Why win rate alone fails
Win rate is the most quoted and least informative number in trading. A system taking 90% of its trades as winners can lose money if one loss swallows ten wins, and a system winning 30% can be highly profitable if one win equals five losses.
Expectancy resolves the contradiction because it weighs both together. This is why "what is your win rate?" is an incomplete question, and "what is your expectancy per trade?" is the complete one.
From the number to the decision
Positive expectancy is necessary but not sufficient. A figure like +0.20R does not promise a profit every month; it is an average realised across a sufficient number of trades, and the path there passes through real drawdowns.
So expectancy is always read alongside two other numbers: sample size, because 20 trades prove nothing; and costs, because expectancy is computed after spread, slippage and swap, not before. Positive before costs and negative after is the most common illusion in strategy testing.
Where this number sits among performance measures
Three numbers describe any strategy completely: win rate, risk-to-reward, and the expectancy that combines them. None of them means anything alone.
The reference record for this family: 100 trades, 40 winners averaging +2R and 60 losers averaging −1R. A win rate of 40% looks weak on its own, yet expectancy is positive at +0.20R per trade. Drawdown is the price you pay to reach that expectancy, and it decides whether you are still trading when it arrives.
The formula
Expectancy = (win rate × average win) − (loss rate × average loss)
A worked example
The reference record: 100 trades, 40 winners averaging +2R and 60 losers averaging −1R.
(0.40 × 2) − (0.60 × 1) = 0.80 − 0.60 = +0.20R per trade
At 1% risk on a $1,000 account — $10 per R — that is $2 on average per trade and $200 across the hundred, before costs.
Here the cost family bites: if the full cost is $3 per trade, net expectancy is 2 − 3 = −$1. The system that "wins" on paper loses in execution, which is the most common reason sound-looking strategies fail.
Common mistakes with this term
- Judging a strategy by win rate alone, which is meaningless without average win and loss.
- Computing expectancy before costs, so it looks positive while being negative after spread, slippage and swap.
- Judging from a small sample; twenty trades cannot separate a real edge from chance.