JasperForex

Expectancy: How Profitable is your Trading Strategy?

FX:EURUSD   Euro Fx/U.S. Dollar
As we all know, when we open a trade, there is no guarantee it will be a winner. Given the win rate of a certain trading strategy, there is a random distribution between wins and losses. We trade to make money over a larger number of trades, not to win every individual trade, which would simply be unrealistic. That is why it’s important to be confident when we place a trade. So we don’t “panic close” the trade when the market goes against us, or exit too soon when we are in profit.

If you know the expectancy of your trading strategy, you will be able to deal with these situations better. There is a psychological aspect here: knowing the predictable profitability of a larger number of trades you undertake will build your confidence, which in turn reduces your tendency to shortcut winners and to let losers run too long. Having this confidence will thereby improve your overall results. In December I developed a spreadsheet for myself, linked to my trading records, where I calculate several performance indicators, among which expectancy.

How to determine the expectancy of your trading system? Assuming you keep records of your trades, you should go back and look at all your trades that were profitable versus all your losing trades. Do this over a period of at least 3 months and at least 100 trades. The more data you can use, the more accurate the result. We only need 4 pieces of information: number of winning trades, number of losing trades, amount of money won and amount of money lost. From this data we can calculate the following:

Net profit = amount of money won - amount of money lost

Win rate = number of winning trades / total number of trades

Lose rate = 1 - win rate

Average winner = amount of money won / total number of winners

Average loser = amount of money lost / total number of losers

Average reward / risk = average winner / average loser

Expectancy per trade = win rate x average winner – lose rate x average loser

Or, alternatively, expectancy per trade = net profit / total # trades

Expectancy per month (profit forecast) = expectancy per trade x average # trades per month

Expectancy per amount of money risked = win rate x (average reward / risk + 1) – 1

Or, alternatively, expectancy per amount of money risked = net profit / average loser / total # trades

I will illustrate this with an example for a euro             account. Lets assume we have been trading for 6 months and made a total of 540 trades. 297 of them were profitable and 243 were not, with €35.640,00 profit coming from the winning trades and €19.440,00 loss stemming from the losing trades. Lets make the calculations:

Net profit = €35.640,00 - €19.440,00 = €16.200,00

Win rate = 297 / 540 = 55%

Lose rate = 1 - 55% = 45%

Average winner = €35.640,00 / 297 = €120,00

Average loser = €19.440,00 / 243 = €80,00

Average reward / risk = €120,00 / €80,00 = 1,5

Expectancy per trade = 55% x €120,00 – 45% x €80,00 = €30,00

Or, alternatively, expectancy per trade = €16.200,00 / 540 = €30,00

In our example the expectancy per trade is €30,00. This means, on average (over many trades), each trade will contribute €30,00 to the overall P&L.

Expectancy per month = €30,00 x 540 / 6 = €2.700,00

In our example we can forecast a monthly profit of €2.700,00 based on prior performance.

Expectancy per             risked = 55% x (1,5 + 1) – 1 = 38%

Or, alternatively, expectancy per             risked = €16.200,00 / €80,00 / 540 = 0,38

In our example the expectancy of the trading strategy is 38%. That means the trading strategy will eventually (over many trades) return 38 eurocents for each euro             risked.

Once you know your expectancy, as a function of your own trading statistics, you can forecast how much you could make per week, per month and per year.
You don´t need to be a weatherman to know which way the wind blows - B. Dylan
Thumbs up, keep up the great work.. Thank You
+4 Reply
Thanks for the kind words, I hope it can be of help to other traders. It was a lot of fun creating the spreadsheet / dashboard based on these calculations.
+1 Reply
Very nice brother! This will help a lot of people out =)
+2 Reply
Thanks alpha! Have you calculated your expectancy yet?
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You are the Best Thanks very helpful (thanks for the new ideas to add to my Excel)
+1 Reply
JasperForex PRO DjalilLounis
Good luck! The indicator provides great insight in the overall performance and you can see the value gradually change as you tweak and update the rules in your trading plan and further eliminate trading mistakes.
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nice explanations!
+1 Reply
Thanks you. I hope its of help to you.
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I'm new in the forex market. Great article to get into Disciplined trading !
+1 Reply
JasperForex PRO yashpalpuri
Its all about having a strategy with an edge and trading with discipline. This indicator measures the effect of both. Thanks for responding to this trade idea.
+1 Reply
Excellent post...thanks a lot. Does anyone have an Excel template for these calculations ? A lot of traders would appreciate it.
+1 Reply
JasperForex PRO Candlestick_trader
I am afraid you are going to have to do a little bit of work on this yourself; I have no product or universal template to give out. But it’s not that hard if you are somewhat proficient with spreadsheets. You can basically copy the formulas I posted and link them to a summary line of your trading records (assuming you keep those in a spreadsheet as well). Good luck and thanks for responding to this idea.
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Thanks a lot. Really helpful.
+1 Reply
Glad to hear that, I appreciate it.
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great and I love such mathematics.. I will try it and see

thanks Jasper
+1 Reply
JasperForex PRO Mohammed_Al-Yahya
Thank you, I appreciate your response. Hope it helps you gain some insight. It is anyway fun to calculate the indicator. Cheers!
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Hi again.. I got +4.82.. is that correct or am I missing something ?

Expectancy per trade =


= = 4.82
??
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Expectancy per trade = win rate x average winner – lose rate x average loser
84 / 112 * 1829.14 / 84 – 0.28 * 1085.92 / 28)
0.72 * 21.78 – 0.28 * 38.78 = 15.68 – 10.86 = 4.82
+1 Reply
JasperForex PRO Mohammed_Al-Yahya
I come to a different expectancy. I assume your account is in dollars? Here we go:

Net profit = $1.829,14 - $1.085,92 = $743,22

Win rate = 84 / 112 = 75%

Lose rate = 1 – 75% = 25%

Average winner = $1.829,14 / 84 = $21,78

Average loser = $1.085,92 / 28 = $38,78

Average reward / risk = $21,78 / $38,78 = 0,56

Expectancy per trade = 75% x $21,78 – 25% x $38,78 = $6,64

Or, alternatively, expectancy per trade = $743,22 / 112 = $6,64

Expectancy per $ risked = 75% x (0,56 + 1) – 1 = 17%

Or, alternatively, expectancy per $ risked = $743,22 / $38,78 / 112 = 0,17

Conclusion: your expectancy per trade is $6,64 and for each $ risked (traded) you eventually return 17 cents.
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Thank you very much..
I got it now. And I know my mistake in calcultions.

Q: is $6.64 good result or needed to be improved!
+1 Reply
Mohammed_Al-Yahya PRO Mohammed_Al-Yahya
But 84 / 12 = 70% not 75% :)

But I got it..
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Mohammed_Al-Yahya PRO Mohammed_Al-Yahya
My bad!!!
I don't know what is 12 !!!!
You are correct and I need to sleep :)
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JasperForex PRO Mohammed_Al-Yahya
Haha no problem! Hope its all clear now.
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Wonderful again :)
+1 Reply
JasperForex PRO Fib.The.Gentleman
Nice to hear, I appreciate it.
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Thanks for taking the time to post this and thank you for all your interest in others expressed below in your answers. Kudos!

Question for you. How do you add to the equation a trade that required say a roll forward but eventually was not a loss. Simple example; I sell a put and on the day of expiry I am finding my thesis did not quite pan out yet and I still believe in it so I roll it forward and low and behold my thesis pans out by the next expiry and I'm on positive ground. Now I could have been on + ground before the roll just not where I wanted to be or I could have been -. How do I treat the two different trades. I'm assuming you'd keep the two trades separate in the equation and not treat them as one trade even though mentally I suspect many 'think' about them as one play. Thanks again.
+1 Reply
JasperForex PRO ghettocounselor
Thank you for responding and for the kind words. I trade only forex and have no experience with options. So I am not sure I fully understand your question and I might not be the best person to ask this. But I "book" a trade as a win or a loss once I have closed it. The result that I book is then used in the expectancy calculation. Hope this clarifies it!
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Thanks JasperForex I'll go with combining the two trades (orig and roll) or how many ever they are until the play closes. What kind of timeline are you running on. Thinking about this I suspect that time does impact things. In the end risk does have an element of influence in the realms of time. I can of course book a trade 3 months out and thereby have less risk than 3 days out. But maybe time is not necessary as we are really only looking at measure the success of a model, time is a part of the model. In which case we would kind of need to have a consistency in our 100 Measured Trades as far as timeline they played out on, if the bell curve was too wide we would risk equating success to a model that didn't even really exist (very interesting).
+1 Reply
I thinks it is also very important the required risk : ratio to achieve a long-term expectancy:

Required Reward:Risk Ratio = (1 / Winrate) – 1

Example 2: If your system has a historical winrate of 60%, you need a reward:risk ratio of 0.6 : 1 to achieve a long-term expectancy:

(1 / 0.6) – 1 = 0.7
+1 Reply
JoaoFerraz JoaoFerraz
I found it in this site: http://www.tradeciety.com/how-to-use-risk-reward-ratio-guide/
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how do you see the records of your previews trades in tradingview? the details? profit losses ? pips? i cant see nothing on my platform
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Absolutely excellent article. Thank you so much for doing this.
Do you mind if I quote this article on futures.io? I will give you the credit of course.
Thanks again.
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JasperForex PRO GrantShuttleworth
@GrantShuttleworth, Sure, no problem and thanks for asking.
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