Breaking Down Win Rate (Percentage) For Traders
A trader’s win rate (percentage) is determined by the number of winning trades out of all the trades they have placed.
If you win 50 out of 100 trades, then your win rate sits at 50%. If you win 80 of 100 trades, your win rate is 80%.
Looking at the above example, you can see that calculating your win % is extremely easy.
Win rate = Number of winning trades/ total number of trades placed.
Ideally, everyone would like their win % to be as high as possible. But there is a lot more to profitable trading than just this, which we will discuss later.
What is the win/ loss ratio
Don’t confuse this with the risk to reward ratio. Your win-loss ratio does not involve how much money was won or lost, only the ratio of your wins to losses. It is calculated as follows.
Win/ loss ratio = Number of wins/ number of losses
Out of 100 trades, if you win 50 and lose 50, your win/ loss ratio would be 1:1. Obviously, this means you have an equal amount of winning and losing trades.
Suppose you win 75 and lose 25 trades, that gives a ratio of 3:1. This means you win three times more often than you lose (for each losing trade you should have 3 winners).
Many traders prefer to keep this ratio in mind when trading because it allows them to track their current wins and losses vs the expectancy.
Relationship between win % and risk to reward
This may sound counterintuitive, but a high win rate does not equal profitability. Achieving a positive expectancy (edge) is a two-sided coin.
Win percentage is the one side, and the other is the size (value) of your winners vs the size of your losses (risk to reward). Let’s discuss some examples.
With a win rate of 50% and a risk to reward ratio of 1:2, you will have a positive expectancy (edge). It is logical since you lose the same number of trades as you win, but the value of your winners is twice that of your losers.
However, with the same win percentage and ratio of 1:0.5, you will have a negative expectancy and lose money in the long run. Reason being, you still have the same number of winning and losing trades, but the value of your winners is half that of your losers.
You have to find the sweet spot between win rate and risk to reward. An approach with a low win % requires a high risk to reward to be profitable when compared to a system with a high win %.
Speaking of approaches, let us look at the effect of strategies on win %.
Relationship between strategies and win %
All the factors of your strategy influence your win rate, for example:
1. Entry approach
2. Exit rules
Trade management also influences your win %. A trader who uses a stop loss to limit the size of their losses will usually have a lower win % (since they could be stopped out before the market moves in their direction) but a better risk to reward.
3. Method of analysis
How you analyse is also a big factor. Take technical analysis which allows a trader to time their entries, decreasing the chances of losing trade. Then think of fundamental analysis which usually takes longer to play out, increasing the likelihood of being wrong, but have a high reward when correct.
Larger timeframes have less noise, and thus a higher success rate vs smaller timeframes where even a small movement could lead to a loss, therefore shorter timeframes have a lower success rate.
Psychology behind win rate
Humans find it very difficult to deal with any form of loss. Resultingly, traders will often run towards the strategy with the highest win rate. As we discussed, the high win rate approach does not always make money.
However, you need to trade a win rate that you are comfortable with. Otherwise, you could be prone to psychological errors and breaking your trading rules.
What trading elements are calculated based on your win rate?
1. Risk per trade
For most traders, risking between 1% – 2,5% is ideal for profitability. Although, even this is a broad range.
If you have a lower win percentage, you should be trading near that 1% mark. If you have a high win percentage, you should be trading near the 2,5% mark.
2. Probability of each outcome
Each time you place a trade, the chance of the outcome being either a win or a loss is determined by your win %. When you open a position with a 60% win rate, there is a 60% chance that the trade will be a winner and a 40% chance what it will be a loser.
3. Risk of ruin
Your win rate determines the probability of having a string of losses. This probability and the average risk for each of those trades dictates your risk of ruin.
To understand this concept further, take a look at this table from the Risk Of Ruin In Trading article.
Risk of ruin probabilities
Conclusion – How vital is your win rate?
Yes, your win rate is an important aspect of trading, but it is not the be-all and end-all to becoming profitable. It is one ingredient, amongst many, to obtain an edge.
So don’t focus on trying to win, focus on extracting more value (profit) out of your trades.
“It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.” – George Soros