Expectancy: the one number that tells you if you have an edge
Win rate is the stat traders quote. Expectancy is the one that decides whether you make money. Here is how to calculate it and what to do with it.
Ask a trader how they’re doing and you’ll usually hear a win rate. “I’m hitting 70%.” It sounds great, and on its own it tells you almost nothing.
A 70% win rate with an average win of $50 and an average loss of $200 loses money. A 35% win rate with an average win of $300 and an average loss of $100 makes money. The number that captures both sides is expectancy.
What expectancy is
Expectancy is what you make, on average, every time you take a trade:
Expectancy = (win rate × average win) − (loss rate × average loss)
Take the two traders above:
- 70% win rate, $50 average win, $200 average loss: (0.70 × 50) − (0.30 × 200) = 35 − 60 = −$25 per trade.
- 35% win rate, $300 average win, $100 average loss: (0.35 × 300) − (0.65 × 100) = 105 − 65 = +$40 per trade.
The trader who is “right” twice as often is the one losing money. Expectancy makes that obvious in one number.
Why it matters more than win rate
Win rate and reward-to-risk pull against each other. Tighten your targets and your win rate goes up while your average win shrinks. Widen your stop and you’ll win more often but lose more when you’re wrong. Looking at either one alone, you can convince yourself you’re improving while your account says otherwise.
Expectancy settles the argument. If a change to your entries, stops or targets raises expectancy over a meaningful number of trades, it’s an improvement. If it doesn’t, it isn’t - whatever it did to your win rate.
Three things to do with it
1. Check it’s positive over enough trades. Twenty trades is a story, not a statistic. Look at expectancy over a month or a quarter before drawing conclusions.
2. Check it after fees. Commissions and exchange fees are a fixed cost on every trade. A strategy with a small positive expectancy can turn negative once fees are counted, especially if you trade size or frequency. Always look at net figures.
3. Use it to set realistic goals. If your expectancy is $40 a trade and you take about 60 trades a month, a month around $2,400 is consistent with your edge. A goal of $10,000 isn’t a goal - it’s a hope, and chasing it is how traders overtrade. Working backwards from a goal also tells you what has to change: more trades at the same quality, or better expectancy per trade.
The catch: outliers
One huge winner can carry a month’s expectancy. That’s not necessarily bad, but you should know whether your edge comes from a repeatable process or from one lucky day. Recalculate expectancy with your biggest winners and losers trimmed out and see whether it holds - we wrote about that in Base hits or home runs?.
How Premo helps
Premo Trading calculates expectancy from every closed position, automatically, alongside win rate, average win and loss, P/L ratio, drawdown and net P&L after fees - for any day, week, month or year, any account and any symbol. Monthly objectives go one step further and show the expectancy you need for the rest of the month to reach your goal.
This article is educational and is not investment advice. Trading involves substantial risk of loss.