 Expectancy - futures io  # Expectancy

Expectancy = (Probability of Win * Average Win) � (Probability of Loss * Average Loss)

As an example let�s say that a trader has a system that produces winning trades 30% of the time. That trader�s average winning trade nets 10% while losing trades lose 3%. So if he were trading \$10,000 positions his expectancy would be:
(0.3 * \$1,000) � (0.7 * \$300) = \$90
So even though that system produces losing trades 70% of the time the expectancy is still positive and thus the trader can make money over time. You can also see how you could have a system that produces winning trades the majority of the time but would have a negative expectancy if the average loss was larger than the average win:
(0.6 * \$400) � (0.4 * \$650) = -\$20

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Link to Van Tharps introductory discussion of expectancy, where the concept of including the individual trade risk ('R') of each trade is introduced as a way of turning expectancy into a risk adjusted return metric comparable across systems.

https://www.iitm.com/sm-Expectancy.htm

Alternative calculation involves using 'average losing trade' as the denominator, which is usually easier to calculate, for a quick measure of risk adjusted returns.