Ed Seykota, one of the most successful traders of the 20th century, was once asked the key to his success. His answer: "I cut my losses and let my profits run." This was not wisdom — it was mathematics. He had a positive expectancy system. A negative expectancy system cuts profits and lets losses run. Every trading strategy in existence falls into one of these two categories, and most retail traders have never actually calculated which one theirs is.
Expectancy is the average profit or loss you can expect per dollar risked across all trades in your strategy. Profit Factor is the ratio of total gross profit to total gross loss. Together, these two metrics tell you definitively whether your strategy makes money over time — regardless of how it feels on any individual day.
Calculating expectancy
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Expectancy = (Win Rate × Avg Win) - (Loss Rate × Avg Loss)
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Example A: 50% win rate, avg win $200, avg loss $100
= (0.50 × $200) - (0.50 × $100) = $100 - $50 = +$50/trade ✓ Profitable
Example B: 60% win rate, avg win $50, avg loss $100
= (0.60 × $50) - (0.40 × $100) = $30 - $40 = −$10/trade ✗ Losing
Despite the higher win rate, Example B loses money. This is how most retail traders operate.
Profit Factor
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Profit Factor = Total Gross Profit ÷ Total Gross Loss
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| PF | Meaning |
|---|---|
| < 1.0 | Losing system |
| 1.0 | Breakeven |
| 1.25–1.5 | Viable strategy |
| 1.75–2.5 | Good professional strategy |
| > 2.5 | Exceptional |
Sample size requirement
An expectancy from 10 trades is meaningless. You need at least 100 trades before statistics are significant. Most retail traders test strategies for 10 trades, declare them failing, and switch — never knowing if the strategy had edge.
200-trade expectancy audit:
Total trades: 200 · Wins: 90 (45%) · Avg win: $180 (1.8R)
Losses: 110 (55%) · Avg loss: $100 (1.0R)
Expectancy = (0.45 × $180) - (0.55 × $100) = $81 - $55 = +$26/trade
Profit Factor = (90 × $180) / (110 × $100) = $16,200 / $11,000 = 1.47
A legitimate profitable strategy with a sub-50% win rate. This is why R:R matters more than win rate.
NGX parallel: An NGX swing trader tracked 150 trades over 12 months: 52 wins at avg ₦8,500 profit, 98 losses at avg ₦4,200 loss. Expectancy = (0.347 × ₦8,500) - (0.653 × ₦4,200) = ₦2,949 - ₦2,742 = +₦207/trade. Profitable — barely. The insight led directly to tightening stop losses to improve the avg loss figure without changing strategy or win rate.
Comparing yourself to a "60% win rate benchmark" without considering R:R. Win rate means nothing in isolation. A 35% win rate strategy with 1:3 R:R has expectancy of (0.35 × 3R) - (0.65 × 1R) = +0.40R per trade — more profitable than a 60% win rate strategy with 0.8:1 R:R.
Track expectancy by setup type, not overall. Your triangle breakouts might have PF 1.8 while your news reversals have PF 0.7. Combined, results look mediocre. Separated, you discover: stop trading news reversals, only trade triangle breakouts. The 80/20 principle almost always applies to setup types.
Positive expectancy — not win rate or gut feel — is the only objective measure of whether a trading strategy has genuine edge, and you need 100+ trades to calculate it meaningfully.
