Win rate is not the point: why 55% can beat 70%

Ask most beginners what makes a good strategy and they say a high win rate. It is one of the most misleading numbers in trading. What matters is how much you win when you win compared with how much you lose when you lose.

The only two numbers that matter together

A strategy is profitable when the average winner, multiplied by how often you win, is bigger than the average loser multiplied by how often you lose. That is called expectancy. Win rate is just one half of it.

Break-even win rate

The break-even win rate is 1 divided by (1 plus your risk-reward ratio). At 1:1 you need to win 50% of trades. At 1:2 you need 33.3%. At 1:3 you need 25%. This is before spreads and commissions, which push the real number up.

A worked example

Trader A wins 70% of trades but risks 3 to make 1. Over 10 trades, 7 wins earn 7 and 3 losses cost 9, a net loss of 2. Trader B wins 40% of trades but earns 2 for every 1 risked. Over 10 trades, 4 wins earn 8 and 6 losses cost 6, a net gain of 2. Trader B wins less often and makes money. Trader A wins most of the time and loses.

A high win rate with a bad risk-reward ratio is a slow way to lose money.

What to do with this

• Before you take a trade, work out its risk-reward ratio with the risk-reward calculator.
• Compare it with the win rate your strategy has actually delivered in your journal.
• If the break-even win rate is higher than the win rate you really achieve, skip the trade or change the plan.
• Judge a strategy over many trades. Twenty trades prove very little.

Trading carries a high risk of loss. This article is for education only and is not financial advice. Results shown are from setups tracked in our own journal, they are not audited, and past results do not guarantee future results.