Expected Value Calculation

Expected Value Calculation is the process of determining the weighted average of all possible outcomes of a trade, based on their probabilities. In trading, it involves multiplying the probability of a win by the potential profit and subtracting the product of the probability of a loss and the potential loss.

A positive expected value indicates that a strategy is profitable over the long term, assuming the trader has sufficient capital to survive short-term losses. This calculation is the foundation of systematic trading and is used to filter out low-quality setups.

It requires an honest assessment of both win rates and risk-reward ratios. Mastering expected value allows a trader to focus on the mathematical edge rather than the emotional outcome of individual trades.