Win rate is the wrong question
Ask a new trader how their system is doing and they'll tell you the win rate. It feels like the natural measure — what fraction of trades win? But win rate alone tells you almost nothing about profitability, because it ignores how much you win when right versus how much you lose when wrong. A 90% win rate is a disaster if the 10% of losers each wipe out the gains of nine winners.
The number that combines both is expectancy: the average amount you can expect to make (or lose) per trade, over a large sample.
Expectancy = (Win% × Average Win) − (Loss% × Average Loss).
It's cleanest in R, where 1R is the amount you risk per trade. A win of 2R means you made twice what you risked; a loss is −1R. Expectancy in R tells you how many "risk units" you earn per trade on average.
The 40% system that beats the 70% system
Here's the result that breaks the win-rate obsession. Two systems, head to head:
| System | Win rate | Avg win | Avg loss | Expectancy |
|---|---|---|---|---|
| High win rate, poor R:R | 70% | +0.5R | −1R | +0.05R |
| Low win rate, good R:R | 40% | +2R | −1R | +0.20R |
Run the maths. The 70% system: 0.70 × 0.5 − 0.30 × 1 = +0.05R per trade. The 40% system: 0.40 × 2 − 0.60 × 1 = +0.20R per trade — four times more profitable, while losing 60% of its trades. The "worse-looking" system, the one that's wrong more often than right, makes far more money. That's the entire reason we'll happily take a setup with a 40% hit rate as long as the reward dwarfs the risk.
The breakeven win rate
Flip the formula and you can ask: at a given reward-to-risk, what win rate just breaks even? The answer is 1 ÷ (1 + R:R):
| Reward : Risk | Breakeven win rate |
|---|---|
| 1 : 1 | 50.0% |
| 1.5 : 1 | 40.0% |
| 2 : 1 | 33.3% |
| 3 : 1 | 25.0% |
| 5 : 1 | 16.7% |
At 2:1, any win rate above 33% is profitable. At 3:1, you can be wrong three times out of four and still make money. This is why a system built on a few large, with-trend winners and many small, quickly-cut losers is so robust — it's profitable at win rates that feel like failure.
Everything in the formula points the same way: keep the average loss small (−1R, enforced by the stop) and let the average win be a multiple of it. The whole edifice of stops, targets, and the 1–2% rule exists to keep your losses at 1R and your winners larger. Expectancy is the maths that rewards exactly that behaviour.
Sample size: expectancy is a long-run average
The catch, and it's a big one: expectancy only expresses itself over a large sample. A +0.20R system is a coin weighted in your favour — but over 10 or 20 trades, variance dominates and you can easily lose, the same way a fair coin can land tails six times in a row. The positive expectancy is real; it just needs hundreds of trades to show up reliably.
First: don't judge a system on a handful of trades. A good system in a normal losing streak looks identical to a bad system — only sample size tells them apart. Second: don't abandon a positive-expectancy system during a drawdown. If the edge is real and the losing streak is within normal variance, quitting locks in the bad luck and forfeits the good. Knowing your expectancy is what lets you hold the line when it's hardest.
This is why scarcity beats frequency
Expectancy also settles the case for trading less. A system that fires rarely but only on high-reward, with-trend setups can have a far higher per-trade expectancy than one that trades constantly on marginal ones. Multiply a bigger edge by fewer trades and you often come out ahead — with less risk, less cost, and less stress. It's the mathematical backbone of why "no trade" is our most common signal.
Test the maths
The calculator below lets you set a win rate, average win, and average loss, and see the expectancy and the breakeven win rate. Push the win rate down and the reward up, and watch a "losing" system turn profitable.
This is Lesson 7-3 in long form
Stops, targets, and expectancy — with the calculator and a quiz gate at 70% — is free in the course. Series 1 is free to read; a free account unlocks all 44 lessons and saves your progress.