Expectancy is the number that decides
Expectancy is what one trade is worth on average, and it is the only statistic that decides whether a method makes money. Everything else — win rate, average win, profit factor, the shape of the equity curve — is an ingredient of it or a consequence of it.
It is the win rate multiplied by the average win, minus the loss rate multiplied by the average loss. Both halves are needed. A method that wins seventy per cent of the time with an average win of ten and an average loss of forty has an expectancy of minus five per trade, and it will feel like a good strategy for a long time, because seven out of ten sessions end green.
The reverse is more common and more useful: thirty-five per cent winners at an average of ninety against sixty-five per cent losers at thirty gives an expectancy of about twelve. That method loses roughly two trades in three and is clearly worth trading. It is also close to psychologically unbearable, which is the real reason most people cannot run one — not because they cannot find it, but because they cannot sit through it.
Expectancy should be measured in R rather than currency wherever possible, because R normalises across instruments and across changes in account size. An expectancy of 0.2R means that on average each trade returns a fifth of what you risked, whatever you risked and whatever you traded. Currency expectancy silently mixes a period of small size with a period of large size and reports the average of two different strategies.
One caution the arithmetic hides: expectancy is an average over a distribution, and averages say nothing about the path. A positive expectancy guarantees nothing about the next twenty trades. It is a statement about the long run, and the long run only arrives for accounts that were sized to reach it.
What to take away
- Expectancy = (win rate × avg win) − (loss rate × avg loss).
- Measure it in R, not currency, or you average across different position sizes.
- Positive expectancy says nothing about the next twenty trades.
Where it goes wrong
- Judging a method by win rate and ignoring the size of the losses.
- Comparing currency expectancy across periods where size changed.
- Expecting a positive expectancy to show up over a short stretch.
This chapter, measured against your own trades
In the app the same chapter ends in your figures rather than an example: how often you did the thing it describes, over your last ninety days. You pick one change to make, and Evidence checks afterwards whether it actually changed — from your journal, arithmetic, no opinion involved. Questions you get wrong come back a week later and again a month after that.
Open the free plan →Check that it stuck
Answers shown — in the app these are asked before you see them, and the ones you get wrong come back after a week.