Expectancy
Expectancy = (win rate × average win) − (loss rate × average loss). A positive expectancy means the strategy makes money on average per trade; multiplied by trade frequency, it estimates the long-run result before costs.
Expectancy from a backtest inherits every flaw of the backtest — costs, slippage, overfitting. Treat it as a hypothesis to be tested forward, not a promise. And remember that even genuinely positive expectancy arrives wrapped in streaks and drawdowns.
Covered in depth in Lesson 13: Win rate is a vanity metric. Expectancy pays the bills..
Related terms
- Win rate — The percentage of trades that close in profit — meaningless on its own, informative next to the reward-to-risk ratio.
- Backtest — Running a strategy against historical price data to see how its rules would have behaved in the past.
- Drawdown — The decline from an account's peak value to its subsequent low — the number that measures how painful a strategy is to hold.
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