In trading, expectancy is the expected average result per trade. It combines the probability of each outcome with its size and uses one consistent unit, such as currency, percentage, or R-multiples, where R is the planned initial risk for the trade.
How the term is used
“The strategy has positive expectancy” means that its estimated net average is above zero for stated rules, costs, and sample. It does not mean that the next trade will win: many individual losses can coexist with an estimated positive average.
Technical distinction
Expectancy is an expected value; the average observed in a sample estimates it. Costs, data selection, and uncertainty can change the sign of that estimate. The Positive expectancy entry also separates the average from drawdown, tails, and risk of ruin.
Sources
- Van Tharp Institute, Tharp Think Trading Concepts — Relates win probability and average win/loss size through expectancy and defines R.
- NIST/SEMATECH, What is a Probability Distribution? — Statistical foundation for probabilities and the outcomes of a distribution.
- Campbell R. Harvey and Yan Liu, Backtesting — Sample, multiple-testing, and significance issues in strategy evaluation.