Win rate and payoff ratio: the trade-off that decides the style

[Amanhasnoname]

A scalper can aim for a high win rate with small wins and larger losses, or a lower win rate with larger wins than losses. Both can be profitable, but they feel different and carry different risks.

High win rate systems, say 75 percent, with a target of 2 pips and a stop of 6 pips, produce frequent small gains and occasional painful losses. They are sensitive to execution costs and to changes in the win rate. A drop from 75 to 70 percent can wipe out the profit.

Low win rate systems, say 40 percent, with a target of 6 pips and a stop of 3, give frequent small losses and occasional big wins. They require psychological resilience and are more robust to small changes in costs, but depend on rare events.

The math is simple: expectancy equals win rate times average win minus loss rate times average loss. Plotting a grid of win rates and payoffs shows combinations with break-even and the sensitivity of profit to estimation errors.

Choosing a style should match the trader's temperament and the characteristics of the strategy.

Which profile fits the current strategy, and how sensitive is its profit to a small shift in win rate?