Expected Value in Trading: Measuring Your Strategy’s Real Potential

There is always excitement when doing something new.

The first time I held a guitar.

The moment I entered a massive nuclear project.

The first trade.

It’s easy to fall into the expectation that this excitement will last forever.

But it doesn’t.

Fingers start to hurt after just a few minutes of playing, and the sound coming out of the guitar is not what you expected.

The big project turns out to be messy like any other project — only bigger.

And the trade doesn’t get as far as it should have.

Shifting mindset toward finding joy in the work itself, instead of fixating on the end goal, is a difficult but critical change — especially if one want to do anything entrepreneurial.

Before we dive in: expected value in trading is the foundation of risk-based thinking. It’s the clearest way to quantify whether your trading system is worth risking real money.

What Is Expected Value in Trading?

Let’s explore the concept of expected value in trading — often called expectancy.

It’s a powerful measure that tells you what your average return per trade will be over time.

If a goal-oriented beginner expects to earn a million dollars in their first year of trading, starting with just a thousand — expectancy can tell them what kind of system is required to make that even remotely possible.

There are two critical factors in estimating expectancy:

1. How often do we win?

2. How much do we earn when we win?

If we know how often we win, we also know how often we lose.

And if we keep our risk constant, that means our losses are always equal — let’s say, 1R.

If we start measuring our winners in multiples of risk (R), we can say, for example:

The Formula for Trading Expectancy (EV)

With this, we can calculate the expectancy of our trading system:

Since Loss Rate = (1 – Win Rate), we can rewrite it:

Let’s calculate a real example of expected value in trading using common values from beginner trading courses.

Real-World Example: 40% Win Rate, 2R Return

Very often in trading courses, it’s taught to aim for 2R winners with a 40% win rate.

Let’s calculate the expectancy of that system.

A system with 40% win rate and 2R winners provides:

Expectancy = (0.4 × 2) – (0.6 × 1) = 0.8 – 0.6 = 0.2

So the expectancy is 0.2.

That means that in the long run, for every dollar we risk, we expect to make 20 cents.

Many traders misunderstand expected value because small numbers feel underwhelming. But over time, consistent positive expectancy compounds significantly.

Can Expected Value Really Get You to $1 Million?

Let’s say each trade risks $100, and we take 10 trades in a month (just hypothetically).

That means we risk $1,000/month.

And in return, we expect to get all of it back — plus $200.

Doesn’t sound exciting?

How do you get to one million from that?

🔜 To Be Continued…

There are several ways to approach this — but we’ll cover that next time.

For now, I suggest you play with the ClockTrades Expectancy Calculator and write down your own observations.

And actually, I’ll do the same — I’ll share my own notes with you next time.

Jump right on to the next issue to explore more on expected value:

• Next read: Exploring Expected Value: The Psychology and Math of Big Wins vs. Frequent Wins 

— Kamil - Markets&Manners