Reading results 2: expectancy and profit factor
A clear guide to expectancy and profit factor, the two numbers that tell you whether a backtest actually made money. Worked example included. Education only, not advice.
Part of the Backtesting and Research track on Agenticks. About 11 minutes, written for a advanced reader.
The last lesson showed why win rate lies on its own. A strategy can win most of its trades and still lose money, because win rate never tells you how big the wins and losses were. This lesson covers the two numbers that fix that blind spot: expectancy and profit factor. Together they answer the only question that really matters after a test: did this set of rules actually make money, and how comfortably?
Expectancy is the average amount you would expect to win or lose per trade, taken across the whole test. It folds three things into one number: how often you win, how much you win when you do, and how much you lose when you do not. The prompt-driven formula is short. Multiply the win rate by the average win, then subtract the loss rate multiplied by the average loss. What you are left with is the typical result of a single trade, averaged over the whole sample.
Expectancy is one trade, averaged out
Expectancy = (win rate x average win) minus (loss rate x average loss). A positive number means the average trade added money. A negative number means the average trade quietly drained the account, even if it won often.
A small example makes this concrete. Say a backtest took 100 trades. It won 40 of them and lost 60, so the win rate is 40 percent and the loss rate is 60 percent. The average win was 150 dollars and the average loss was 80 dollars. Win it less than half the time, lose it more than half the time. On a win rate basis it looks like a loser. Now run the expectancy math: 0.40 times 150 is 60, and 0.60 times 80 is 48. Subtract: 60 minus 48 leaves 12. The expectancy is positive 12 dollars per trade. Over those 100 trades, the average trade made money despite winning only 40 percent of the time, because the winners were almost twice the size of the losers.
A low win rate can still print money
Forty percent winners with winners nearly double the losers still produced a positive expectancy. The size of the wins and losses did the work that the win rate alone could never show.
A test wins 30 percent of its trades. Its average win is 300 dollars and its average loss is 100 dollars. What is the expectancy per trade? Positive 20 dollars per trade Right. 0.30 x 300 = 90, and 0.70 x 100 = 70. 90 minus 70 leaves positive 20 per trade. A 30 percent win rate is fine when winners are three times the size of losers.
Profit factor answers the same question from a different angle. Instead of averaging per trade, it sums everything up. Take the total money won across all winning trades, then divide it by the total money lost across all losing trades. That single ratio tells you how many dollars the strategy made for every dollar it gave back. Above 1 means the wins outweighed the losses. Below 1 means they did not. Exactly 1 means it broke even before costs.
Back to the 100-trade example. The 40 winners at 150 dollars each made 6,000 dollars in total. The 60 losers at 80 dollars each lost 4,800 dollars in total. Profit factor is 6,000 divided by 4,800, which is 1.25. For every dollar this strategy lost, it made one dollar and twenty-five cents. That lines up with the positive expectancy we already found: 12 dollars per trade across 100 trades is 1,200 dollars of net profit, which is exactly 6,000 minus 4,800. The two numbers are two views of the same result.
Read profit factor with a sense of scale
Below 1 lost money. Around 1 is fragile. Many durable strategies land somewhere between 1.2 and 2. A profit factor far above that on a small number of trades is a flag to check, not a trophy, because a couple of huge winners can inflate it.
That last point is the honest catch. Profit factor is a ratio, so a handful of unusually large winning trades can lift it well above 1 even when the strategy is shaky. If one giant trade is carrying the whole number, the strategy may not survive when that kind of trade does not repeat. This is why neither metric is read alone. Expectancy and profit factor tell you whether the rules made money. They say nothing about how rough the ride was, which is what drawdown and the equity curve cover in the next lesson, or whether the sample was even large enough to trust.
A results screen lays expectancy, profit factor, and win rate side by side so no single number gets read in isolation.
- Expectancy
- The average win or loss per trade across the test
- Profit factor
- Total money won divided by total money lost
- Win rate
- The percentage of trades that ended in a profit
- Average loss
- The typical size of a losing trade
win rate loss positive
Put these steps in the order you would compute the per-trade expectancy from a results screen.
- Read the win rate, average win, and average loss off the report
- Multiply the win rate by the average win
- Multiply the loss rate by the average loss
- Subtract the loss side from the win side
A backtest made 9,000 dollars across all its winners and lost 6,000 dollars across all its losers. What is the profit factor, and what does it say? 1.5, meaning it made one dollar fifty for every dollar it lost Correct. 9,000 divided by 6,000 is 1.5. The strategy made more than it gave back, though you would still check the trade count and drawdown.
You can now read past win rate
Expectancy is the average result per trade, profit factor is total won over total lost, and both can stay positive even when the win rate looks low. Read them together, and never on their own.
Common questions
- What is expectancy in trading?
- Expectancy is the average amount a set of rules won or lost per trade across the whole test. It combines how often you win with how big the wins and losses are, so a positive expectancy means the average trade added to the account and a negative one means it drained it.
- What is profit factor?
- Profit factor is the total money won divided by the total money lost across all trades. Above 1 means the wins outweighed the losses, below 1 means they did not, and the further above 1 it sits, the more cushion the strategy had.
- Which matters more, win rate or expectancy?
- Expectancy is the more honest number because it accounts for the size of wins and losses, not just how often you win. A high win rate can still produce negative expectancy if the rare losses are large.
- Can profit factor be misleading?
- Yes. A few unusually large winning trades can lift profit factor well above 1 even if the strategy is fragile, so it should be read alongside trade count, expectancy, and drawdown rather than on its own.
Terms defined in this lesson
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