Understanding Trade Expectancy
Trade expectancy is the average amount you can expect to win or lose per trade. It's a crucial metric for evaluating trading strategy effectiveness.
Calculating Expectancy
Formula: Expectancy = (Win Rate × Average Win) - (Loss Rate × Average Loss)
A positive expectancy means your strategy is profitable over the long term. The higher the expectancy, the more robust your strategy.
Improving Expectancy
Ways to increase your trade expectancy:
- Increase win rate through better entry criteria
- Increase average win size with trailing stops
- Decrease average loss size with tight stops
- Optimize position sizing based on setup quality
Common Mistakes
Avoid these expectancy-killing errors:
- Cutting winners too early
- Letting losses run too long
- Ignoring transaction costs
- Not accounting for market conditions