Drawdown and Trade Expectancy
Trade expectancy is an average net outcome under a specified sample and sizing convention. Drawdown is the decline from an equity peak to a subsequent trough. A positive average does not eliminate severe losing sequences.
How it works
For fixed comparable risk units, expectancy=p(win)×average win−p(loss)×average loss−average costs. Compute drawdown on a time-ordered equity series, including open exposure if that is part of the stated definition. Distinguish arithmetic averages from compounded wealth outcomes.
Worked example
Suppose 40% of trades win 2R and 60% lose 1R. Gross expectancy is 0.4×2−0.6×1=0.2R. If average costs are 0.1R, net expectancy is 0.1R. Separately, equity falling from 10,000 to 8,000 is a 20% drawdown; returning to 10,000 requires 25%, not 20%.
Amounts, prices and scenarios are fictional teaching examples. They exclude any effects not explicitly stated and are not trade recommendations.
Limits and common mistakes
A small or selected sample cannot establish a stable win rate. Losses may be correlated, tail losses larger than planned and costs regime-dependent. Compare uncertainty and adverse sequences, not just a single attractive average.
Knowledge check
Can a profitable system have a large drawdown?
Read the explanation
Yes. Average outcome does not determine the ordering, dependence or extreme size of losses, all of which affect the equity path.
References and further reading
These sources explain the underlying concepts and specifications. They do not endorse QBMFX Academy. Check the relevant market, protocol version and reporting rules before applying an example.