OK, something bizarre has happened to me lately…
As I've been talking to more and more traders, I’ve realized that perhaps the most important statistic to them, in terms of their trading performance, is their win rate.
It’s quite strange, considering that win rate on its own cannot determine profitability.
You could have a strategy with a 90% win rate that’s not profitable.
At the same time, you could have a strategy with a 10% win rate that is profitable.
That’s because, as you hopefully know, the profitability of a strategy is a combination of factors.
The simplest way to look at it is by considering your win rate and the relationship between your average win and average loss.
For example, if you have a 90% win rate, but your average win is 5% and your average loss is 50%, you're not going to make any money.
If you want an easy way to work out the math, simply multiply the win rate by the average win (In this case, 90 * 5 = 450).
Then, take the remaining percentage (which represents your losses, in this case 10%) and multiply it by the average loss (that would be 10 * 50 = 500).
So, with this setup, your net expectancy over 100 trades is -50 because you have a positive expectancy of 450 units and a negative expectancy of 500 units over the course of 100 trades, leading to a net loss.
Why am I talking about all this boring math?
Because it's been very surprising for me to see how much people care about win rate when it doesn’t determine, on its own... well, anything.
Now, I will say that there’s something to be valued in terms of mindset when trading.
In other words, it's difficult to stay disciplined and confident with a 10% win rate because you’re constantly taking losses.
Even if you know the strategy has a positive expectancy and should eventually hit a large win to make up for the losses, it’s hard to stay positive and keep executing if you lose 10, 15, or 20 trades in a row.
So, for most traders, I think a win rate above 50% is worth aiming for just to maintain a healthy mindset.
However, it should always be understood that the win rate alone won’t determine whether a strategy is profitable until it’s combined with the average win and average loss.
The real issue I find is that many traders would prefer a strategy with a high win rate and mediocre expectancy (since the average win is not typically substantial) over a strategy with a lower win rate and much better expectancy.
In reality, you should use a metric like Profit Factor to determine the success of a strategy, regardless of win rate (and regardless of average win and loss too, by the way). Profit Factor is a simple calculation of what you lose on average versus what you gain on average over time.
A Profit Factor of 2.0, for example, means that for every $1,000 you lose, you expect to make back $2,000 in return.
A Profit Factor of 3.0 means that for every $1,000 lost, you expect to make back $3,000 in return.
And so on.
So, hopefully, everyone reading this can agree that focusing on expectancy is far more important than a surface-level, one-dimensional statistic like win rate.
However, there’s another component of trading strategies that most people ignore altogether.
Even if you're a more sophisticated trader who doesn’t care about win rate or other one-dimensional components, most people still fail to consider one of the most critical elements of how effective a strategy can be over time.
And that’s the total volume of trades.
This means that if a strategy with a 2.0 Profit Factor takes 50 trades a year, it’s not nearly as effective as a strategy with a 2.0 Profit Factor that takes 200 trades a year.
This is something most people completely miss.
The higher the Profit Factor, combined with the higher the frequency of trades, the quicker a strategy can stack up profits.
This is one of the reasons I’ve been testing strategies around the clock, trying to find one that triggers more frequently—daily rather than weekly.
It’s not just because I think it would be cool or fun to trade every day with the same strategy.
It’s because if I can find something with a high expectancy and a high number of trades, the potential is exponentially greater than a strategy with fewer trades.
If you saw me post that graph in Telegram, you already know what I’m talking about:
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