Win rate vs expectancy
Why a trader who wins 90% of the time can still lose money.
The question that really matters
"How often do you win?" is the question everyone asks. It's the wrong one. The real question is: on average, how much do you make or lose per trade? That number is called .
The recipe
Expectancy = (win rate x average win) minus (loss rate x average loss), minus fees
- : how often you win, like 40%. In the math, write it as 0.40.
- Loss rate: how often you lose. It's whatever is left, so 100% minus the win rate.
- Average win and average loss: the usual size of each, in dollars.
Ava wins 90% of the time
Ava grabs tiny profits fast, but she lets her losing trades run and hopes they come back.
- She wins 90% of her trades. Average win: $50.
- She loses 10% of her trades. Average loss: $600.
Expectancy = (0.90 x $50) minus (0.10 x $600) = $45 minus $60 = lose $15 per trade.
Ava feels great almost every day, and she's slowly losing money. After 100 trades she's down about $1,500, before fees.
Ben wins 40% of the time
Ben cuts losing trades fast and lets winners reach their target.
- He wins 40% of his trades. Average win: $300.
- He loses 60% of his trades. Average loss: $100.
Expectancy = (0.40 x $300) minus (0.60 x $100) = $120 minus $60 = make $60 per trade.
Ben loses more often than he wins and feels bad a lot. And he's slowly making money.
Don't forget fees
Every trade costs something: , exchange fees and slippage. Say they add up to $5 per trade.
- Ben: $60 minus $5 = $55 per trade. Still good.
- A trader who makes $3 per trade before fees really loses $2 per trade.
That's why making lots of trades for tiny profits is so hard. The fees eat the profit.
How to find your own number
You find your expectancy by writing down every trade in a : win or loss, and how many dollars. After many trades, do the math.
How many is "many"? A handful of trades tells you almost nothing, because luck is huge over a few trades. Most traders want at least 50 to 100 trades before they trust the number. Even then, markets change, and a strategy that worked last year can stop working. Keep checking.
What goes wrong
- Judging a strategy by win rate alone. 90% sounds amazing. Ask Ava.
- Judging after 5 trades. That's like flipping a coin 5 times, getting 4 heads, and deciding the coin is broken.
- Leaving out fees. A small edge can disappear completely.
Remember
- Expectancy = (win rate x average win) minus (loss rate x average loss), minus fees.
- A high win rate can still lose money if the losses are big.
- A low win rate can make money if the wins are big.
- You need lots of recorded trades before you can trust the number.
Check yourself
1. Win rate 90%, average win $50, average loss $600. What's the expectancy?
2. Which number tells you more about a strategy?
3. Why should fees go into the math?
4. How many trades do you need before trusting your expectancy?
Next lesson: Leverage and margin
Money Tree School is education, not financial advice. Examples use made-up or historical numbers to show how things work; they are not recommendations to buy or sell anything. Markets can lose money.