Win Rate vs Profitability: Understanding Expectancy
A 90% win rate can still lose money, while a 35% win rate can make you a millionaire. Master the math of trading expectancy.
01. Why Win Rate is a Vanity Metric
Beginner traders prioritize high win rates, falling victim to scam strategies that promise '99% accuracy.' These strategies often have a massive downside risk, risking $1,000 to make $10 (100:1 RR).
A single loss will wipe out 100 consecutive wins. Therefore, a high win rate strategy is useless without looking at the average size of your winners versus your losers.
02. Calculating Trading Expectancy
Expectancy is the mathematical formula that determines the viability of your trading edge. Calculate it using this equation:
For example, if your strategy has a 40% win rate (60% loss rate) with an average win of $300 and average loss of $100: Expectancy = (0.40 * $300) - (0.60 * $100) = $120 - $60 = +$60. On average, you make $60 per trade.
03. Using Expectancy to Grow Your Account
Once you verify that your backtested strategy has a positive expectancy, your objective is simply to execute as many setups as possible to let the law of large numbers play out.
This shifts your focus away from individual trade outcomes, letting you execute setups calmly because you know the math works in your favor over time.