ForecastingStocks

Expectancy is the single number that tells you whether a strategy makes money over many trades. It combines your win rate with your reward-to-risk into the average profit or loss you can expect per trade.

The formula

Expectancy = (Win % x Average win) - (Loss % x Average loss)

A worked example

Win rate        = 40%   (you win 4 trades in 10)
Loss rate       = 60%
Average win     = US$300
Average loss    = US$100

Expectancy = (0.40 x 300) - (0.60 x 100)
           = 120 - 60
           = +US$80 per trade

A positive expectancy of US$80 means that, on average, every trade you take is worth US$80 — even though you lose 60% of the time. Over 100 trades the system is expected to earn about US$8,000, despite the majority being losers. This is exactly how a low win rate with good reward-to-risk beats a high win rate with poor reward-to-risk.

The losing-system check

Flip the reward-to-risk and watch it invert:

Win rate 40%, average win US$100, average loss US$300:
Expectancy = (0.40 x 100) - (0.60 x 300) = 40 - 180 = -US$140 per trade

Same 40% win rate, now a guaranteed loser. Win rate alone tells you nothing — only expectancy does.

Why it ties the track together

Expectancy is where everything connects: your reward-to-risk (from stops and targets) and your win rate (from your edge) combine into one verdict, and position sizing decides how fast a positive expectancy compounds — and how safely. A positive expectancy is the only thing that makes risk-taking worthwhile; risk management is what keeps you in the game long enough for that expectancy to play out.