Expectancy answers: 'on average, what does each trade earn me?' The formula is (winRate × avgWin) − (lossRate × avgLoss).
Worked example: 40% win rate, average win $500, average loss $200. Expectancy = (0.40 × 500) − (0.60 × 200) = $200 − $120 = $80 per trade. Take 100 trades, expect around $8,000.
Expectancy in dollars is account-specific. Expressing it in R (the R-expectancy) makes it portable: with the same numbers and a $200 average risk, R-expectancy = $80 / $200 = 0.4R per trade.
Negative expectancy is the fatal signal. No amount of psychological discipline will compound a strategy with negative expectancy into profit. If your historical expectancy is below zero across a 100+ trade sample, the strategy needs revision, not more conviction.