Ask a beginner what they want, and they will say: "I want a strategy that wins 90% of the time."
Ask a professional hedge fund manager, and they will say: "I want a strategy with Positive Expectancy."
There is a massive misconception in trading that Being Right = Making Money.
Mathematically, this is false. You can be right 90% of the time and still go broke. You can be wrong 60% of the time and become a millionaire.
In this guide, we will put aside the charts and focus on the Math that separates the gamblers from the casinos.
1. The Myth of Accuracy
Why do beginners lose money with high win-rate strategies?
Because to achieve a 90% win rate, you usually have to use a Negative Risk-Reward Ratio.
The Scalper's Trap:
- Take Profit: 5 Pips
- Stop Loss: 50 Pips
- Result: You win 9 trades in a row (+45 pips). You feel like a god.
- The Crash: You lose 1 trade (-50 pips). You are now net negative, despite being right 90% of the time.
2. The Magic of Risk-to-Reward (RR)
Risk-to-Reward is simply: How much do I risk to make how much?
- 1:1 RR: Risk $100 to make $100.
- 1:2 RR: Risk $100 to make $200.
- 1:3 RR: Risk $100 to make $300.
As your RR increases, the Win Rate required to be profitable drops dramatically.
3. The Expectancy Formula
This is the only formula that matters. It calculates the average amount you can expect to win (or lose) per trade over the long run.
Expectancy = (Win % x Average Win) – (Loss % x Average Loss)
Example A (The Bad Scalper):
- Win Rate: 80%
- Avg Win: $10
- Avg Loss: $50
- Calculation: (0.8 x 10) - (0.2 x 50) = 8 - 10 = -$2.00
- Verdict: Losing Strategy (Negative Expectancy).
Example B (The Smart Money Trader):
- Win Rate: 40%
- Avg Win: $300 (1:3 RR)
- Avg Loss: $100
- Calculation: (0.4 x 300) - (0.6 x 100) = 120 - 60 = +$60.00
- Verdict: Winning Strategy (Positive Expectancy).
You can afford to be "wrong" more often than you are "right", and still print money.
4. The Law of Large Numbers
A common mistake is judging a strategy based on 5 trades.
Mathematically, a 5-trade sample size is random noise.
If you have a 50% win rate strategy, it is statistically possible to lose 10 trades in a row. This is not "bad luck"; it is probability variance.
This is why Risk Management (risking only 1%) is mandatory. It ensures you survive the "losing streak" to reach the "winning streak".
5. Why 1:2 RR is the Sweet Spot
While 1:10 RR sounds amazing, it comes with a cost: Lower Win Rate.
If you aim for the moon on every trade, you will be stopped out frequently.
Recommendation for 2025:
- Aim for a standard 1:2 Risk-to-Reward.
- This allows you to be wrong 66% of the time and still break even.
- Any win rate above 34% is pure profit.
Final Thoughts
Trading is not about predicting the future. No one can do that.
Trading is about managing probabilities.
Stop looking for a crystal ball. Look for a Calculator.
Test your math with real data: How to Backtest Your Expectancy