<p>Expectancy, in the context of trading, is a measure that quantifies the average amount expected to win or lose per trade. It's a key metric used to evaluate the potential profitability of a trading strategy, taking into account both the <a href="/NewSite/encyclopedia/win-rate/" class="ency-link">win rate</a> and the risk-reward ratio.</p>

<h2>How It Works</h2>
<p>Expectancy is calculated using the following formula:</p>
<p><strong>Expectancy = (Win Rate * Average Win) - (Loss Rate * Average Loss)</strong></p>
<p>Where:</p>
<ul>
  <li>Win Rate is the percentage of winning trades</li>
  <li>Average Win is the average amount won per winning trade</li>
  <li>Loss Rate is the percentage of losing trades (100% - Win Rate)</li>
  <li>Average Loss is the average amount lost per losing trade</li>
</ul>
<p>For example, if your win rate is 60%, average win is $500, average loss is $300, then:</p>
<p><strong>Expectancy = (0.6 * $500) - (0.4 * $300) = $120</strong></p>

<h2>Why It Matters</h2>
<p>Expectancy is a crucial concept for traders as it helps to:</p>
<ul>
  <li>Assess the potential profitability of a trading strategy</li>
  <li>Compare different strategies</li>
  <li>Identify the need for improvement in win rate, average win, or risk-reward ratio</li>
  <li>Make informed decisions about risk management and position sizing</li>
</ul>
<p>Even a small improvement in expectancy can lead to significant long-term gains, making it a valuable tool for traders at all levels.</p>