Glossary · Risk & money management
Expectancy
The average amount a strategy makes or loses per trade: (win rate × average win) − (loss rate × average loss).
In practice
With a 45% win rate, an average win of 2R and an average loss of 1R, expectancy is 0.45 × 2 − 0.55 × 1 = +0.35R per trade. Risking $50 per trade, that averages about $17.50 per trade over many trades.
Judging a strategy on a handful of trades. Expectancy only becomes meaningful over dozens of trades.
Related terms
Win rate
The percentage of trades that close in profit. On its own it says…
Risk:reward ratio
The potential loss compared with the potential gain. Risking 30…
Profit factor
Gross profit divided by gross loss. Above 1 a strategy is…
R-multiple
A result expressed as a multiple of the initial risk. A trade that…
Backtesting
Testing a strategy on historical data to see how it would have…
Black swan
A rare, unpredictable event with extreme market impact, such as…