Expectancy - futures.io

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# 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

## Contents

##### [top]Stub
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.

http://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.
In mathematical and probability terms, this concept is known as "Expected Value" (EV).

https://en.wikipedia.org/wiki/Expected_value
##### [top]References

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 Contributors:  mikusha ,  Big Mike Created by  Big Mike , July 11th, 2010 at 09:12 PM Last edited by  mikusha , August 20th, 2015 at 01:47 AM 0 Comments, 4,504 Views
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