What Is Expectancy in Trading?
Michael Whitman
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Trading since 2017, full-time since 2020
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YouTube creator, 137K subscribers
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Published 2026-09-13
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Updated
Expectancy is the average amount a single trade makes or loses once win rate and the size of wins and losses are combined into one number. A system with a high win rate can have negative expectancy, and a system that loses most of its trades can have positive expectancy.
Most traders judge a system by how often it wins. That number on its own cannot tell you whether the system makes money, and treating it as though it can is probably the most expensive habit in retail trading.
How it works
Expectancy is the average profit of one trade. Take every trade a system produced, add the wins, subtract the losses, divide by the number of trades. That is the whole calculation, and the answer is a single number in money or in R.
Written out, it is the win rate multiplied by the average win, minus the loss rate multiplied by the average loss. Two inputs, and neither is meaningful without the other.
Nine wins in every ten can still be a losing system. If nine trades make one unit each and the tenth loses twelve, the win rate is superb and the account is down two units. This is not a contrived case — it is the exact shape of selling premium without a hedge, and of moving a stop to avoid taking a loss.
And three wins in ten can be a strong system, if the wins are large enough. Trend following lives here, which is why it feels so uncomfortable to trade — the experience is mostly losing, and the arithmetic is fine.
The costs come out first
Every trade pays to enter and pays to leave, and that comes out of the average before any edge is counted. That toll is the spread plus any commission, and it is charged whether the trade wins or loses.
That sounds small. Whether it is small depends entirely on how far you were planning to hold, which is the part most cost discussions skip.
A worked example
Here is the calculation with a real base rate and a hypothetical cost.
The base rate. On the S&P 500 from 1950 to 2026, 59% of ten-day windows finished higher than they started. Suppose a long-only system captures exactly that — it wins 59% of the time, and the wins and losses are the same size, R.
The gross edge. Win 59% and lose 41% at the same size, and the average trade returns 0.59R − 0.41R = 0.18R. Eighteen percent of whatever you are risking, per trade, before costs.
The costs. Say the instrument has an average true range of $1.00 and a round trip costs $0.03. Subtract it: the average trade is worth 0.18R − $0.03.
The break-even point. Set that to zero and solve. 0.18R = $0.03 gives R = $0.1667, which is about a sixth of an ATR.
What that means. At this base rate, a target smaller than roughly a sixth of an ATR is a losing system — not because the trader executed badly, not because the market changed, but because the arithmetic was negative before the first trade was placed. No amount of discipline fixes it.
And the same edge is fine at a wider target. At 1 ATR the average trade returns $0.18 gross against $0.03 of cost — costs take a sixth of the edge and the rest survives. Identical system, identical win rate, opposite outcome, decided entirely by how far the target sits from the entry.
What it cannot tell you
Expectancy says nothing about the order the results arrive in. A positive-expectancy system produces losing runs routinely, and a run of four or six losses is not evidence that anything has broken. A fair coin throws long streaks over a few hundred tosses, and markets add clustering on top, so results cluster too.
It also says nothing about survival. A system with excellent expectancy will still end an account that sizes every trade at a third of the balance. Expectancy is the edge; position sizing is whether you are still there when the edge shows up.
And it is silent about the path. The S&P 500 finished September 2026 far above its January 1950 level, yet it closed below an earlier record on 93% of the trading days in between, and one wait for a new high ran from January 1973 to July 1980. A positive result and an uncomfortable ride are the normal combination, not a contradiction.
The original data
On the S&P 500 from January 1950 to September 2026, 59% of 19,290 ten-day windows finished higher, and 53.1% of single trading days closed up.
Put the ten-day base rate beside a hypothetical $0.03 round trip on an instrument with a $1.00 average true range and the figure this page exists for follows: the break-even target is about $0.17, or a sixth of an ATR. Below it the expectancy is negative regardless of execution.
That number is specific to this base rate and these costs. The method is not — run it on whatever you actually trade, with whatever your broker actually charges, and you will get your own floor. Most people have never calculated theirs, which is why “cut your winners short” gets discussed as a psychological failing when a good part of it is a costs problem.
When it fails
The characteristic failure is calculating expectancy over far too few trades. Twenty trades produce a number, the number looks authoritative because it came from arithmetic, and it is almost entirely noise. A system with genuinely positive expectancy can show a negative average over twenty trades without anything being wrong, and a system with no edge at all can show a strong positive one. The sample has to be large enough that a single outlier cannot move the answer, and on most retail trading frequencies that means months rather than weeks.
A second failure is assuming the average loss equals the stop distance. Gaps skip the level, slippage widens it, and the realized average loss is bigger than the planned one — which pushes expectancy down without any change in strategy.
A third is recalculating after every losing run and concluding the edge has gone. That is the one thing the number cannot answer on a small sample, and acting on it converts an ordinary run into a change of system.
The question: Four losses in a row. Has the edge stopped working?
A fourth is leaving costs out entirely, which is the single most common way a backtested edge fails to appear in a live account.
And a fifth is treating expectancy as a promise. It is an average over many trades and it makes no claim about the next one, the next ten, or this month. It tells you which direction the arithmetic points, and that is genuinely all it tells you.
Related
Risk management covers position sizing, which decides whether a positive expectancy ever gets collected. Stop loss covers where the loss side of the calculation is actually set. And ATR covers the volatility measure the break-even target above is expressed in.
Expectancy matters more than any indicator. Chasing a higher win rate feels like the obvious improvement, and the arithmetic does not care about it on its own. Measure average profit per trade instead, and some setups that look good turn out to be moving money sideways and paying the broker for the privilege.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.