Compute expectancy before you celebrate hit rate
Calculate net trade expectancy and explain why hit rate alone can mislead strategy evaluation.
step-trail before-after now-you-try A signal wins 62 percent of trades. Average gross win is 18 bps, average gross loss is 36 bps, and estimated all-in cost is 4 bps per trade. Should the team celebrate the hit rate? Expected value: P(win) x average win - P(loss) x average loss - cost The common trap is treating a high hit rate as proof of edge while ignoring payoff asymmetry and transaction costs. Step 1 Convert hit rate to probabilities: P(win) = 0.62 and P(loss) = 0.38. Expectancy needs the full distribution. A win rate alone is not a decision metric. Step…
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