“This strategy wins eight trades out of ten.” It sounds reassuring. But that statement does not tell you how much the winning trades make—or how much the losing trades give back.
To understand a trading result, you need both the frequency and the size of its outcomes.
A simple comparison
The following figures are invented teaching examples, not backtest results or forecasts. Each strategy makes 100 trades with fixed dollar outcomes. There is no compounding. Trading costs are excluded initially.
| Measure | Strategy A | Strategy B |
|---|---|---|
| Winning trades | 80 | 40 |
| Losing trades | 20 | 60 |
| Win rate | 80% | 40% |
| Gain per winner | $100 | $300 |
| Loss per loser | $500 | $100 |
| Total gains | $8,000 | $12,000 |
| Total losses | $10,000 | $6,000 |
| Net result before costs | −$2,000 | +$6,000 |
Strategy A wins more frequently, yet loses money overall. Strategy B loses more frequently, yet makes money in this example. This does not prove that B is a better real-world strategy: the example says nothing about required capital, drawdown, trade sequence or whether these outcomes are achievable.
Calculate the average outcome
A useful measure is expectancy: the average profit or loss per trade implied by the outcomes.
Expectancy = (win rate × average win) − (loss rate × average loss).
Use a positive number for the average loss magnitude. For A: (0.80 × $100) − (0.20 × $500) = −$20 per trade. For B: (0.40 × $300) − (0.60 × $100) = +$60 per trade.
Include the cost of trading
If each completed trade costs $5 in total, A’s 100-trade result becomes −$2,500 and B’s becomes +$5,500. The corresponding average outcomes are −$25 and +$55. Actual costs vary with the instrument, broker, spread, liquidity and execution.
Find the break-even win rate
Before costs, and assuming only wins and losses, the break-even win rate is:
Average loss ÷ (average win + average loss).
With a $100 average win and a $500 average loss, this is 500 ÷ 600, or about 83.33%. Winning 80% of the time is below that threshold. Costs raise it further.
Ask what the average hides
A handful of unusually large losses can change the conclusion. A short test may miss them. Even a positive historical expectancy does not tell you whether you can withstand the losing streaks, finance the positions or obtain the assumed fills.
Before trusting a win-rate claim, ask for the full trade count, average and largest losses, costs, drawdowns and test period. Then ask whether the rules were fixed before the results were observed.
The useful question is not simply “How often does it win?” It is “What is the complete distribution of wins and losses, after costs?”
Educational example only. No actual strategy performance is represented.
