Expected Value Calculator Trading

Expected Value Formula:

\[ EV = (P_{success} \times Gain) - (P_{fail} \times Loss) \]

Expected Value (EV):

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1. What is Expected Value in Trading?

Expected Value (EV) is a fundamental concept in probability that represents the average outcome if a trade (or similar decision) were to be repeated multiple times. It helps traders assess whether a trade is statistically favorable in the long run.

2. How Does the Calculator Work?

The calculator uses the Expected Value formula:

\[ EV = (P_{success} \times Gain) - (P_{fail} \times Loss) \]

Where:

$ P_{success} $ — Probability of the trade being successful (0 to 1)
$ Gain $ — Potential profit if the trade succeeds ($)
$ P_{fail} $ — Probability of the trade failing (1 - P_success)
$ Loss $ — Potential loss if the trade fails ($)

Interpretation: A positive EV suggests a favorable trade in the long run, while negative EV suggests an unfavorable one.

3. Importance of EV Calculation

Details: EV helps traders make objective decisions by quantifying trade setups. Consistently taking positive EV trades (with proper risk management) leads to long-term profitability.

4. Using the Calculator

Tips: Enter probability (0-1), potential gain ($), and potential loss ($). For example, if you have a 60% win rate with $100 potential gain and $50 potential loss, EV = (0.6 × 100) - (0.4 × 50) = $40.

5. Frequently Asked Questions (FAQ)

Q1: What's considered a good EV?
A: Any positive EV is theoretically good, but practical considerations like trade frequency and account size matter. Higher EV is generally better.

Q2: How accurate does probability need to be?
A: More historical data improves accuracy. Track your win rate for similar setups. Even estimates can be valuable for comparison.

Q3: Should I only take positive EV trades?
A: Not necessarily - consider opportunity cost and portfolio effects. But consistently negative EV trading will lose money long-term.

Q4: How does this relate to risk management?
A: EV doesn't account for risk of ruin. Always consider position sizing and maximum acceptable loss per trade.

Q5: Can EV be used for other investments?
A: Yes - the concept applies to any probabilistic decision (stocks, options, crypto, etc.), though inputs may be harder to estimate.