This page defines how edge is evaluated, verified, and retained. It does not teach probability theory. It establishes which metrics matter, when they are used, and what they authorize.
Two Measures, One Purpose
Edge is evaluated using two complementary measures:
- Expectancy answers: Should this setup be traded?
- Profit Factor answers: Did this setup actually work?
They serve different roles in the same lifecycle.
Expectancy (Forward View)
Expectancy is a planning metric. It describes the average outcome per trade if the same setup were repeated many times under the same rules.
Expectancy combines:
- win rate
- average win size
- average loss size
It answers whether a setup is worth deploying capital before execution.
Formula:
E = (Win% × AvgWin) − (Loss% × AvgLoss)
If E is positive → the setup has a positive theoretical edge.
If E is negative → no amount of discipline can save it.
Short Example:
- Win rate: 60%
- Avg Win: 1.33R
- Avg Loss: 1.0R
E = (0.60 × 1.33R) − (0.40 × 1.0R) ≈ +0.40R
This defines the potential of a setup. Everything else must be validated.
Expectancy is theoretical. It assumes:
- consistent execution of defined rules
- fixed risk per trade
- no deviation under pressure
It is used before committing capital, not to evaluate results after the fact.
Profit Factor (Backward View)
Profit Factor is a validation metric. It measures realized performance across a sample of executed trades.
Profit Factor = Gross Wins ÷ Gross Losses
- PF > 1.0 → profitable sample
- PF ≈ 1.0 → marginal
- PF < 1.0 → negative
As a rule of thumb:
- PF ≥ 1.2 indicates a tradeable edge
- PF ≥ 1.5 indicates a strong edge
Profit Factor reflects what actually happened, including:
- execution quality
- discipline
- fees and slippage (when included)
It is used after sufficient repetition to confirm or reject a setup.
How They Work Together
- Expectancy authorizes exploration
- Profit Factor authorizes continuation
Expectancy defines what should work. Profit Factor confirms what did work. A setup is only considered edge when both align.
Operational Preference
In day-to-day trading, Profit Factor is the primary operational tool because it is:
- automatically calculated
- sample-based
- inclusive of costs
- easy to group by setup, tag, or series
Expectancy remains essential for design and planning, but Profit Factor is the metric that governs retention, removal, and scaling. Tools such as Journalytix (by Jigsaw Trading) calculate Profit Factor directly from executed trades, making edge evaluation practical and repeatable.
Sample Discipline
Edge evaluation is meaningless without discipline. Profit Factor and Expectancy are only valid when:
- stops, targets, and sizing are executed as written
- samples are sufficiently large (25 / 50 / 75 / 100 trades)
- trades are grouped correctly by setup
Process violations distort both metrics and invalidate conclusions.
Bottom Line
Expectancy defines the theory of edge. Profit Factor proves the reality of edge. Capital is allocated, retained, or withdrawn based on proof.