Expectancy: the number that matters

Win rate gets a lot of attention, but on its own it tells you very little. A setup can win 70% of the time and still lose money. Another can win 35% of the time and make money. The number that ties it together is expectancy.

Expectancy is what you make or lose per trade, on average, over many trades. If it is negative, no amount of risk control will fix it. Risk management keeps losses small, but expectancy decides whether you have an edge at all.

The formula

Expectancy = (win rate × average win) − (loss rate × average loss)

I like to work it out in points rather than dollars. Points don't depend on how many contracts you traded, so the number describes the setup and not your size. You can turn it into dollars later. On MNQ, one point is $2 per contract.

A worked example

Say you look back over your trades and find these numbers. You win 40% of the time, so you lose 60% of the time. Your average win is 30 points, and your average loss is 15 points.

• Win side: 0.40 × 30 = 12 points.
• Loss side: 0.60 × 15 = 9 points.
• Expectancy: 12 − 9 = 3 points per trade.

So, on average, each trade made 3 points before costs. On one MNQ contract that is $6 per trade, and commissions and fees come out of that. A small edge like this can disappear once costs are included, so always check the number after costs too.

Notice the win rate was under half. The setup worked on paper because the wins were twice the size of the losses. Flip those numbers, with 15-point wins and 30-point losses, and the same 40% win rate gives minus 12 points per trade.

Why sample size matters

Expectancy from a few trades is close to useless. Random chance can make a coin look skilled over a short run. If you flip a fair coin 20 times, there is about a 5.8% chance of getting 14 or more heads. That is a 70% "win rate" from pure luck.

Trading results are noisier than coin flips. The sizes of wins and losses vary too, and one big trade can swing the average. So you need many trades before the number means much. There is no magic count, but more is better. A good first goal is 30 sessions of the same setup, followed exactly. Then keep going and see if the number holds.

This is also why you have to trade one setup, at one size, the same way each time. If you change the rules every week, you never collect enough trades of any one thing to measure it.

Where the data comes from

You can only calculate expectancy if you keep a record. You need every trade, with its result in points, its date and whether you followed the rules. My own posted record at the record shows exactly that kind of data, session by session. It is simulated and in points, so treat it as an example of what to collect, not a promise of results.

Keep in mind that most people who day trade lose money. An honest expectancy number is often the thing that shows you this early, before it costs much.

The takeaway

Expectancy is win rate times average win, minus loss rate times average loss. Work it out in points, then check it after costs. Trust it only after many trades of the same setup, and keep a record so you have the data to work with.

Do this today

• Pull your last 20 or more trades of one setup and list each result in points.
• Work out your win rate, average win and average loss from that list.
• Calculate your expectancy in points, then subtract your costs per trade.
• Set a goal for how many sessions you will record before judging the number.

Check yourself

Answer each one in your head, then open it to check.