The lesson in full
One method wins 8 trades out of 10. Another wins only 3 or 4. The second can still be the better one, and expectancy shows why.
Expectancy is what a method makes on average per trade: (win rate × average win) minus (loss rate × average loss).
Method A wins 80% of trades at +US$100 but loses 20% at -US$500. 0.8 × 100 = 80, and 0.2 × 500 = 100. Expectancy: -US$20 per trade.
Method B wins only 35% at +US$300 and loses 65% at -US$100. 0.35 × 300 = 105, and 0.65 × 100 = 65. Expectancy: +US$40 per trade.
Over 100 trades, Method A loses about US$2,000 and Method B makes about US$4,000. Spreads and fees come off every trade, so subtract them too.
- Common mistake
Myth: a high win rate means a good method. Many small wins can be wiped out by a few big losses. How much you win and lose matters as much as how often.
- Key takeaway
A high win rate feels good. Positive expectancy, after costs, pays the bills.
Quick check
- Expectancy tells you... The average result per tradeExpectancy blends how often you win with how big wins and losses are, giving one average per trade.
- 80% wins at +US$100, 20% losses at -US$500. Expectancy? -US$20 per trade0.8 × 100 = 80 and 0.2 × 500 = 100. 80 minus 100 = -US$20.
- A strategy that wins 35% of the time can make money if... Its wins are much bigger than its lossesWith few wins, each win must be big enough to cover several small losses.
- Win 50% at +US$200, lose 50% at -US$100. Expectancy? +US$50 per trade0.5 × 200 = 100 and 0.5 × 100 = 50. 100 minus 50 = +US$50.
Words in this lesson
Risk Management
- Your safety exit: stop loss
- How much to risk
- Risk and reward
- Win rate isn't everything
- The maths of losses
- Staying in the game
- Backtesting and overfitting