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I have understood from working with many traders over the years that “Expectancy” is one of the few terms truly understood by many people who wish to learn how to trade successfully.

Expectancy refers to what you can expect to earn on average per trade/per day/per week etc.   Of Course on the other hand it can also highlight before hand whether your expectancy is to LOSE!  Typically most traders that will back test trading systems would be very interested in this figure (Or should be!).  However many discretionary traders totally forget/ignore or worse just don’t understand how important this concept is to their own trading.  Expectancy is more important than Risk to Reward ratio (Pay Off ratio) and Win/Loss Percentages alone.

The Calculation for expectancy is very simple.  Firstly you need to keep/have a Record of:

The Calculation for Expectancy is: EXPECTANCY = (Average Gain x Win %) – (Average Loss x Loss %)

An Example for an Average Daily Expectancy for a trader that has traded 6 months with a record of 80% of days with a positive gain and a 20% of days with a loss.  Average Gain per Day (Total Revenue from Up Days/Number of Up Days) being \$1200, Average Loss per day (Total Cost from Down Days/Number of Down days) being \$500

Average Daily Expectancy = (1200 x 80%) – (500 x 20%) = 960 – 100 = \$860

Knowing this the above trader can be more comfortable and confident that they can expect to gain on frequent days (Note not all!) with a positive expectancy.  I have personally found that my Up days generally fall just above/below expectancy on MOST days,  however not all.  Some days we have to accept that we may have a down day, of course some days we will hit our main objective and every now and again we can also expect some outliers with exceptional days that exceed our targets.  Taking all of the above into consideration, it is important to note that this is assuming the trader keeps on performing well.  It is the responsibility of the trader to make Risk/Objective adjustments as and when required as Expectancy is a Dynamic and constantly changing figure, however over time you will find that for quite some time it sits around a Monetary value that you start achieving frequently.  You can also do the above for each week or month.  For day traders weekly expectancy is worth tracking, for longer term traders the monthly figures may become more useful.  Whatever you do you should know it so that you can move forward with confidence.