Expectancy

Expectancy is one of the most critical metrics used to determine whether a trading strategy is profitable over the long term. It combines win rate, average win, and average loss into a single formula, yielding a value that reflects the expected return for every dollar risked.

The expectancy formula is calculated as follows: Expectancy = (Win Rate × Average Win) - (Loss Rate × Average Loss)

A positive result indicates that the strategy is statistically profitable over the long run, despite the possibility of experiencing consecutive losing streaks during certain periods. Conversely, a negative result means the strategy is a losing one, regardless of how high its win rate may occasionally appear.

The importance of this metric lies in providing an objective evaluation free from personal impressions or short-term results, helping traders make decisions grounded in reliable statistical data across a sufficient sample of trades.

Common mistakes include judging a strategy based on a small number of trades, or failing to calculate expectancy periodically over batches of trades to verify whether the strategy remains effective.