A scalping system can show a win rate of 80 percent and still lose money. The reason is the payoff ratio: small wins, occasional big losses. Four wins of 1 pip and one loss of 6 pips net to minus 2.
A high win rate feels good. Each winning trade gives a small reward, and the brain starts to equate the percentage with skill. It also makes losses harder to accept, because they feel like exceptions.
Scalpers drift toward a high win rate by taking profits quickly and holding on to losers. That gives a nice-looking statistic and a poor expectancy.
The more reliable metric is expectancy per trade, after costs: average win times win rate minus average loss times loss rate. A system with a 45 percent win rate and a payoff ratio of 1.5 can outperform one with a 75 percent win rate and a ratio of 0.4.
Reviewing both numbers side by side shows what's driving results. Many traders are surprised by how bad the expectancy is for strategies that feel great in practice.
It's also helpful to look at the distribution, in particular the worst 5 percent of trades, which often account for the bulk of the losses.
Putting some numbers on it makes the point clearer. Two systems, each with 100 trades:
System A wins 75 times for 1 pip and loses 25 times for 4 pips. Gross: 75 minus 100 equals minus 25 pips. The win rate looks great, and the system loses money before costs.
System B wins 40 times for 3 pips and loses 60 times for 1.5 pips. Gross: 120 minus 90 equals plus 30 pips. The win rate looks poor, and the system makes money.
Now subtract a cost of 0.5 pips per trade, or 50 pips over 100 trades. System A ends at minus 75. System B ends at minus 20. Costs flip B negative too, which shows how little room small-target systems have.
The takeaway is that win rate alone can't say anything useful about profitability. The payoff ratio and the cost per trade complete the picture.
Many experienced traders watch the average trade in pips, after costs, as the primary figure, and treat the win rate as a descriptive detail.
What is the win rate and the average win-to-loss ratio on your own trades, and do they fit together?
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Win rate obsession
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Amanhasnoname
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Re: Win rate obsession
My numbers sit at about a fifty two percent win rate with the average winner around one and a half times the average loser, and it took me a long time to accept that. A few years back I was proud of being right three times out of four, while the account went sideways and then down.
The reason was exactly what you describe. I grabbed profits at the first chance and gave losers room because I didn't want to take a loss. When I finally calculated expectancy after costs, it was slightly negative, even though nearly every day felt like a winning day until one bad trade wiped it out.
Changing it was uncomfortable. I set targets as orders and stopped touching trades once they were open, and for a few weeks it felt like I was losing all the time. But the average trade after costs turned positive, which is the only figure I watch on my weekly review now.
The reason was exactly what you describe. I grabbed profits at the first chance and gave losers room because I didn't want to take a loss. When I finally calculated expectancy after costs, it was slightly negative, even though nearly every day felt like a winning day until one bad trade wiped it out.
Changing it was uncomfortable. I set targets as orders and stopped touching trades once they were open, and for a few weeks it felt like I was losing all the time. But the average trade after costs turned positive, which is the only figure I watch on my weekly review now.