Expectancy

Expectancy is a statistical concept used to measure the profitability of a trading strategy. It quantifies how profitable a trade is on average and is used to evaluate the long-term success of a trading strategy.

Expectancy is calculated using a simple formula:

Expectancy = (Average Gain per Winning Trade * Percentage of Winning Trades) – (Average Loss per Losing Trade * Percentage of Losing Trades)

In this formula, the average gain per winning trade, percentage of winning trades, average loss per losing trade, and percentage of losing trades are used.

If the expectancy value is positive, it indicates that the strategy is profitable in the long run. A negative expectancy value indicates that the strategy is unprofitable in the long run. If the expectancy value is close to zero, the strategy is considered neutral and neither profitable nor unprofitable.

Expectancy has several advantages. Firstly, it can be used to objectively evaluate the performance of a trading strategy. Secondly, expectancy can be used to compare trading strategies by considering the risk-reward ratio. Additionally, expectancy can be used to assess the sustainability of a trading strategy in the long term.

However, expectancy also has some limitations. Firstly, it should be noted that expectancy does not guarantee future results based on past performance. Additionally, expectancy alone cannot evaluate all aspects of a trading strategy. Other factors such as risk management, psychology, and market conditions can influence the success of a strategy.

In conclusion, expectancy is a statistical concept used to measure the profitability of a trading strategy. It quantifies how profitable a trade is on average and is used to evaluate the long-term success of a trading strategy. Expectancy is an objective performance measure, but it should be considered in conjunction with other factors.