Win rate is seductive. 'I win 65% of my trades' sounds impressive at a trading meetup. It implies skill, accuracy, a disciplined approach. But win rate alone tells you almost nothing about whether a strategy is profitable.
The Problem with Win Rate
Consider two traders: Trader A has a 70% win rate. Trader B has a 40% win rate. Who's making more money? You can't tell without knowing the average size of their wins and losses.
If Trader A's average win is $100 and average loss is $400, their expectancy per trade is: (0.70 × $100) + (0.30 × -$400) = $70 - $120 = -$50 per trade. They're losing money with a 70% win rate.
If Trader B's average win is $400 and average loss is $150, their expectancy per trade is: (0.40 × $400) + (0.60 × -$150) = $160 - $90 = +$70 per trade. They're consistently profitable with a 40% win rate.
What is Expectancy?
Expectancy is the average amount you expect to make per trade, expressed in dollars (or R multiples). It accounts for both your win rate and your average win/loss ratio.
Formula: Expectancy = (Win Rate × Average Win) - (Loss Rate × Average Loss)
A positive expectancy means your strategy is profitable in the long run. A negative expectancy means you're losing money over time, regardless of how any individual trade feels.
Optimizing for Expectancy
Instead of trying to increase your win rate (which often leads to widening stops or taking quick profits that hurt your R:R), focus on maximizing expectancy by: letting winners run to their full targets, cutting losses quickly at your predetermined stop, and only taking setups with a favorable R:R.
Track both metrics in your journal. Over time, you'll find that optimizing for expectancy naturally produces a more sustainable, profitable approach than chasing a high win rate.
“Consistency is built through systems, not willpower. The journal is the system.”