Trading Expectancy Explained: The Formula Behind Every Profitable System

Why Win Rate Is the Wrong Question

Ask most new traders how their strategy is doing and they answer with a win rate. It feels natural, but it is only half of the picture. A strategy that wins 70 percent of the time can still lose money if the average loser is much larger than the average winner. A strategy that wins only 40 percent of the time can be profitable if its winners are large enough.

The Formula

Expectancy is the average amount you can expect to make or lose per trade, over a large number of trades:

Expectancy = (Win Rate × Average Win) − (Loss Rate × Average Loss)

Measured in R-multiples, where a full stop-out is -1R, the formula gives you a number such as +0.25R per trade. That reads as: on average, each trade has added a quarter of the risk amount to the account.

Two Worked Examples

Strategy A: wins 70 percent of the time, average win +0.5R, average loss -1.5R.

Expectancy = (0.70 × 0.5) − (0.30 × 1.5) = 0.35 − 0.45 = -0.10R. Despite the high win rate, this system loses money.

Strategy B: wins 40 percent of the time, average win +2.5R, average loss -1R.

Expectancy = (0.40 × 2.5) − (0.60 × 1.0) = 1.00 − 0.60 = +0.40R. Losing six trades out of ten, this system makes money.

What Expectancy Does and Does Not Tell You

• It is an average, not a promise. Individual trades and short streaks will vary widely around it.
• It needs a real sample. Twenty trades is not enough to trust the number. Aim for 100 or more per setup before relying on it.
• It says nothing about drawdown. Two systems with the same expectancy can have very different losing streaks, which matters for how you size positions.
• It assumes consistent execution. If you only sometimes follow the rules, you are measuring a blend of strategies, not one.

How to Use It

Calculate expectancy separately for each setup you trade. Often one setup carries the whole account while another quietly drains it. Cutting the negative-expectancy setup is one of the highest-value changes a trader can make, and it requires no new skill, only the data to see the problem.

This is the reason DepthLevel's journal measures every trade in R and breaks results down by playbook tag. The goal is to replace a feeling about your strategy with a number you can test.