Looking at just Win Rate and Risk Reward Ratio is a common mistake retail traders make when evaluating trading performance.
Retail traders often overlooked the more important criteria called Expectancy. Please allow me to explain…
In the WhaleTrades’ Performance table below, you’ll see it has a Positive Expectancy of 64% after 337 closed trades. This is statistically significant.
If you have a 64% Positive Expectancy from your trading results, means statistically you can expect to get a $0.64 profit for every $1 traded over the long term.
It is critically important you have a positive expectancy in your trading results in order to achieve consistent profits as you continue your trading journey.
Successful professional traders watch their Expectancy like a hawk to evaluate performance. Shouldn’t you do it too?
Performance Table from WhaleTrades.com
The problem with Win Rate
Is a 80% winning rate good? At first look, it is awesome. However, there is a need to look further into how much would you lose for that 20% losing rate. If every winner is a $0.10 and every loser is a $0.90, you will still end up as a loser. We need to consider Risk Reward Ratio.
The problem with Risk Reward Ratio
If reward is higher than risk, will it definitely end up as a winner? Looks like it but not necessarily. We need to consider Win Rate.
Standalone Calculation Is Skewed and Not Meaningful
Having a win rate by itself is not enough in your overall portfolio performance evaluation. Having a risk reward ratio by itself is also not meaningful to paint the whole picture.
How are these results being measured? What is a good way to measure them?
There is a need to combine both win rate as well as risk-reward ratio to give a fuller and more meaningful picture. Combination of this 2 components provides us with a measured result known as “Expectancy“.
Most retail traders may have missed out on tracking and evaluating the Expectancy of their trading results. Let me share with you how it is calculated…