Expectancy: why win rate is not enough
A method that wins 70% of the time can lose money. A method that wins 35% of the time can make a lot. What decides it is expectancy: the average result per trade.
The formula
Expectancy = (win rate × average win) − (loss rate × average loss)
With wins and losses in R:
| Method | Win rate | Avg win | Avg loss | Expectancy |
|---|---|---|---|---|
| A | 70% | 0.4R | 1R | 0.7 × 0.4 − 0.3 × 1 = -0.02R |
| B | 35% | 3R | 1R | 0.35 × 3 − 0.65 × 1 = +0.40R |
Method A feels great (it wins most days) and slowly loses. Method B feels awful (it loses most days) and makes money. Most famous trend traders run something like method B.
The break-even win rate
For any payoff there is a minimum win rate:
Break-even win rate = average loss ÷ (average win + average loss)
With this site's plan (target 2.5 ATR, stop 1.5 ATR) a perfect target-or-stop trade needs to win about 38% of the time just to break even, before costs. In practice many trades end at the 10-day time limit with a smaller win, so the real bar is higher.
How to use it
- Judge any method by expectancy over 30 or more trades, never by a few wins.
- When someone shows you a high win rate, ask for the average loss.
- Costs come out of every trade, so a method with a thin edge often loses after brokerage, taxes and slippage.
Each setup page on this site shows the numbers for that setup.