Win rate and expectancy: does your strategy really make money?

“I win seven trades out of ten.” It is the line you hear most often from traders who want to impress. It proves nothing. A trader who wins 70% of the time can easily lose money, and another who wins only 35% of the time can be comfortably profitable. To know which one has a strategy that holds up, you need a single number: expectancy.

Win rate and its limits

Your win rate is the share of your trades that close in profit. Out of 50 trades with 20 winners, it is 40%. The loss rate is its complement: 60% here. It is easy to calculate and nice to look at when it is high, but it completely ignores the size of your wins and losses.

A strategy that banks lots of small wins and a few very large losses can show a beautiful win rate while draining the account. That is typically what happens to traders who close their winners quickly and let their losers run, hoping they will come back.

The expectancy formula

Expectancy tells you what your strategy makes or costs on average per trade. If it is positive, each new trade adds money to your account on average over the long run. If it is negative, the more you trade, the more you lose, however good your best days are.

Two worked examples

Strategy B is the one that feels best day to day: you win almost every day. Yet it is the one that destroys the account. Strategy A is more uncomfortable, with long losing streaks, but it is the one that produces a positive result.

Thinking in R

To compare strategies regardless of account size, expectancy is often expressed in R, meaning multiples of the risk taken per trade. If you always risk 1R and your winners make 2R on average, a strategy with a 40% win rate gives 0.40 × 2 − 0.60 × 1 = 0.2R per trade.

With 1% risk per trade, an expectancy of +0.2R means about +0.2% of capital per trade on average. That sounds small. Over 200 trades in a year, though, it is a solid result, provided the measured expectancy is real and holds up over time.

You can also turn the formula around to set yourself targets. If your measured win rate is 45%, what average win do you need to break even? You need 0.45 × average win to equal 0.55 × 1R, so an average win of about 1.22R. Below that you lose; above it you win. This tells you whether the way you manage your exits fits how often you are right.

Pitfalls to avoid

• Sample too small: over 10 trades, chance dominates. You need dozens of trades, ideally more than a hundred, before drawing a conclusion.
• Forgotten costs: calculate your average win and average loss after spread, commission and swap. An expectancy of +$3 before costs can turn negative after them.
• Market conditions: an expectancy measured in a trend can vanish in a directionless market. Note the context of every trade.
• Changing your method: if you change your rules along the way, you are no longer measuring the same strategy.

Be wary of results posted by other traders, too. A high win rate shown without the average loss, or a total profit shown without the number of trades, does not let you calculate expectancy. Always ask for both halves of the formula: how many trades win, and how much the winners and the losers make or cost on average.