Expectancy Trading

Expectancy in trading is the average amount you can expect to gain or lose per trade over a series of trades, calculated from your win rate and the average size of your wins and losses. A positive expectancy means the strategy is profitable over the long run; a negative expectancy means you will lose money over time no matter how disciplined your execution.

What Is Expectancy?

Expectancy translates your trading strategy’s historical performance into a single number that tells you if the strategy makes or loses money per trade, on average.

**Formula:**
Expectancy = (Win Rate x Average Win) – (Loss Rate x Average Loss)

**Example:**
Win rate: 45%
Average winning trade: Rs 3,000
Loss rate: 55%
Average losing trade: Rs 1,200
Expectancy = (0.45 x Rs 3,000) – (0.55 x Rs 1,200)
= Rs 1,350 – Rs 660
= Rs 690 per trade

This means that on average, each trade earns Rs 690. Over 100 trades, the expected profit is Rs 69,000.

Why Expectancy Matters More Than Win Rate

Many traders obsess over their win rate. But the real measure of a strategy is expectancy. A strategy with a 35% win rate and a 1:5 risk-reward can have much higher expectancy than a 65% win rate strategy where winners are barely larger than losers.

Positive vs Negative Expectancy

– **Positive expectancy**: the strategy will be profitable over a large number of trades
– **Negative expectancy**: the strategy will lose money over time no matter how good the risk management
– **Zero expectancy**: breaks even before costs; transaction costs make it negative

Calculating Your Expectancy from a Trade Journal

1. Review the last 100 trades from your journal
2. Calculate: total winning trades / 100 = win rate
3. Calculate: sum of all wins / number of wins = average win
4. Calculate: sum of all losses / number of losses = average loss
5. Apply the formula

Practical Example

Sanjay has traded 200 futures contracts over 6 months. 80 trades were winners averaging Rs 4,500 each. 120 trades were losers averaging Rs 2,000 each. Win rate: 40%. Expectancy = (0.40 x Rs 4,500) – (0.60 x Rs 2,000) = Rs 1,800 – Rs 1,200 = Rs 600 per trade. His strategy has a positive expectancy of Rs 600 per trade. Over 200 trades, total expected profit: Rs 1.2 lakh.

Key Takeaways

– Expectancy is the average profit or loss per trade based on win rate and average win/loss size
– Positive expectancy means the strategy is profitable over many trades
– A 40% win rate strategy with 1:3 risk-reward has better expectancy than a 60% win rate with 1:1 risk-reward
– Calculate expectancy from at least 100 trades in your trading journal for statistical significance
– Expectancy is the single most important metric for evaluating a trading strategy’s effectiveness