Expected Value

Expected value is a mathematical concept representing the weighted average of all possible outcomes of a decision or investment, based on their probabilities. In trading, it is the cornerstone of determining whether a strategy has a positive statistical edge.

If a trader calculates that the expected value of a trade is positive, it means that, over a large number of iterations, the strategy will result in a profit. Calculating expected value requires an estimation of the probability of success, the magnitude of the gain, the probability of failure, and the magnitude of the loss.

In cryptocurrency derivatives, this involves modeling potential price moves, liquidation risks, and funding rate impacts. A trader who consistently executes trades with a positive expected value will grow their capital over time, even if individual trades result in losses.

It is the objective way to remove emotion from the decision-making process.