Expectancy Calculation

Expectancy calculation is the quantitative determination of the average amount a trader can expect to win or lose per dollar risked on a trade. It is derived by combining the win rate with the average size of winning trades and the average size of losing trades.

A positive expectancy indicates that, over a large enough sample size, the strategy will be profitable. This calculation is the foundation of any robust trading system, as it mathematically confirms whether a strategy has a statistical edge.

Traders use expectancy to prioritize strategies and allocate capital more effectively. If a strategy has a low or negative expectancy, no amount of position sizing can make it profitable in the long run.

It encourages a focus on the law of large numbers, reminding traders that individual trade results are less important than the cumulative outcome of a consistent process. Expectancy calculation helps in filtering out noise and focusing on strategies that provide a genuine edge.