Beware of traders who say their win rate is x or y% because win rate doesn’t give a complete picture of someone’s trading performance…at all. Win rate is simply the percentage of trades that net gains. On the other hand, expectancy takes into account the average size of gains and losses giving you a better picture of a trader’s performance. In this post, we’ll explain both metrics and why they matter in understanding how good a trading strategy really is.
The win rate is the percentage of trades that result in net profits. If you trade 10 times and realize a profit in 8 trades, your win rate is 80%. The problem is that if the losses are bigger than the gains, you could still be unprofitable. That’s why this metric alone is not ideal when evaluating your or anyone’s performance even though we hear traders mentioning their “great” win rates all the time. Win rate is important when combined with other metrics such as profit factor.
Trading expectancy is basically how much you make per trade, on average. If it’s negative, you are losing money. If it’s positive, you have a winning strategy. Because it takes into account the avg size of wins and losses, it’s a better metric to evaluate your performance than your win rate. It’s simple to calculate too. Let’s look at an example.
Let’s say you traded 5 times and out of these, you had 3 losses of $-100, $-200, $-300, and 2 wins of $1000 and $700.
While your win rate is about 40%, your expectancy is:
($1000+$700) * 40% – ($100$200$300) * 60% =
($1000+$700) * 0.4 – ($100$200$300) * 0.6 =
$680 – ($360) = $320 per trade.
With this result, the trader has a profitable strategy netting on average $320 per trade even though his win rate is only 40%.
A few more examples…
A classic trader mistake is to take small profits hoping to win often, but then letting the losing trades run. Consider a trader who wins 70% of the time, making $150 on average when he wins but losing $400 on losing trades.
($150 x 0.7) – ($400 x 0.3) = $105 – $120 = -$15
For every trade taken, he can expect, on average, that $15 will be lost. 10 trades later, he is down $150. With a negative expectancy, the more trades you take, the more you lose regardless of whether your win rate is above 50%.
The easiest fix here is to cut losses short, potentially with a stop loss order. If this trader can reduce losses to about $200, he will be profitable, even though the wins are only $150. This is because this trader is winning more than they are losing.
(0.7 x $150) – (0.3 x $200) = $105 – $60 = $45
By reducing the size of losses, this trader can expect to make $45 on average, every time he places a trade. Regardless of what your win rate is, make sure your expectancy is always positive!
At Trademetria, we offer more than 30 trading performance metrics to help you trade better.
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