Win rate vs risk-reward: why a 43% win rate can be profitable

A win rate on its own tells you nothing about whether a trading system makes money. A system that wins 90% of its trades can lose, and one that wins 40% can be profitable. What decides it is the win rate together with the payoff: how large the average winner is next to the average loser.

The break-even win rate

For any payoff there is a win rate at which a system exactly breaks even. Above it the system makes money; below it, it loses. If the average winner is b times the average loser, the break-even win rate is 1 ÷ (1 + b).

Read the first row again. A system whose winners are half the size of its losers needs to win two trades in three just to stand still, before any trading costs.

Expectancy: the number that matters

Expectancy is what a system makes per trade on average. Measured in R, where 1R is the amount risked on a trade:

expectancy = win rate × average win − loss rate × average loss

A positive expectancy repeated over many trades is how a systematic approach makes money. A negative one loses however good the win rate looks.

A worked example with our own figures

Across the 3-year backtest of all 5 markets, 43.2% of 2,787 trades closed in profit. Fewer than half. The average winner was 1.54 times the average loser.

At a payoff of 1.54 the break-even win rate is 39.4%. The system won 43.2%, which is 3.8 points above it. After spread and slippage that came to an average of +0.077 R per trade and a profit factor of 1.17.

These are backtested, hypothetical results, and the figures for each market are on the signals pages.

Why a very high win rate deserves a second look

A high win rate is easy to manufacture. Take small profits quickly and give losing trades a lot of room, and most trades will close green. The cost shows up in the losers: one of them can take back many winners.

So when a signal service advertises a win rate of 80% or 90% and nothing else, the missing number is the one you need. Ask what the average loss is next to the average win.

What a 43% win rate feels like

The price of a lower win rate is losing streaks. With 56.8% of trades losing, and treating each trade as independent, the chance that any five in a row all lose is about 5.9%, and for eight in a row about 1.1%. Over hundreds of trades, streaks like that are expected, not a sign that something broke.

This is why position size matters more than any single signal. Risk a small, fixed part of the account on each trade, so that a normal losing streak is something you can sit through.

Five questions to ask any signal provider

1. What is the win rate, and what is the average win next to the average loss?
2. Are the results after spread and slippage, or before?
3. How many trades are they based on, over how long?
4. What was the largest drawdown, and when?
5. Which results are backtested and which are live?

A provider who answers all five is giving you something you can check. Our own answers are on the signals pages and on the About page.