Definition in one sentence: expectancy is the average gain expected per trade, obtained by combining the win rate with the average size of gains and losses. It is what determines a strategy's real profitability.
The formula, and what it measures
Expectancy reconciles what the win rate and the payoff ratio say separately:
(win rate × average gain) − (loss rate × average loss)If the result is positive, each trade earns on average; if it is negative, each trade costs on average. It is as simple — and as decisive — as that. A positive expectancy, even a modest one, repeated over a large number of trades, builds capital. A negative expectancy destroys it, no matter how beautiful the win rate.
How to read it
Expectancy is often expressed as a percentage of the capital risked per trade, or as a multiple of risk (in 'R'). An expectancy of +0.2 R means that on average, each trade returns 0.2 times the amount risked. What matters is not so much the absolute value as two things: that it is positive, and that it is stable over time.
The classic mistake
Optimising the win rate at the expense of expectancy. You can almost always raise your win rate by cutting gains early and letting losses run — but that degrades expectancy. A system with fewer winning trades but a higher expectancy beats a system with a beautiful win rate and mediocre expectancy. Frequency flatters the ego; expectancy makes the results.
At Sextant
Sextant is a transparent quant platform: the 'under-promise' stance follows directly from this logic. A win rate stated between 52 and 58% is nothing to worry about if expectancy is positive and stable — which is the case shown on the public logbook. The methodology details how expectancy is measured, real costs included.
Frequently asked questions
What is expectancy in trading?
It is the average gain (or loss) expected per trade, obtained by combining the win rate, the average gain and the average loss. A positive expectancy means each trade earns on average; a negative expectancy means it costs on average, regardless of the win rate.
Why does expectancy matter more than the win rate?
Because the win rate says nothing about the size of gains and losses. You can have a high win rate and a negative expectancy if losses are bigger than gains. Expectancy is the synthesis that truly determines whether a strategy creates or destroys capital.
How do you improve expectancy?
By increasing the relative size of gains versus losses (payoff ratio) or the win rate — without degrading the other. Beware the trap: cutting gains early raises the win rate but often degrades overall expectancy.