Expectancy, win rate and profit factor, explained

Four statistics do most of the work in describing a set of trades. Each answers a different question, and each can mislead on its own.

Win rate

Win rate is the share of closed trades that made money. It answers “how often am I right?” — and nothing about how much. A strategy can win nine times in ten and still lose overall if the tenth trade is large enough.

Payoff ratio

Payoff ratio is the average winning trade divided by the average losing trade. It answers “when I am right, how much do I make compared with what I lose when I am wrong?” A payoff ratio below 1 needs a high win rate to be profitable; a high payoff ratio can survive a low one.

Profit factor

Profit factor is gross profit divided by gross loss. Above 1, the winners outweighed the losers over the period; below 1, they did not. It folds win rate and payoff ratio into a single number, but it hides how many trades produced it.

Expectancy

Expectancy is the average result per trade: win rate multiplied by the average win, minus loss rate multiplied by the average loss. It answers the question traders usually care about most — “what has a typical trade been worth?” Expressed in R (units of planned risk), it lets you compare trades of different sizes and instruments.

Read them together

• A high win rate with a low payoff ratio is common, and fragile: one large loss can erase many small wins.
• A low win rate with a high payoff ratio is also common, and emotionally hard: long losing streaks are normal.
• Expectancy tells you which of the two is working for you. Profit factor confirms it.

Always check the sample size

All four numbers are estimates from the trades you happened to take. With twenty trades they can move a long way on the next five. TradeDrift reports win rate and expectancy with an interval and a sufficiency grade for exactly this reason.