Expectancy — the Only Formula That Matters

The formula

Expectancy = (Win% × AvgWin) − (Loss% × AvgLoss). Win rate alone is meaningless: a 90% win rate with tiny wins and rare huge losses (picking up pennies before a steamroller) is negative-expectancy. A 40% win rate at 3:1 reward:risk has positive expectancy: (0.40 × 3R) − (0.60 × 1R) = 1.2R − 0.6R = +0.6R per trade.

The breakeven table

Breakeven win rate = 1 ÷ (1 + R). At 1:1 you need >50%; at 2:1 >33%; at 3:1 >25%. This is why trend-followers survive 35–40% win rates (their winners run) and why scalpers with 70% win rates die (their rare loss is 3× their average win). Know which side of the table your strategy eats from.

The practical rule

Before entry, define BOTH exits: the structural stop (1R) and the target (≥2R away, or a trailing plan). If the target is not at least 2× the stop distance away, the trade must be exceptional to justify itself — most of the time the answer is "no trade," which is a perfectly good outcome.

Sources

• Trade Your Way to Financial FreedomVan K. Tharp
• Risk/Reward RatioInvestopedia