foundations · TRADING LEARNING GUIDE
Reward and expectancy
What is this concept?
Reward-to-risk compares planned target and stop distances. Expectancy also includes probabilities and realized payoffs: p × average win − (1−p) × average loss − costs.
Step by step
Record realized R for every completed trade, including losses, scratches and costs. Evaluate an unseen period. Attractive small samples may reflect luck or selection bias.
From observation to decision
Record the instrument, venue, session and timeframe. Classify the observation using the definition, then write at least one alternative interpretation. Decide what evidence would invalidate your idea before entry. Mark missing information explicitly. Examples are hypothetical. Collect paper observations, including failures. Include fees, spread, slippage and timestamp alignment when measuring outcomes. Recognizing a chart shape and establishing a profitable trading rule are separate tasks.
Worked example
40% wins at +2R, 60% losses at −1R and 0.1R costs yield 0.1R expectancy. If average wins fall to 1.5R, expectancy becomes −0.1R.
Common mistakes and limits
Do not equate planned targets with realized payoffs, select only good trades or ignore costs and sample uncertainty.
Practice
Create twenty hypothetical R outcomes. Hold win rate constant while reducing average wins and calculate the effect.
Resources and further reading
These sources explain definitions and underlying mechanics. Worked examples are original illustrations; a source does not establish the profitability of a custom pattern.
Further reading / foundational context. Worked examples on this page are original illustrations, not source performance claims.