Expectancy and the distribution of returns

Expectancy estimates the average profit or loss per trade after the chosen costs. It combines win frequency, average win, average loss, and sometimes commissions or slippage. A positive average does not mean every month or sequence will be positive.

The distribution around the average determines how uncomfortable the path can be before the long-run estimate has a chance to appear.

Look at median trade, percentiles, largest wins and losses, consecutive losses, and how much of the result comes from the best few trades. A strategy with a positive mean but a long right tail needs enough capital and patience to survive ordinary periods without those large outcomes.

A strategy's trade expectancy does not specify a safe position size. Size determines the account-level distribution, drawdown, and probability of a damaging sequence. Evaluate the same strategy across several risk levels before choosing an operating range.

If the return profile only looks attractive at a risk level that makes the normal losing streak unacceptable, the strategy is not ready for that use.