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What is trading expectancy?

sevenstarfxsevenstarfx Posts: 31
Trading expectancy is a statistical measure used to assess the effectiveness of a trading strategy over a series of trades. It quantifies the average amount a trader can expect to win or lose per unit of risk on each trade placed according to the strategy.

The formula for trading expectancy is:
Expectancy=(AverageGainperTrade×WinRate)−(AverageLossperTrade×LossRate)
Where:

Average Gain per Trade: The average profit earned per winning trade.
Win Rate: The percentage of trades that result in a profit.
Average Loss per Trade: The average loss incurred per losing trade.
Loss Rate: The percentage of trades that result in a loss.
A positive expectancy indicates that, on average, the trading strategy is expected to generate profits over the long run. Conversely, a negative expectancy suggests that the strategy is likely to incur losses over time.

Traders use expectancy to evaluate the viability of their trading strategies and to compare different strategies. A high expectancy indicates a more robust and profitable strategy, while a low or negative expectancy may indicate the need for adjustments or a reassessment of the strategy's effectiveness.

It's important to note that while trading expectancy provides valuable insights into the profitability of a trading strategy, it does not guarantee future performance. Traders should consider other factors such as risk management, market conditions, and psychological factors when evaluating and implementing trading strategies.

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