Calculation and mechanics
The win rate is multiplied by the average win and the loss rate by the average loss. The difference is the expectancy. The average loss is used as a positive amount. With 60% winners averaging a gain of 300 CHF and 40% losers averaging a loss of 250 CHF, the result is 0.6 x 300 - 0.4 x 250 = 80 CHF per trade.
Trades with a result of exactly zero add nothing to the result but count in the total number of trades. When the win and loss rates are also based on all trades, expectancy equals the plain average of all trade results.
Expectancy describes the trades actually evaluated and is no forecast of future results. Whether a similar value recurs depends, among other things, on whether the strategy and market conditions stay comparable.
Expectancy = win rate x avg win - loss rate x avg loss
Distinction
As an amount of money, expectancy depends on position size. When larger positions are traded, expectancy in the base currency changes in the same proportion, even though the quality of the strategy stays the same. The average R-multiple instead relates results to the risk taken in each trade. This makes trades of different position sizes easier to compare.
The Profit factor looks at the same gains and losses from a different angle. It divides the sum of all gains by the absolute sum of all losses. For the same selection of trades a positive expectancy always goes with a profit factor above 1.
Related terms
- Win rate (Hit rate, percent profitable)
- Profit factor (PF)
- R-multiple (R, result in R)
- Base currency (Reporting currency)
All market and analytical information is provided for educational and analytical purposes only and does not constitute investment advice or a trading recommendation.