In probability, the expected value (or expectancy) of a random variable is the sum of the probability of each possible outcome of the experiment multiplied by its payoff (“value”). Thus, it represents the average amount one “expects” to win per bet if bets with identical odds are repeated many times.
In layman’s terms expectancy is how much profit to expect on each trade.
The formula for expected value is:
(Average win x probability of win) – (average loss x probability of loss)
As an example let’s say that a trader has a system that produces winning trades 30% of the time. That trader’s average winning trade nets 10% while losing trades lose 3%. So if he were trading $10,000/position his expectancy would be:
(0.3 * $1,000) – (0.7 * $300) = $90 per trade.
Amibroker does not calculate expectancy but it can be quickly calculated with Excel.
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