Winning seven out of ten trades sounds impressive until the losing trades are measured. Win rate counts outcomes, while profitability also depends on their sizes. A simple expectancy calculation brings those pieces together.
Define a consistent trade sample
Use completed trades recorded under the same counting rule. Decide how partial exits are grouped and whether gains and losses already include costs. Then calculate average winning profit, average losing loss and the fraction of trades in each group.
A high-win-rate example
Imagine ten hypothetical trades: seven winners averaging $40 and three losers averaging $120. The winners contribute $280, while the losers subtract $360. The result is an $80 loss before costs, despite a 70% win rate.
Average expectancy per trade is (0.70 × $40) − (0.30 × $120) = −$8. This is a summary of that sample, not a forecast for the next trade.
A lower win rate can produce a different result
Now imagine four winners averaging $150 and six losers averaging $70. Total gains are $600 and losses are $420, giving $180 before costs. Expectancy is $18 per trade, with a 40% win rate.
If additional costs average $5 per trade and were excluded from those figures, net expectancy becomes $13. Do not subtract those costs twice if the recorded gains and losses already include them.
Keep expenses visible
The SEC’s fee guidance explains that trading and account costs can reduce investment returns. A performance worksheet should identify which charges are captured in the execution records and which are allocated separately.
What the average leaves out
- The size and quality of the sample.
- The order in which wins and losses occurred.
- Capital committed and time in each position.
- Whether one unusually large trade dominates the total.
A positive historical average does not guarantee repeatability. Review the underlying records, costs and drawdowns before drawing conclusions from one number. Expectancy is useful because it exposes the arithmetic hidden by win rate, not because it removes uncertainty.
Source
SEC Investor.gov: How Fees and Expenses Affect a Portfolio. Numerical examples are illustrative calculations.
Featured image: Photo by Jakub Żerdzicki on Unsplash.
