How to Read Your Expectancy & SQN Numbers (And Why They Matter More Than Win Rate)

The Two Numbers That Predict Your Trading Future

Van K. Tharp spent decades studying what separates profitable traders from everyone else. His conclusion wasn't about chart patterns, indicators, or market timing. It was about two numbers most traders have never computed:

• Expectancy — Your average profit per dollar risked
• SQN (System Quality Number) — How reliable your expectancy is over time

These two numbers, computed automatically by the Expectancy Engine in Pro Trading Journal, tell you more about your trading future than any guru, signal service, or YouTube analyst ever could.

What Is Expectancy?

Expectancy is the average amount you expect to make (or lose) per dollar risked, expressed in R-multiples.

The Formula

Expectancy = (Win% x Avg Win R) - (Loss% x Avg Loss R)

Where:

• Win% = Percentage of trades that are winners
• Avg Win R = Average R-multiple of winning trades
• Loss% = Percentage of trades that are losers (1 - Win%)
• Avg Loss R = Average R-multiple of losing trades (usually close to 1R if you use stops)

Example

Let's say over 100 trades:

• You won 40% of the time (Win% = 0.40)
• Your average winner was 2.5R (Avg Win R = 2.5)
• Your average loser was 1.0R (Avg Loss R = 1.0)

Expectancy = (0.40 x 2.5) - (0.60 x 1.0) = 1.00 - 0.60 = 0.40R

This means for every dollar you risk, you expect to make $0.40 on average. If you risk $100 per trade, you'll make $40 per trade on average over a large sample.

What the numbers mean:

• Positive expectancy (above 0) — Your system makes money over time. Keep trading.
• Zero expectancy — You're break even. The market is taking your time for free.
• Negative expectancy (below 0) — Your system loses money. Stop trading live immediately.
• 0.20R - 0.50R — Good. Most profitable traders live here.
• Above 0.50R — Excellent. You have a significant edge.
• Above 1.0R — Exceptional. Verify this isn't just a small sample size artifact.

The Dollar Projection

The Expectancy Engine doesn't just show you the R-multiple — it projects the dollar value. If your expectancy is 0.35R and you risk $200 per trade, your expected profit per trade is:

0.35 x $200 = $70 per trade

Over 200 trades per year, that's $14,000 in expected profit. Now you can evaluate whether your system is worth your time — not based on feelings, but on math.

What Is SQN (System Quality Number)?

Expectancy tells you if your system is profitable. SQN tells you how reliable that profitability is.

The Formula

SQN = (Mean R / StdDev R) x sqrt(n)

Where:

• Mean R = Average R-multiple across all trades (same as expectancy)
• StdDev R = Standard deviation of your R-multiples (how much individual trades vary)
• n = Number of trades in the sample (capped at 100 for Tharp's formula)

Why standard deviation matters

Two traders can both have 0.40R expectancy:

Trader A: Wins are consistently 1.5-2.5R. Losses are consistently 0.8-1.2R. Low variance. Smooth equity curve.

Trader B: Occasional 10R winners mixed with lots of -1R losers. Same average, but wild swings. Emotional rollercoaster.

SQN captures this difference. Trader A will have a much higher SQN because their results are consistent.

The SQN Scale (Tharp's ratings):

• 1.6 - 1.9 — Below average. Your system works but barely.
• 2.0 - 2.4 — Average. Room for improvement.
• 2.5 - 2.9 — Good. You have a real edge.
• 3.0 - 5.0 — Excellent. Most professional traders land here.
• 5.0 - 6.9 — Superb. You're in Market Wizard territory.
• 7.0+ — Holy Grail. Extremely rare. Verify your data.

The Expectancy Engine shows a visual scale so you can see exactly where you fall.

The R-Distribution Histogram

Below your expectancy and SQN scores, you'll see a histogram of your R-multiple distribution across 7 buckets:

• < -2R — Catastrophic losses (these should be near zero with good stops)
• -2R to -1R — Large losses
• -1R to 0 — Small losses (expected)
• 0 to 1R — Small wins
• 1R to 2R — Moderate wins
• 2R to 3R — Large wins
• > 3R — Home runs

What to look for:

Healthy distribution:

• Tall bar at -1R to 0 (lots of small, controlled losses)
• Decent bars at 1R-2R and 2R-3R (good winners)
• Small or empty bar at < -2R (you cut losses fast)

Unhealthy distribution:

• Tall bar at < -2R (you're holding losers too long or not using stops)
• Tall bar at 0 to 1R (you're cutting winners too short)
• Empty bars above 2R (you never let winners run)

The histogram makes the abstract concept of R-multiples visual and actionable.

Win/Loss Streaks

The Expectancy Engine tracks:

• Current Win Streak / Current Loss Streak
• Maximum Win Streak / Maximum Loss Streak

Why streaks matter

Curtis Faith writes in Way of the Turtle that the Turtles were trained to expect losing streaks of 10+ trades. This is normal for trend-following systems with a 35-40% win rate.

If your maximum loss streak is 6 and you start panicking at 3 losses in a row, you have a psychology problem, not a system problem. The data proves your system recovers. Your job is to keep executing.

Conversely, if you've never had a winning streak longer than 2, your system might genuinely struggle to string together consecutive wins. That's a signal to investigate — are you cutting winners too early?

How to Improve Your Expectancy

There are only 4 levers:

• Increase Win% — Be more selective. Only take A+ and A grade setups. Trade only in favorable market conditions.
• Increase Avg Win R — Let winners run. Use trailing stops. Don't take profit too early.
• Decrease Avg Loss R — Cut losses faster. Use tighter stops. Don't move stops further away.
• Increase trade frequency — Take more opportunities (without lowering quality).

The highest-leverage change for most traders is #2 and #3 combined: let winners run and cut losers fast. This is what the "Did You Sit Tight?" check in the Post-Trade Autopsy is designed to reinforce.

The Minimum Sample Size

A critical warning: expectancy and SQN are meaningless with fewer than 30 trades. Below 30 trades, the statistics are unreliable — a few outlier trades can completely distort the numbers.

Tharp recommends a minimum of 100 trades for reliable SQN calculation. The Expectancy Engine will compute from whatever data you have, but treat anything below 30 trades as directional, not conclusive.

This is why logging every trade matters. You need the data volume. Skip trades and your statistics lie to you.

"If you don't know your numbers, you don't know your business." — Van K. Tharp