Win rate versus expectancy: why a high win rate can still lose money

[Shadow Trader]

Many traders judge a strategy by how often it wins. A seventy percent win rate sounds impressive, but if average winners are small and average losers are large, the strategy may lose money overall. Expectancy combines win rate and payoff: it equals the win rate multiplied by the average win, minus the loss rate multiplied by the average loss. For example, winning seventy percent of the time with average winners of one R and losers of three R gives an expectancy of negative zero point two R per trade. Meanwhile, a thirty five percent win rate with average winners of three R and losers of one R yields a positive expectancy of about zero point four R. This is why looking at win rate alone is misleading. When you test a setup, compute expectancy using real data including costs, and look at its stability across different periods. Also track the largest losing streak, since a positive expectancy can still involve long drawdowns that are psychologically hard to handle. Know your numbers, not just your feelings.

[FXS HongKong Scalper]

Many traders focus on win rate because it feels good to win often, but expectancy is what matters for profitability. Tracking both in the journal shows the real picture.