Win rate is the first number most traders look at, and it's one of the least useful on its own. A strategy can win most of its trades and still lose money, and a strategy can lose most of its trades and still do well. What matters is how win rate combines with the size of wins and losses.
Expectancy: the number that matters
Expectancy is the average result per trade. Measured in units of risk (R, where 1R is the amount you risk on a trade):
Expectancy = (win rate × average win) − (loss rate × average loss)
If expectancy is above zero after costs, the strategy makes money over many trades. If it's below zero, it loses, no matter how often it wins.
Two strategies compared
| Strategy A | Strategy B | |
|---|---|---|
| Win rate | 70% | 40% |
| Average win | 0.4R | 2.5R |
| Average loss | 1R | 1R |
| Expectancy per trade | 0.7 × 0.4 − 0.3 × 1 = −0.02R | 0.4 × 2.5 − 0.6 × 1 = +0.40R |
| Profit factor | 0.28 ÷ 0.30 = 0.93 | 1.00 ÷ 0.60 = 1.67 |
Strategy A wins 7 out of 10 trades and still slowly loses money. Strategy B loses more often than it wins, yet makes 0.4R per trade on average.
Profit factor
Profit factor is gross profit divided by gross loss. Above 1.0 the strategy made money, below 1.0 it lost. Many traders look for a profit factor comfortably above 1.0 after costs, because thin margins disappear quickly once fees and slippage are counted.
The break-even win rate
For a given reward-to-risk ratio R, the win rate you need just to break even (before costs) is:
Break-even win rate = 1 ÷ (1 + R)
At 1:1 you need to win 50% of trades. At 2:1 you need 33%. At 2.5:1, about 29%. So a 40% win rate with 2.5:1 winners has a healthy margin above break-even.
- Never judge a strategy on win rate alone.
- Look at expectancy and profit factor, after costs.
- Check drawdown and consistency too: two strategies with the same expectancy can feel very different to trade.
That's why PaperShieldAi ranks strategies on risk-adjusted results like Sharpe ratio, profit factor, drawdown and consistency, so a flashy win rate can't fool the tournament.
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