Expected Value (EV)
The probability-weighted average outcome of a trade over many repetitions: EV = (Win% x Avg Win) - (Loss% x Avg Loss).
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Explained Simply
Expected value is the single most important concept in trading. A positive EV means you'll make money over time if you keep taking the same type of trade. You can have a low win rate and still have positive EV if your winners are much bigger than your losers. Example: 40% win rate with average win of $300 and average loss of $100: EV = (0.40 x $300) - (0.60 x $100) = $120 - $60 = +$60 per trade.
How to Calculate Expected Value for Any Trade
Expected value is the mathematical foundation of all profitable trading. Here is how to calculate it:
The formula: EV = (Win Probability x Average Win) - (Loss Probability x Average Loss)
Example 1 — Positive EV: Win rate 50%, average win $200, average loss $150. EV = (0.50 x $200) - (0.50 x $150) = $100 - $75 = +$25 per trade. Over 100 trades, expected profit = $2,500.
Example 2 — Negative EV despite high win rate: Win rate 75%, average win $50, average loss $200. EV = (0.75 x $50) - (0.25 x $200) = $37.50 - $50 = -$12.50 per trade. Profitable 3 out of 4 times but loses money long-term.
Example 3 — Positive EV despite low win rate: Win rate 30%, average win $400, average loss $80. EV = (0.30 x $400) - (0.70 x $80) = $120 - $56 = +$64 per trade. Loses money 7 out of 10 times but highly profitable over time.
The key insight: Frequency of winning is separate from profitability. A trader who wins 80% of the time can lose money. A trader who wins 30% can make a fortune. Expected value combines both dimensions into a single number that tells you whether your strategy has an edge.
How to Use Expected Value (EV)
- 1
Gather Your Trade Statistics
Review your last 50+ trades and calculate your win rate (wins ÷ total trades) and the average size of wins vs losses. You need at least 50 trades for the numbers to be statistically meaningful.
- 2
Calculate Average Win and Average Loss
Sum all winning trade profits and divide by the number of wins to get your average win. Do the same for losses. Example: average win = $300, average loss = $200.
- 3
Compute the Expected Value
Use the formula: EV = (Win Rate × Avg Win) - (Loss Rate × Avg Loss). With a 45% win rate: EV = (0.45 × $300) - (0.55 × $200) = $135 - $110 = $25 per trade.
- 4
Evaluate Whether to Take the Trade
A positive EV means the trade is profitable over many repetitions. Only take trades with positive expected value. If EV is negative, either improve the win rate, improve the R:R, or skip the setup entirely.
- 5
Track EV by Strategy
Calculate separate EV for each strategy you trade (momentum, mean reversion, breakout, etc.). Double down on strategies with the highest EV and stop trading strategies with negative or near-zero EV.
Frequently Asked Questions
What is expected value in trading?
Expected value (EV) is the average amount you expect to gain or lose per trade over many repetitions. It is calculated as: (win probability x average win) minus (loss probability x average loss). Positive EV means the strategy makes money over time. Negative EV means it loses money. EV is the definitive measure of whether a trading strategy has a real edge.
How do I know if my trading has positive expected value?
Track at least 30-50 trades with precise records of wins, losses, and sizes. Calculate your win rate, average winning trade, and average losing trade. Plug these into the EV formula. If the result is positive, your strategy has an edge. You can also compute EV as: (Average Win / Average Loss) x Win Rate - Loss Rate. If this number is positive, your expected value is positive.
Why can a high win rate still lose money?
Because win rate ignores the size of wins and losses. A trader who wins 80% of the time but makes $50 on winners and loses $300 on losers has negative EV: (0.80 x $50) - (0.20 x $300) = $40 - $60 = -$20 per trade. The few large losses wipe out the many small gains. This is why traders must evaluate win rate alongside risk/reward ratio — both matter equally.
How Tradewink Uses Expected Value (EV)
Every signal has an implicit expected value calculated from the AI's estimated win probability and the defined risk/reward ratio. Signals with negative or marginal EV are filtered out. The LearningEngine tracks actual EV by signal type over time and adjusts confidence scores to maintain positive EV across all categories.
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See Expected Value (EV) in real trade signals
Tradewink uses expected value (ev) as part of its AI signal pipeline. Get daily trade ideas with full analysis — free to start.