What is Expectancy in Forex Trading?

Q: What is Expectancy in Forex Trading?

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.