Expectancy and variance
Why win rate is marketing until payoff and sample size are included.
A method can lose more often than it wins and remain profitable, or win frequently and still lose money. Expectancy combines frequency and magnitude. Variance explains why realised outcomes wander around that average.
Expected value
A simplified expectancy is: probability of win multiplied by average win, minus probability of loss multiplied by average loss. All terms should be measured after realistic costs.
R-multiples
Expressing outcomes relative to initial planned risk makes different trades comparable. A gain twice the initial risk is +2R; a full planned loss is -1R. Slippage can create losses worse than -1R.
Sequence risk
A positive long-run expectancy does not control the order of wins and losses. Losing streaks are normal. Oversizing can destroy an account before an edge has time to appear.
The lesson in three lines.
- 1Win rate is incomplete without payoff.
- 2Measure outcomes after costs.
- 3Positive expectancy still includes losing streaks.