GLOSSARY // Risk & Psychology
Expectancy
Expectancy is the average amount a trading approach makes or loses per trade: expectancy = (win rate x average win) - (loss rate x average loss). A positive number means the edge is real; a negative number means more trades just lose money faster.
Expectancy only stabilizes over a sample. Twenty trades can make a losing system look brilliant; a few hundred start to tell the truth. It also has to survive costs — a thin positive expectancy of $5 per trade disappears entirely once commissions and slippage take their cut.
A system wins 40% of the time with a $300 average win and a $150 average loss. Expectancy = (0.40 x $300) - (0.60 x $150) = $120 - $90 = $30 per trade. Across 200 trades a year that is about $6,000 before costs; at $10 of round-trip costs per trade, $4,000 after.
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Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.