Profit factor, expectancy and win rate: is each trade worth taking?
Why a high win rate can still lose money, how to calculate profit factor and expectancy, and which numbers to trust in a trading report.
Win rate is the first number most people look at and the one that misleads them most often. A strategy that wins 9 trades out of 10 sounds wonderful, until the tenth trade wipes out the other nine. What matters is how the size of the wins compares to the size of the losses.
Average win $50, average loss $250
Expectancy -$10 per trade
Average win $200, average loss $100
Expectancy +$20 per trade
Expectancy: the value of one trade
Expectancy = (win rate × average win) - (loss rate × average loss). It tells you what an average trade is worth after costs. If it is positive and based on enough trades, the strategy has an edge. If it is close to zero, costs and bad luck will decide the result.
Profit factor: the quick health check
Profit factor = gross profit ÷ gross loss. A value of 1 means break even. Real, robust systems usually sit somewhere between 1.2 and 2. Numbers far above that, especially from a short test, deserve suspicion rather than celebration.
Read them together
- Breakout strategies often win less than half the time but let winners run further than losers. Their strength shows up in expectancy and profit factor, not in win rate.
- Strategies with very high win rates usually use wide or no stops. Check the largest single loss before you trust them.
- Always look at how many trades the numbers come from. 30 trades say very little; several hundred start to mean something.
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Read next: Maximum drawdown: the number that decides if you can stick with a strategy
Risk warning. Trading leveraged products such as CFDs carries a high risk of losing money. Backtest figures are simulations, not real results, and past performance does not guarantee future results. Read the risk disclosure before you connect an account. Nothing here is financial advice.