Trading Expectancy Explained With Formula and Examples

The expectancy formula

Expectancy = (win probability × average win) − (loss probability × average loss). If 40% of trades win, the win probability is 0.40 and the loss probability is 0.60. Use positive magnitudes for average win and average loss in the formula.

A positive expectancy means the selected sample's average result was positive before any omitted costs. A negative expectancy means the opposite. It is an estimate, not a promise.

Two worked examples

The examples are fictional. If charges average ₹20 per trade, the first sample's net expectancy would be about ₹52, assuming the charge treatment is comparable. Keep gross and net calculations clearly labelled.

Segment expectancy, not just total expectancy

Calculate expectancy by strategy, instrument and time of day when each group has enough observations. A positive total can hide a weak setup, and a weak total can include one useful process that deserves more testing.

• Use consistent setup tags.
• Compare equal periods and the same cost treatment.
• Report the number of trades with every segment.
• Inspect outliers and the largest drawdown alongside the average.

Sample-size limitations

Expectancy moves when one large winner or loser enters a small sample. Treat early results as evidence to investigate, not as a forecast. Continue recording the underlying trades and revisit the estimate after a broader, comparable sample.

Calculate expectancy step by step

Suppose 40 of 100 trades win and the average winning trade is ₹300. The winning contribution is 0.40 × ₹300 = ₹120. The remaining 60 trades lose an average of ₹80, so the losing contribution is 0.60 × ₹80 = ₹48. Expectancy is ₹120 − ₹48 = ₹72 per trade before any omitted charges.

If the same sample had a ₹20 average charge per trade, the simple net estimate would be ₹52, but only if the ₹20 is consistently measured across the same trades. Do not mix a gross average win with a net average loss.

A negative sample works the same way: 65% wins at ₹100 and 35% losses at ₹250 gives ₹65 − ₹87.50 = −₹22.50 per trade.

Segment expectancy without fooling yourself

Create separate groups for strategy, instrument and time of day only when the group has a meaningful number of comparable trades. For each group, show trade count, win probability, average win, average loss, net P&L and drawdown. A small group can be a hypothesis, not a conclusion.

The same trade can belong to more than one grouping, but the underlying result must not be counted twice in the overall sample. If a multi-leg strategy is reviewed as one decision, use the combined result consistently rather than mixing leg-level and strategy-level expectancy.

What expectancy cannot tell you

Expectancy does not describe the order of wins and losses, the size of the worst drawdown, liquidity, slippage or the likelihood of the next trade. It is a historical average based on recorded assumptions. Use it to identify what to investigate and what data to collect next, not to forecast a guaranteed income.