How to Measure Your Expectancy
To measure expectancy, express every closed trade as a multiple of what you risked on it, then take the average across all of them including the losses. A positive average means the approach earns per attempt; the number is only meaningful if no trades were left out.
Expectancy answers the only question that matters about an approach: does taking it repeatedly earn anything. Everything else — the win rate, the best trade, the feeling — is downstream of that number.
Before you start
A record of every closed trade, including the ones you would rather forget. A record with holes measures your memory rather than your method, and the holes are systematically the bad ones.
The risk you took on each, so results can be expressed in units of it. Entry minus stop, times size. Without it, a large win on a large position looks like skill.
A decision about the sample period, made before you look at the answer. Choosing the window after seeing the numbers selects the window that flatters you.
The steps
1. List every closed trade in the period
Date, instrument, entry, stop, exit, size. Nothing else is needed yet, and no trade is excluded for being unrepresentative.
2. Compute the risk on each one
The distance from entry to the stop you actually placed, multiplied by the position size. This is one R, and it is fixed at entry rather than at exit.
3. Express each result as a multiple of that risk
A trade that made twice what it risked is 2R. One that lost what it risked is −1R. A trade stopped worse than planned is −1.4R, and it is recorded that way.
4. Average across every trade, losers included
Add the R multiples and divide by the count. That is expectancy: what the approach earns per attempt, in units of what each attempt risked.
5. Subtract the costs before believing it
Commission and spread are paid whether the trade won or lost. On a small average they are a large share of it, so a pre-cost expectancy is a different number from a real one.
6. Count the trades and be honest about the sample
Distinguishing a five-point edge from noise takes roughly 380 observations. A positive expectancy over 30 trades is an encouraging story and it is not yet evidence.
7. Recompute it monthly and keep the history
One figure tells you where you are. A series of them tells you whether it is improving, which is the question the measurement is actually for.
How to tell it worked
The trade count in your calculation matches the trade count in your broker statement. If it does not, the record has holes and the number describes a selection.
Losers are in the average. Recomputing with only winners should produce a visibly different figure — if it does not, they were already excluded.
The figure is quoted with its sample size. “0.32R over 214 trades” is a measurement; “0.32R” alone is a claim.
And costs were subtracted, so the number describes what reached the account rather than what the chart implied.
What the number cannot tell you
It cannot tell you the next trade will work. It is an average over a sample, and even a method that wins half its trades has better-than-even odds of a six-loss streak somewhere in 100 of them — streaks are ordinary, and an average says nothing about their order.
Costs can be measured in R too. Say you risk $100 a trade and a round trip costs $5: that is 0.05R, so a strategy with an expectancy of 0.05R before costs has none after them — the measurement and the fee are the same size.
It also cannot see slippage you did not record. A stop filled worse than placed is a larger loss than −1R, and recording it as −1R quietly inflates the average.
Reading the number once you have it
A figure between 0 and 0.1R is inside the noise for most sample sizes. It may be real and it cannot be distinguished from zero without a very large record.
Between 0.1R and 0.3R is a workable edge if the sample is in the hundreds and the costs are already subtracted. Most durable approaches live here rather than higher.
Above 0.5R over a large sample is unusual, and the first thing to check is whether the record is complete rather than whether the strategy is exceptional.
And a negative figure is the most useful result the calculation produces. It says the approach loses per attempt, which no amount of position sizing or discipline corrects — the answer is to stop taking it rather than to take it better.
The original data
Of the 24,971 unique videos collected for this site’s search study, win rate appears in 169 videos at a median of 15,735 views across 136 channels, and trading journals in 29 at 24,870. Duplicates are removed first, so each video is counted once.
169 videos on win rate. Win rate cannot say on its own whether an approach pays; expectancy is the number that does, and it takes a trading record to compute.
The question: Expectancy is positive over 40 trades. Scale up?
The answer is that 40 trades cannot separate an edge from a good run. The arithmetic is on the sample size calculator, and it puts the requirement in the hundreds. A positive figure over 40 trades is a reason to keep the record going, not a reason to increase size — and increasing size is what turns a normal losing streak into a serious one.
When it fails
The failure is a record with quiet gaps, and it produces a number that looks respectable. Trades closed in frustration, positions exited without a plan, the week that went badly — none of them get entered, not through dishonesty but because entering them is unpleasant. The resulting expectancy describes a filtered version of the strategy, it is always better than the real one, and the filter removes exactly the trades that would have said something useful.
The second failure is averaging only the winners. That is not expectancy.
A third is quoting it without a sample size. The count is half the measurement.
A fourth is using pre-cost figures. Costs are paid on every attempt.
A fifth is recording every stop as −1R. Slippage makes some of them worse.
And a sixth is recomputing after every trade. The number moves on noise and invites reacting to it.
Related
Trade review is the process that produces the record. Trading journal is where the raw entries live. And win rate is the number this one exists to replace.
Record every trade before you trust the number. Expectancy moves a long way once the handful you quietly skipped go back in, and a record with gaps describes a selection rather than a strategy. The gaps are never random.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.