Trading expectancy is the average amount a set of trading rules makes or loses per trade, measured over many trades: win rate × average win − loss rate × average loss. A positive expectancy means the wins, weighted by how often they occur, outweigh the losses; it summarizes past results and is not a promise about the next trade.
How it works
Expectancy needs four numbers from a run of closed trades: the win rate (W), the loss rate (1 − W), the average win and the average loss, taken as a positive amount.
- In dollars: expectancy = W × average win − (1 − W) × average loss.
- In R: divide each result by the trade's initial risk first, so a trade stopped out as planned counts as −1R. Expectancy in R compares systems and periods with different position sizes.
- Payoff ratio = average win ÷ average loss. When losses average 1R, expectancy in R = W × payoff − (1 − W).
- Break-even win rate = 1 ÷ (1 + payoff): the win rate at which expectancy is zero before costs.
The planned reward-to-risk of a single trade is covered in risk-reward ratio. Expectancy is the system-level counterpart: it uses what actually happened, including early exits, slippage and gaps, across all the trades of one trading system.
How to read it: win rate vs payoff table
Expectancy in R per trade before costs, assuming every loss is −1R and every win equals the payoff (rounded to two decimals):
| Win rate | Payoff 1 | Payoff 1.5 | Payoff 2 | Payoff 3 |
|---|---|---|---|---|
| 30% | −0.40 | −0.25 | −0.10 | +0.20 |
| 35% | −0.30 | −0.13 | +0.05 | +0.40 |
| 40% | −0.20 | 0.00 | +0.20 | +0.60 |
| 45% | −0.10 | +0.13 | +0.35 | +0.80 |
| 50% | 0.00 | +0.25 | +0.50 | +1.00 |
| 55% | +0.10 | +0.38 | +0.65 | +1.20 |
| 60% | +0.20 | +0.50 | +0.80 | +1.40 |
The break-even win rates are 50% at a payoff of 1, 40% at 1.5, 33.3% at 2 and 25% at 3. Neither the row nor the column decides the result on its own: a 35% win rate is profitable at a payoff of 2, while a 55% win rate at a payoff of 1 earns only +0.10R per trade before costs, a margin that commissions and slippage can erase.
Profit factor = gross profit ÷ gross loss over the same trades. It carries the same information in another form: profit factor = (W × average win) ÷ ((1 − W) × average loss), so expectancy is positive exactly when the profit factor is above 1. A profit factor of 1.5 means every $1 lost was matched by $1.50 won. It says nothing about how much each trade earns, so read it together with expectancy; what counts as a good value is covered in profit factor.
Worked example (illustrative numbers)
A journal holds 50 closed trades of one setup, each sized to risk $300 (1R = $300). 22 trades won, averaging +$540; 28 lost, averaging −$270, because some losers were closed before the stop.
| Measure | Calculation | Result |
|---|---|---|
| Win rate | 22 ÷ 50 | 44% |
| Payoff ratio | $540 ÷ $270 | 2.0 |
| Expectancy ($) | 0.44 × $540 − 0.56 × $270 | +$86.40 per trade |
| Expectancy (R) | 0.44 × 1.8R − 0.56 × 0.9R | about +0.29R per trade |
| Profit factor | $11,880 ÷ $7,560 | about 1.57 |
| Net result | 50 × $86.40 | +$4,320 |
At a payoff of 2 the break-even win rate is 33.3%, so the sample sits comfortably above it. That still does not prove the edge is real.
Limitations: sample size and common mistakes
- Win rates are noisy. With 50 trades and a 44% win rate, the standard error of the win rate is about 7 percentage points (√(0.44 × 0.56 ÷ 50)), so a rough 95% range runs from about 30% to 58%. The lower end is below break-even: the true expectancy could be negative.
- Losing streaks are normal. At a 44% win rate with independent trades, the chance of at least six losses in a row somewhere in 100 trades is about 76%, and of at least eight about 34%. A streak alone is not evidence that a system has stopped working; max drawdown shows what streaks do to an account.
- Averages hide outliers. One very large winner can carry a whole sample. Recalculate with the largest trade removed.
- Mixing setups. A combined figure can hide one profitable setup and one losing one. Measure each separately.
- Leaving out costs or trades. Expectancy before commissions and slippage, or without the trades that "did not count", overstates the result.
- Chasing the win rate. Taking profits early raises the win rate but usually lowers the payoff by more.
- Treating it as a forecast. Expectancy measured in a trending market may not hold in a range-bound one. It is an estimate from past trades, never a promise of future results.
In Clear Tape
The free expectancy calculator takes a win rate, an average win and an average loss and returns the expectancy, the result per 100 trades, the payoff ratio, the break-even win rate and the profit factor. The Clear Tape trade journal, free for every signed-in member, calculates these statistics from your own closed trades: win rate, average win and loss, profit factor, expectancy in $ and in R, and the longest winning and losing streaks, with breakdowns by system or setup, tag, long/short, weekday and holding period (dashboard: Portfolio › My journal). Backtests on the Systems page report the win rate, profit factor and expectancy after costs on past prices; they are available to Tools and Pro members.
For educational purposes only. Not investment advice.