Expectancy

Expectancy

Definition
A measure of a trade’s potential reward relative to its risk. It helps traders assess the risk-reward profile of potential trades.

Formula
Expectancy = Profit Target / (Average Entry Price – Risk)

  • Profit Target: The price you aim to exit the trade with a profit.
  • Average Entry Price: The average price at which you enter the trade.
  • Risk: The amount you are willing to risk per trade (often determined by stop-loss placement).

Example
Let’s say you have the following trade setup:

  • Profit Target: $1.50 above entry
  • Average Entry Price: $10.00
  • Risk: $0.50

Your Expectancy would be: $1.50 / ($10.00 – $0.50) = 0.16

This means, for every dollar you risk, you have the potential to gain $0.16.

Key Points

  • Risk-Reward Assessment: A higher Expectancy indicates a more favorable risk-reward ratio.
  • Trade Selection: Can be used to compare potential trades and prioritize those with better Expectancy values.

Considerations

  • Realistic Targets: Setting achievable profit targets is crucial for accurate Expectancy calculations.
  • This Definition: It’s important to remember that this is one way to calculate and interpret Expectancy.

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