90% Winning Rate Is Useless. Here's Why...

Key Concepts

• Winning Rate: The percentage of trades that result in a profit.
• Risk-to-Reward Ratio (R:R): The ratio of potential profit to potential loss on a trade.
• Expected Value: The average outcome of a series of trades, considering both wins and losses and their probabilities.

The Paradox of a High Winning Rate

The video highlights a critical paradox in trading: a high winning rate (e.g., 90%) does not guarantee profitability. This is because the magnitude of losses can significantly outweigh the gains from winning trades, even with a seemingly successful win percentage.

Example Scenario:

• Winning Rate: 90%
• Average Win: +$100
• Average Loss: -$2,000

In this scenario, even winning 9 out of 10 trades, the single losing trade can wipe out the profits from multiple winning trades. The calculation for expected value demonstrates this:

• Expected Value per trade = (Winning Rate * Average Win) - (Losing Rate * Average Loss)
• Expected Value per trade = (0.90 * $100) - (0.10 * $2,000)
• Expected Value per trade = $90 - $200
• Expected Value per trade = -$110

This calculation shows that, on average, each trade results in a loss of $110, leading to consistent losses in the long run despite a high winning rate.

The Solution: Combining Winning Rate and Risk-to-Reward Ratio

The core argument presented is that focusing solely on either the winning rate or the risk-to-reward ratio is insufficient for determining long-term trading profitability. The true determinant lies in the combination of these two metrics.

Key Takeaway: Traders must consider both how often they win and how much they win or lose on each trade.

Conclusion

The video emphasizes that a successful trading strategy is not defined by a high winning percentage alone. Instead, it requires a balanced approach that integrates the probability of winning (winning rate) with the potential profit relative to the potential loss (risk-to-reward ratio). Only by analyzing these two factors in conjunction can a trader accurately assess the long-term viability and profitability of their trading system.