Trading practiceUpdated 2 min readBy the FXNOD team
Is a high win rate enough to make a trading strategy profitable?
No. A high win rate is not enough. A strategy is profitable only when its win rate multiplied by its average win is greater than its loss rate multiplied by its average loss. A strategy that wins 90% of the time loses money if each loss is more than nine times the size of a win. Win rate and payoff must be read together.
The one formula
Expected value per trade equals win rate times average win, minus loss rate times average loss. If it is positive, the strategy makes money over many trades. If it is negative, no win rate will save it.
Four strategies compared
| Win rate | Average win | Average loss | Expected value per trade | Verdict |
|---|---|---|---|---|
| 90% | 1 | 10 | -0.10 | Loses |
| 60% | 1 | 2 | -0.20 | Loses |
| 50% | 1.5 | 1 | +0.25 | Profitable |
| 35% | 3 | 1 | +0.40 | Profitable |
The strategy that wins least often is the most profitable in this table, and the one that wins most often loses. Win rate tells you how the strategy feels to trade. Expected value tells you whether it makes money.
Why high win rates are so tempting
- Winning often feels like being right, and people will pay a great deal to feel right.
- The balance climbs in a smooth line, which looks like skill.
- The large loss is rare, so a short test may never show it.
- It is the easiest number to advertise.
How high win rates are manufactured
- Tiny profit targets with distant stops or none: many small wins, occasional disaster.
- Martingale: nearly every sequence ends in a small win until one does not.
- Contracts that win on most outcomes and pay a fraction of the stake, such as Differs.
- Refusing to close losing trades, which are then not counted as losses.
The break-even win rate
For any payoff there is a win rate you must beat. It equals average loss divided by the sum of average win and average loss. With wins of 1 and losses of 10, that is 10 divided by 11, or 90.9%. A 90% win rate is below it. Work out this figure for your own strategy before being pleased with its win rate.
The questions to ask instead
- What is the average win and the average loss?
- What was the largest single loss?
- How many trades is the win rate measured over?
- Does the stake change after a loss?
Questions people ask
- What is a good win rate in trading?
- Any win rate above the break-even rate for your payoff. With wins twice the size of losses, 34% is profitable. With wins half the size of losses, 66% is not.
- Can a strategy with a 30% win rate be profitable?
- Yes, if the average win is more than about 2.3 times the average loss. Many trend-following strategies work this way.
- Why does my 80% win rate strategy lose money?
- Because the losses are more than four times the size of the wins. Compare your average win with your average loss and the reason will be visible.
Test your rules before you fund them
Turn a rule into a bot in Bot Forge by answering questions, run it on your Deriv demo account, and read the result trade by trade.
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