like a winner (wins 4 of 5!) but bleeds money; A’s “low” 40% win rateThe percentage of trades that are profitable. prints. ExpectancyThe average profit or loss you can expect per trade., not win rateThe percentage of trades that are profitable., told the truth.
Key takeawayExpectancyThe average profit or loss you can expect per trade. = (Win% × Avg Win) − (Loss% × Avg Loss) — the average ₹ per trade and the only verdict that matters. Positive = profitable over time; negative = slow death. Win rateThe percentage of trades that are profitable. alone misleads; a low win rateThe percentage of trades that are profitable. with big winners can crush a high win rate with fat losses.
FAQs
If expectancy is positive, am I guaranteed to make money?
Over a *large enough* number of trades, and if the edge persists, positive expectancy should produce profit — but any short run can lose due to variance (the next lesson). You also need the discipline to take every trade and survive the drawdowns. Positive expectancy is necessary, not instantly sufficient — it plays out over many trades, not a few.