Expected value

Expected value in trade review

Expected value asks whether the payoff is attractive after combining probability, average gain, average loss, and costs. A high success percentage alone does not prove the trade is good.

Hypothetical example

A trade risking $240 to make $760 with a 45% estimated probability has simplified EV of 0.45 × 760 - 0.55 × 240 = $210 before costs. If the probability estimate is unsupported, the score should be penalized even when the math looks positive.

Why low success percentage can still work

A low-probability setup can still have positive expected value if the wins are large enough relative to losses. The relationship matters more than the probability headline.

Primary reading: Investor.gov risk tolerance overview · FINRA options overview and risk · SEC Investor Bulletin on options · OIC options pricing overview · OCC Options Disclosure Document

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Related lessons and tools on this site

Start with the main guideInstitutional-Style Trade Logic TestComplete Scoring Formula and MethodologyPosition Sizing and Risk BudgetingCorrelation and Concentration RiskLiquidity and Execution QualityVolatility and Market-Regime FitCatalyst and Timing QualityExit Plan and Invalidation ChecklistTrade Logic Score ExamplesTrade Logic Test FAQSources and Methodology for Trade Logic Test
Reviewed/updated 2026-07-30 · SourcesMethodologyRisk disclosureCorrections

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