What is Expectancy in Forex Trading?
Quick Answer: Expectancy is a formula that calculates the average amount you can expect to win or lose per trade over many trades. Positive expectancy means your trading system is profitable long-term. Formula: (Win% × Avg Win) - (Loss% × Avg Loss).
Understanding Expectancy in Trading
Expectancy is a statistical measure that tells you the average amount you can expect to win or lose per trade over the long run. It's one of the most important metrics for evaluating a trading system's profitability.
The Expectancy Formula
Expectancy Calculation:
Expectancy = (Win Rate × Average Win) - (Loss Rate × Average Loss)
Breaking Down the Formula
To calculate expectancy, you need four key metrics:
- Win Rate - Percentage of trades that are profitable (e.g., 0.45 for 45%)
- Average Win - Average profit from winning trades (in dollars or pips)
- Loss Rate - Percentage of trades that lose (1 - Win Rate)
- Average Loss - Average loss from losing trades (in dollars or pips)
Practical Expectancy Examples
✓ Positive Expectancy System
Stats:
- Win Rate: 40% (0.40)
- Average Win: $200
- Loss Rate: 60% (0.60)
- Average Loss: $100
Expectancy = (0.40 × $200) - (0.60 × $100) = $80 - $60 = +$20 per trade
✗ Negative Expectancy System
Stats:
- Win Rate: 60% (0.60)
- Average Win: $50
- Loss Rate: 40% (0.40)
- Average Loss: $120
Expectancy = (0.60 × $50) - (0.40 × $120) = $30 - $48 = -$18 per trade
Why Expectancy Matters More Than Win Rate
Many traders focus too much on win rate and ignore expectancy:
- High win rate ≠ profitability - You can win 80% of trades and still lose money
- Risk/reward is key - A 40% win rate with 3:1 reward-to-risk ratio is highly profitable
- Long-term edge - Positive expectancy guarantees profit over many trades
- System evaluation - Expectancy tells you if a strategy is worth trading
Interpreting Expectancy Values
Positive Expectancy (+$20 per trade)
System is profitable - over 100 trades, expect to make $2,000
Zero Expectancy ($0 per trade)
Breakeven system - you'll make/lose nothing after spreads and commissions
Negative Expectancy (-$15 per trade)
Losing system - over 100 trades, expect to lose $1,500. Don't trade this strategy!
Improving Your Expectancy
Ways to increase your trading expectancy:
- Improve win rate - Better entry signals, confirmation indicators
- Increase average win - Let winners run, use trailing stops
- Reduce average loss - Tighter stops, better risk management
- Better trade selection - Only take highest probability setups
Critical Insight
Before trading any strategy with real money, calculate its expectancy from backtesting or demo trading. A strategy with negative expectancy will eventually drain your account, no matter how disciplined you are. Professional traders only trade systems with proven positive expectancy of at least $10-$20 per trade after costs.
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