If you perform an internet search on how to calculate expectancy as it relates to trading systems, you will most often see the following:

Expectancy = (probability of win x average win) + (probability of loss x average loss)

The average win and average loss can be either percent gain or loss or it can be dollar values. For example, following are the performance statistics for one of my trading strategies:

  • Probability of win = 71.7%
  • Average win = 2.72%
  • Probability of loss = 28.3%
  • Average loss = -3.59%

I can calculate the expectancy in percentage terms as follows:
Expectancy = (0.717 x 0.0272) + (0.283 x -0.0359) = 0.93% (more…)

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