Expected Return

Expected return is a single number that summarizes what an investor or trader might, on average, gain or lose from a trade or investment if it were repeated many times under similar conditions. It is not a promise of what will happen once; it is a weighted average of all the different things that could happen, based on how likely each outcome is judged to be.

To calculate it, you list the possible outcomes of a trade, assign a probability to each one, and multiply each outcome by its probability, then add the results together. For example, a trade might have a 60% chance of gaining 100 dollars and a 40% chance of losing 80 dollars; the expected return blends those two scenarios into one figure that represents the "average" result over many repetitions.

The nuance that trips people up is that expected return says nothing about a single occurrence. A trade with a positive expected return can still lose money the very next time you take it, and a trade with a negative expected return can still win. Expected return only becomes meaningful as a guide when the same setup is repeated enough times for the probabilities to play out, and it is only as accurate as the probability estimates fed into it, which in trading are almost always guesses based on past patterns rather than known facts.

It is closely tied to risk-reward: a trade with a small win rate can still have a positive expected return if the average win is much larger than the average loss, and a trade with a high win rate can still have a negative expected return if losses are large relative to wins.