Expectancy provides the expected outcome of a trading system over a given series of trades. Expectancy can be measured in ticks, dollars, pips etc.
The formula for expectancy is (Average Win * Winning Percentage) – (Average Loss * Losing Percentage).
Expectancy is used to:
- Measure the performance of a system, setup or trader over time.
- Assist in setting performance goals.
- Help to determine what part of the system (from the expectancy equation) might need improvement.