Formula
Expectancy = (Win rate x Average win) minus (Loss rate x Average loss)
If a strategy wins 50% of trades, average win is $120, and average loss is $80: Expectancy = (0.50 x $120) minus (0.50 x $80) = $20 per trade.
Why it is the foundational metric
Expectancy determines whether a strategy has positive edge. Without positive expectancy, no amount of position sizing or compounding can produce long-term profit.
Practical note
Expectancy from backtests overstates live performance because live spread, slippage, and execution delay reduce the effective win amount. A backtest expectancy of $20/trade may translate to $12/trade live. The gap is largest for scalping strategies.