The biggest but most meaningless metric you will see on YouTube is “win rate”. How this trading system has a 40% win rate, so it must be bad, while the other algorithmic trading system has a 90% win rate, so it must be good. Win rate, does not tell you whether the system will make or lose money. Win rate is a simple metric, where if you take 10 trades, and 5 result in profit, you have a 50% win rate.
Let’s look at an example of a system with a 99% win rate that loses money. A common system to produce this result would be one where the profit target is set very close, and the stop loss very far. Let’s say we have a $10 Profit Target, and a $1500 dollar stop loss.
Trade 1 – $10 WIN
Trade 2 – $10 WIN
Trade 2 – $10 WIN
Trade 99 – $10 WIN
Trade 100 – $1500 LOSS
WIN RATE 99%
NET P/L ($510) LOSS
The metric you should be concerned about is Expectancy. Expectancy is the expected return per trade. Only systems with a POSITIVE EXPECTANCY should be traded. A system with a negative expectancy simply means you will lose money or have an expected negative return per trade.
Let’s calculate the expectancy of this system
Expectancy Formula = (Win% X Avg Win) – (Loss% x Avg Loss)
(.99 x 10) – (.01 x 1500)
(9.9) – (15)
Expectancy = -5.1
The expectancy of the above system is NEGATIVE 5.1 and should not be traded.
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