Nick Goold
Why Expected Value Matters
A winning trade does not always mean you made a good decision, and a losing trade does not always mean the setup was bad. Individual trades are affected by uncertainty. Expected value helps you judge the average result of the same setup over many trades.
Expected value uses three main numbers:
- Your win rate
- Your average profit
- Your average loss
The basic formula is:
Expected value = (win rate × average profit) − (loss rate × average loss)
A strategy can have a low win rate and still be profitable if its winning trades are much larger than its losses. A high win rate can still lose money if the losses are too large.
The interactive lesson below explains expected value using simple trading examples, charts and a trade simulator.
Loading the expected value lesson…
Use Expected Value to Evaluate a Setup
Calculate expected value using results from similar trades. Avoid mixing different strategies, markets or entry rules, because each setup may perform differently.
A positive expected value suggests that the setup has an advantage over many trades. A negative expected value suggests that the win rate, potential profit or risk needs to improve.
Remember that positive expected value does not guarantee that the next trade will win.
Use Results From Your Trading Journal
Your calculation is only useful when the numbers are realistic. Use your actual win rate, average profit and average loss rather than estimates based on a few memorable trades.
Record enough trades before judging a strategy. Ten trades may produce misleading results because wins and losses can arrive in an unusual order.
Include trading costs such as spreads, commissions and slippage when reviewing real performance.
Compare the Potential Profit With the Risk
A setup does not need a very high win rate when its winning trades are larger than its losses.
For example, risking ¥100 to make ¥200 allows the strategy to lose more often and still remain profitable. However, the target and stop must be realistic for the market conditions.
Define your entry, stop-loss and profit target before entering the trade.
Judge the Decision, Not One Result
A well-planned trade can lose, while a poorly planned trade can win through luck. Review whether the setup followed your rules and had positive expected value when you entered.
Do not abandon a good strategy after one loss or increase your risk after one lucky win. Focus on repeating the same disciplined process.
Skip Setups With Negative Expected Value
Not every trading opportunity is worth taking. If the possible profit is too small, the loss is too large or the required win rate is unrealistic, skip the trade.
Waiting for a clearer setup is also a trading decision. The goal is not to trade more often—it is to repeatedly take trades with a measurable advantage.
Keep Learning and Improve Your Trading
Understanding expected value and reviewing your trade results can help you evaluate your strategy’s edge and make better decisions. Build on these skills with the Titan FX Education Hub, featuring practical lessons on market analysis, trading strategies, risk management and trading psychology, plus quizzes to test your knowledge.
Explore the Titan FX Education Hub
You can also learn about algorithmic trading in the Titan FX Research Hub to explore how to program and test your trading system. By turning your trading rules into code and analysing the results, you can assess whether a strategy has positive expected value. You can then use these findings to refine your entry rules, profit targets and risk management.
