Every successful trader needs to know their expectancy. This single number tells you whether your trading strategy will make money over time. In this guide, we will break down the expectancy formula, show you how to calculate it, and explain how to use it to improve your trading.
What is Trading Expectancy?
Expectancy is the average amount you can expect to win (or lose) per dollar risked on each trade. A positive expectancy means your strategy makes money over time. A negative expectancy means you will eventually lose money, no matter how good your recent results have been.
The simple version: Expectancy tells you how much you make on average per trade. If your expectancy is $0.50 per dollar risked, you can expect to make 50 cents for every dollar you risk over many trades.
The Expectancy Formula
There are several ways to express the expectancy formula. Here is the most common version:
Basic Expectancy Formula
Expectancy = (Win Rate x Average Win) - (Loss Rate x Average Loss)
Where:
- Win Rate = Number of winning trades / Total trades
- Loss Rate = Number of losing trades / Total trades (or 1 - Win Rate)
- Average Win = Total profit from winners / Number of winners
- Average Loss = Total loss from losers / Number of losers
Step-by-Step Calculation Example
Let us calculate expectancy for a sample trading record:
Example: 100 Trades Analysis
Trading Record:
- Total trades: 100
- Winning trades: 45
- Losing trades: 55
- Total profit from winners: $9,000
- Total loss from losers: $5,500
Calculations:
- Win Rate = 45/100 = 0.45 (45%)
- Loss Rate = 55/100 = 0.55 (55%)
- Average Win = $9,000/45 = $200
- Average Loss = $5,500/55 = $100
Expectancy = (0.45 x $200) - (0.55 x $100)
Expectancy = $90 - $55 = $35 per trade
This trader has a positive expectancy of $35 per trade. Even with only a 45% win rate, the strategy is profitable because average wins are twice the size of average losses.
Expectancy Per Dollar Risked
A more useful version of expectancy measures profit per dollar risked:
Expectancy Per Dollar Risked (R-Multiple)
Expectancy (R) = (Win Rate x Avg Win in R) - (Loss Rate x Avg Loss in R)
Using the previous example with $100 risk per trade:
- Average Win in R = $200/$100 = 2R
- Average Loss in R = $100/$100 = 1R
- Expectancy = (0.45 x 2) - (0.55 x 1) = 0.90 - 0.55 = 0.35R
This means for every $1 risked, you expect to make $0.35 over time.
What Makes a Good Expectancy?
Expectancy benchmarks vary by trading style:
- Negative expectancy: Below 0 - strategy loses money
- Break-even: Around 0 - no edge after costs
- Decent edge: 0.1R to 0.3R per trade
- Good edge: 0.3R to 0.5R per trade
- Excellent edge: Above 0.5R per trade
The Win Rate vs. Risk-Reward Tradeoff
Many traders obsess over win rate, but expectancy shows that win rate alone does not determine profitability. You can have positive expectancy with various combinations:
Different Paths to Positive Expectancy
High Win Rate, Small Wins:
- 70% win rate, 1:1 risk-reward
- Expectancy = (0.70 x 1) - (0.30 x 1) = 0.40R
Low Win Rate, Big Wins:
- 35% win rate, 3:1 risk-reward
- Expectancy = (0.35 x 3) - (0.65 x 1) = 0.40R
Both strategies have the same expectancy despite very different win rates.
Minimum Win Rate for Different Risk-Rewards
To break even, your win rate must meet certain minimums based on your risk-reward ratio:
- 1:1 risk-reward: Need above 50% win rate
- 2:1 risk-reward: Need above 33% win rate
- 3:1 risk-reward: Need above 25% win rate
- 4:1 risk-reward: Need above 20% win rate
This formula helps: Minimum Win Rate = 1 / (1 + Reward/Risk)
How to Improve Your Expectancy
There are only three ways to increase expectancy:
1. Increase Your Win Rate
- Be more selective with entries
- Trade with the trend
- Improve your analysis skills
- Avoid trading during unfavorable conditions
2. Increase Your Average Win
- Let winners run longer
- Use trailing stops instead of fixed targets
- Add to winning positions
- Target higher risk-reward setups
3. Decrease Your Average Loss
- Cut losses quickly
- Use tighter stop losses where appropriate
- Exit early when your thesis is invalidated
- Avoid averaging down on losers
Sample Size Matters
Expectancy calculations need sufficient data to be reliable:
- 20-30 trades: Very rough estimate, high variance
- 50-100 trades: Starting to be meaningful
- 200+ trades: Reliable expectancy estimate
- 500+ trades: High confidence in your edge
Do not make major strategy changes based on small sample sizes.
Expectancy and Position Sizing
Once you know your expectancy, you can optimize position sizing:
Combining Expectancy with Position Sizing
If your expectancy is 0.35R and you take 100 trades per year:
- Expected annual R = 100 x 0.35 = 35R
- If risking 1% per trade: Expected return = 35%
- If risking 2% per trade: Expected return = 70%
Higher risk increases both expected returns and drawdowns.
Track Your Expectancy Automatically
Pro Trader Dashboard calculates your expectancy and all related metrics automatically. See your edge in real-time and track how it changes over time.
Common Expectancy Mistakes
1. Ignoring Commissions and Fees
Always subtract trading costs from your calculations. A marginally positive expectancy can turn negative after fees.
2. Curve Fitting
Be careful about optimizing your strategy based on past data. Out-of-sample testing is essential.
3. Survivorship Bias
Make sure you include all trades in your calculation, including the painful losses you would rather forget.
Summary
The expectancy formula is one of the most important concepts in trading. It combines win rate and risk-reward ratio into a single number that tells you whether your strategy has a real edge. A positive expectancy means you will make money over time if you trade consistently and manage position sizes properly.
Calculate your expectancy regularly, aim for at least 0.2R to 0.3R per trade, and focus on increasing it by improving any of the three components: win rate, average win size, or average loss size.