Lessons › Why traders lose › Your edge in one number
World 11 · Why traders lose · lesson 13 · level 2
Your edge in one number
Expectancy tells you what one trade is worth on average, and only a number above zero over many trades is an edge.
In one line
Forget your win rate. One number tells you if your trading works.
Explained simply
Expectancy is what one trade is worth on average. Take how often you win times your average win, then subtract how often you lose times your average loss. Win 40% of the time and make $150, lose 60% and give up $100: $60 minus $60 is zero, and fees push it below zero. We tested 1,726 real pattern setups, trade plans from chart patterns: on average each lost about 3 cents for every dollar risked, before fees. An edge, a lasting advantage, is a number above zero over many of your own logged trades.
A worked example
An example, per trade: 40% × $150 = $60. 60% × $100 = $60. Expectancy = $60 − $60 = $0, before fees. After fees, it is below zero.
Mistakes to avoid
- Checking only the win rate, not the size of the wins and losses.
- Calling something an edge after a handful of trades.
- Trusting a hot tip instead of your own logged numbers.
- Forgetting fees: zero before fees is a loss after them.
Check yourself
What does expectancy tell you?
What one trade is worth on average. It puts how often you win and lose together with how big the wins and losses are, in one number.
Win 40% making $150, lose 60% giving up $100. What is the expectancy per trade, before fees?
$0. 40% × $150 = $60 and 60% × $100 = $60. $60 − $60 = $0, and fees push it below zero.
On average, 1,726 real pattern setups lost about 3 cents per $1 risked, before fees. What does that show?
Patterns alone were not an edge. An edge is a number above zero over many trades. These setups were slightly below zero, even before fees.
A tip won three trades in a row. What does that tell you about an edge?
Not much: an edge shows over many trades. Three wins can come by chance. An edge is a number above zero over many logged trades, and a hot tip is not one.
You win 50% of trades making $150 and lose 50% giving up $100. What is the expectancy per trade, before fees?
$25. 50% × $150 = $75, minus 50% × $100 = $50, gives +$25 a trade before fees. Only many logged trades would show if it lasts.
Goal of this lesson: Work out expectancy from a win rate, an average win and an average loss.