Mathematical Expectation in Trading

Mathematical Expectation in Trading

Mathematical Expectation

From a mathematical perspective:

The term "mathematical expectation" was introduced by Pierre-Simon, Marquis de Laplace, in 1795 and originated from the concept of "expected value of winnings."

A random variable has a numerical characteristic called mathematical expectation, which represents the distribution of values or probabilities of the random variable. It is typically expressed as the weighted average of all possible values of the random variable. Mathematical expectation is denoted as M(x)M(x)M(x).

From a trading perspective:

Mathematical expectation in trading is calculated using the following formula:

(Mathematical Expectation) = (Probability of Profit × Average Profit per Trade) − (Probability of Loss × Average Loss per Trade).

For this metric to be reliable, a sufficient number of trades is required—at least 100 or more. A negative mathematical expectation is considered a sign of inevitable failure in trading.