Ask most people what makes a good signal and they say 'a high win rate'. It is only half the story. What matters is how often you win and how much you make compared with what you lose.
The Math in One Table
| Win rate | Avg win | Avg loss | Result per trade |
|---|---|---|---|
| 70% | +0.3R | -1R | (0.7 x 0.3) - (0.3 x 1) = -0.09R (loses) |
| 50% | +1R | -1R | 0R (breaks even) |
| 40% | +1.5R | -1R | (0.4 x 1.5) - (0.6 x 1) = 0R (breaks even) |
| 60% | +1.5R | -1R | (0.6 x 1.5) - (0.4 x 1) = +0.5R (profits) |
| 30% | +4R | -1R | (0.3 x 4) - (0.7 x 1) = +0.5R (profits) |
A 70% win rate can lose money. A 30% win rate can make it. The payoff size decides.
The Break-Even Win Rate
Break-even win rate is 1 divided by (1 plus your average win in R). With 1.5R wins that is 1 / 2.5 = 40%. With 1R wins it is 50%. With 3R wins it is 25%.
How to Judge a Signal Service With This
- →Ask for the win rate and the average R of wins and losses, not the win rate alone.
- →Check the sample size. A 60% win rate over 20 trades means little.
- →Check the period and whether it is live or backtested.
Bigger targets, lower hit rate
A far target such as 7.5R pays a lot when it is hit but is hit less often. Look at how the results split between first and second targets.
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Try The Secret Vault FreeWhat is expectancy?
The average R you make per trade: (win rate x average win) minus (loss rate x average loss).