Your Win Rate Is Lying to You: Profit Factor and Expectancy
A 70% win rate can still lose money, and a 40% win rate can be a goldmine. Two numbers tell you more about your edge than win rate ever will.
Win rate is the first number most traders brag about and the most misleading one to chase. You can win 70% of your trades and still bleed money, or win just 40% and compound steadily. Win rate only counts how often you're right — it says nothing about how much you make when right versus how much you lose when wrong. Two other numbers fill that gap.
Why win rate seduces and misleads
A high win rate feels like skill, and it's emotionally easy — lots of small wins, rare losses. But if those rare losses are large, they quietly erase a long run of small wins. Strategies built to win often tend to cut winners early and let losers run, which is exactly backwards. The comfortable number can hide an uncomfortable math problem.
Profit factor: the ratio that matters
Profit factor is total profit divided by total loss across all your trades. Above 1.0 means the wins outweigh the losses; below 1.0 means they don't, regardless of how often you win. It rolls frequency and size into a single honest figure — a strategy that wins rarely but large can post a strong profit factor, and a strategy that wins constantly but small can post a weak one.
Expectancy: what one average trade is worth
Expectancy answers a more useful question: on average, how much does each trade make or lose? In words, it's your average win times your win rate, minus your average loss times your loss rate. A positive expectancy means the strategy makes money over enough trades; a negative one means more trading just loses faster.
Win 40% of the time, but make $300 on winners and lose $100 on losers: (0.40 × $300) − (0.60 × $100) = $60 expected per trade. A losing record, a winning system.
Flip it: win 70% of the time, but make $50 on winners and lose $200 on losers, and expectancy is (0.70 × $50) − (0.30 × $200) = −$25 per trade. A great-looking record, a losing system. Same lesson from both directions — frequency without size is only half the picture.
What to actually track
Keep watching your win rate — it's still useful context — but judge a strategy by profit factor and expectancy. They need a reasonable sample to mean anything, so let them settle over dozens of trades rather than reacting to the last few. Once you're measuring the right numbers, you stop optimizing for being right and start optimizing for making money, which are not the same thing.