Trading expectancy is the average amount a strategy has historically made or lost per trade. A positive expectancy means the combination of win rate, average winner, and average loser produces a positive result over time.
The formula is: Expectancy = (Win Rate x Average Win) minus (Loss Rate x Average Loss). For example, a 45% win rate with a $250 average winner and $125 average loser produces an expectancy of +$43.75 per trade.
Expectancy is more useful than win rate alone because it combines both the frequency and magnitude of wins and losses. A trader with an 80% win rate can still have negative expectancy if occasional losses are very large.
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