Profit factor and expectancy

Win rate answers the wrong question

Win rate is the share of trades that closed in profit. It is easy to understand, and it is the statistic most often used to sell a strategy. The problem is that it tells you how often a strategy wins, never how much.

A strategy can win nine trades out of ten and still lose money, if the tenth trade is large enough. To see whether a strategy actually has an edge, you need two more numbers.

Profit factor

Profit factor is the total profit of all winning trades divided by the total loss of all losing trades:

profit factor = gross profit ÷ gross loss

• Above 1 the strategy has made more than it has lost.
• Exactly 1 it has broken even before any fees.
• Below 1 it is losing money, whatever its win rate says.

A profit factor of 2 means every euro lost has been matched by two euros won. It is a measure of cushion: how much room the strategy has before a bad run turns the whole record negative.

Expectancy

Expectancy is the average result per trade, combining how often you win with how much you win and lose:

expectancy = (win rate × average win) − (loss rate × average loss)

It answers the question a trader actually cares about: if this strategy takes one more trade, what is it worth on average?

A 90% win rate that loses money

Take a strategy that wins 90% of its trades. Its average win is 10 euros and its average loss is 120 euros.

• Expectancy: 0.9 × 10 − 0.1 × 120 = 9 − 12 = −3 euros per trade.
• Profit factor: 9 ÷ 12 = 0.75.

It wins almost every time and loses money over any meaningful number of trades. Strategies like this are common, because they are easy to build: take profit quickly, let losses run, and the win rate looks spectacular right up to the losing trade that erases months of small gains.

A 30% win rate that compounds

Now take a strategy that wins only 30% of the time, with an average win of 300 euros and an average loss of 80 euros.

• Expectancy: 0.3 × 300 − 0.7 × 80 = 90 − 56 = +34 euros per trade.
• Profit factor: 90 ÷ 56 = 1.61.

It loses seven trades out of ten and makes steady money. It is also harder to live with, because long losing streaks are normal for it, which is why the previous lessons on monthly returns and drawdown matter just as much.

Which number to trust

None of them on its own. Read them as a set:

1. Win rate tells you how the strategy will feel day to day.
2. Average win against average loss tells you whether the wins are paying for the losses. If the average loss is many times the average win, the win rate is carrying a hidden risk.
3. Profit factor and expectancy tell you whether there is an edge at all.
4. Number of trades tells you whether any of the above means anything. A profit factor from 30 trades is a guess; from several hundred it starts to be evidence.

Myfxbook lists profit factor, average win and average loss in the Advanced Statistics section of every account page. Our strategy pages show win rate and profit factor side by side for the same reason: one without the other is half the picture.