Win rate, reward-to-risk and expectancy
The three numbers that decide whether a strategy makes money.
A strategy's long-run result depends on how often it wins, how much it wins when it does, and how much it loses when it does not.
Expectancy
Expectancy = (win rate × average win) − (loss rate × average loss)
Example: you win 40% of trades. Average win is $300, average loss is $150.
Expectancy = 0.4 × 300 − 0.6 × 150 = 120 − 90 = $30 per trade.
Positive expectancy means the strategy makes money over many trades even though it loses more often than it wins.
The trade-off
| Win rate | Reward-to-risk needed to break even |
|---|---|
| 25% | 3 : 1 |
| 33% | 2 : 1 |
| 40% | 1.5 : 1 |
| 50% | 1 : 1 |
| 60% | 0.67 : 1 |
High win rates feel good but usually come with small wins and occasional big losses. Low win rates with large wins require patience through losing streaks. Neither is better; what matters is that the combination is positive and that you can stick to it.
Profit factor
Profit factor = gross profit ÷ gross loss. Above 1 makes money; 1.5 or more is solid for most styles. Your account metrics show your profit factor, win rate and expectancy automatically.
Losing streaks are normal
With a 40% win rate, a run of 6 losses in a row will happen regularly over a few hundred trades. Run your numbers through the Equity Simulator to see how often, and size positions so such a streak cannot breach your daily or maximum loss.
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