Forex Trading WinRate is Actually Not the Most Important Thing

Winrate is not important for a system. The most important thing for a trading system is the reward/risk. It also means what is the average size of the win and what is the average size of the loss. If your average win is bigger than your average loss you will be profitable with even a winrate of 30% and even 20%. Let me explain it in detail below.

Let’s suppose we have a forex algorithm that wins 51% of the time.

  1. Suppose the algorithm uses a stop loss of 10 pips and the take profit of 20 pips. In a series of 100 trades, we should win 51 trades and lose 49 trades. With a take profit of 20 pips, in 100 trades the algorithm should be able to make 1020 pips and it should lose 490 pips. So on net you have 530 pips profit with this algorithm.
  2. Now suppose the algorithm has a stop loss of 20 pips and a take profit of 20 pips. In this case, in a series of 100 trades the algorithm will win 51 trades and lose 49 trades on average. So it will make 510 pips and lose 490 pips giving net profit 20 pips.
  3. Let’s suppose the algorithm uses a stop loss of 20 pips and a take profit of 100 pips and the winrate on average is 51%. In this case, in a series of 100 trades, the algorithm will make 5100 pips and lose 980 pips producing net 4120 pips.
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We cannot depend solely on the winrate

As you must have seen by now, we cannot depend solely on the winrate. What is more important is the average size of the win and the average size of the loss. If the average size of the win is equal or more than the average size of the loss we only need a winrate of 50% to breakeven.

In the first example, average size of the win was 20 pips and the average size of the loss was 10 pips. So the size of the win was double the size of the loss and we made good pips.

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In the second example average win was equal to average loss and we were breakeven. In the third example we increased the average win to 5 times the average loss and we made many pips.

We also call this REWARD/RISK Ratio.

As long as the algorithm has a Reward/Risk ratio greater than 1, you only need to win 50% of the time.

So if our algorithm can make 200 pips with a stop loss of 20 pips, you only need to have a winrate of 30% to make profit. In 10 trades, you win 3 trades and make 600 pips and lose 7 trades (140 pips). So you make net 460 pips.

You cannot avoid losing in forex.



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