Why your win rate is lying to you

Win rate is the first number every trader learns and the last one they should judge themselves on. It is a fact about your trading, but on its own it is almost content-free — you can have a 70% win rate and lose money every month, or a 35% win rate and compound steadily for years.

The reason is simple arithmetic that is easy to state and easy to forget.

The arithmetic

Expectancy — the average dollars you can expect from the next trade — is:

(win rate × average win) − (loss rate × average loss)

Put a 70% win rate into that with an average win of $100 and an average loss of $400 and you get:

(0.70 × 100) − (0.30 × 400) = 70 − 120 = −$50 per trade

Seventy per cent of your trades work. You still lose fifty dollars every time you press the button.

Now the other direction. A 35% win rate, average win $600, average loss $150:

(0.35 × 600) − (0.65 × 150) = 210 − 97.50 = +$112.50 per trade

Two out of three trades fail and the account grows anyway.

The breakeven win rate

For any risk-to-reward ratio there is a win rate below which you lose money. It is:

breakeven win rate = 1 ÷ (1 + R:R)

At 1:1 you need 50%. At 2:1 you need 33.3%. At 3:1 you need 25%. At 0.5:1 — which is what "I move my stop to breakeven and take profit early" usually produces — you need 66.7%.

This is why cutting winners short is so expensive. It does not just reduce your average win; it raises the win rate you need to survive, usually past the point where your strategy can deliver it.

What to look at instead

Read win rate and average win-to-loss ratio as a pair, and read profit factor as the summary of both.

• Profit factor is gross profit divided by gross loss. Above 1.25 is workable. Above 1.5 is a durable edge. Below 1.0 you are paying for the privilege of trading.
• Average R is the same idea in units of risk, which makes it comparable across account sizes and position sizes.
• Expectancy in dollars is what you actually take home per trade.

A journal that shows you win rate alone is showing you a third of the picture.

The uncomfortable corollary

If your win rate is high and your results are not, the problem is almost certainly your exits, not your entries. That is good news: exits are far easier to fix than entries, because they are a rule rather than a judgement.

The specific number to look at is profit capture — how much of the available move on your winners you actually kept. If your winners reach an unrealised $600 on average and you close them at $250, your profit capture is 42%, and no improvement to your entry will fix that.