Win rate alone misleads
Win rate is the share of trades, days or months that made money. A strategy can win 90% of the time and still lose, if the 10% of losses are large enough. Another can win only 35% of the time and do very well if the wins are big.
Payoff ratio and expectancy
- Payoff ratio = average winning trade / average losing trade.
- Expectancy = win rate x average win - (1 - win rate) x average loss.
| Strategy | Win rate | Avg win | Avg loss | Expectancy per trade |
|---|---|---|---|---|
| A | 90% | +1% | -10% | -0.1% |
| B | 35% | +8% | -2% | +1.5% |
Strategy A feels better day to day and loses money. Strategy B feels worse and makes money.
Profit factor
Profit factor = total gains / total losses. Above 1 means the strategy made money; above 1.5 over many trades is solid.
Using it
Always read win rate together with payoff ratio, Skewness of returns and Maximum drawdown. A very high win rate with rare large losses is the classic profile of strategies that "pick up pennies in front of a steamroller".
See also
- Skewness of returns What skewness means for investment returns, how positive and negative skew differ, and why negatively skewed strategies hide their risk.
- Tail ratio The tail ratio compares a strategy's best days with its worst days. How it is calculated from percentiles and what values above or below 1 tell you.
- How to read a backtest Which numbers in a backtest report to trust, which to question, a checklist for spotting unrealistic results, and how to compare a strategy with a benchmark.
Last updated September 30, 2026. Education only, not investment advice.