Quickly, add up all the trades you placed last month. Was your win ratio more than 75%? Were you only profitable 25% of the time? If 25% is your number, should you stop trading?
The short answer to all these questions is “Not only is win ratio the most misleading stat in finance, it means absolutely nothing.” You might as well measure the amount of times you traded while wearing your favorite t-shirt vs. those days you wore that old sweater your mom gave you. That ratio would likely mean more.
Disclaimer: This was not meant to be a disparaging remark about mom sweaters. We are pro moms and pro sweaters.
What is win ratio?
Win rate (also called win accuracy and winning percentage) is quite simply a measure of how often you win divided by the total number of trades placed. Place 10 trades where 9 of them were profitable and your win rate is 90%. (Yes, we have taken a significant step down from talking about gauge and chaos theory to single digit division).
“But if I win 9/10 times and always traded the same amount with the same risk, I made a huge profit.”
Yes, that’s true. But that’s not how the markets work and we would challenge anyone to find a scenario in which this occurred for periods longer than a month or two. Year to year and even day to day the markets display entirely unique environments (repeating patterns, but unique environments). A risk of 5 points one day is in no way similar to a risk of 5 points the next day.
The more likely scenario is one where you find yourself winning $1 and doing so 9 times… then taking a one-time loss of $20. This results in a net loss of -$11. Yes, your win rate is 90%. But you lost money.
What should I focus on instead of win ratio?
Remember what we said a few weeks ago?
“The average day trader’s life span is 3 weeks. In addition to that, only 1% of traders show a profit net of fees.”
Focusing on how often you win / total trades is a recipe for disaster and will lead you contributing towards that low live span. Rather, focus on how much you win when you win vs. how much you lose when you lose. This ratio allows you to take 2 steps forward and 1 step back, always gaining ground as you move forward.
Win rate, win accuracy, winning percentage… All of these “stats” are gimmicks used by services to attract customers. You know better than this. Don’t fall for it.
Side note: each of the services highlighted in the above images are all out of business.
If you don’t care about win ratio but you do care about results…
Learn more about fractalerts. Fill in the form on our home page and a member of our team would be happy to give you a call or engage via email. Follow our trades. Leave the math to us.
To simply learn more about our process, check out our “The Science” page.
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