When it comes to trading, many people fixate on their winning percentage as a measure of their success.
However, it’s important to understand that a high winning percentage doesn’t necessarily mean you are making money, and a low winning percentage doesn’t necessarily mean you are losing money.
Expected Value > Winning Percentage
Expected value is a more accurate measure of your trading success.
Expected value is the average amount of money you expect to make (or lose) per trade, taking into account the probability of different outcomes.
For example, let’s say you make 10 trades and win 6 of them, with an average profit of $100 per winning trade and an average loss of $50 per losing trade. Your winning percentage is 60%, but your expected value per trade is:
(0.6 * $100) – (0.4 * $50) = $60 – $20 = +$40
So, your expected value per trade is $40, which means that over the long run, you can expect to make $40 per trade on average.
When Trading Underlying Securities
When trading only underlying securities, a winning percentage of 55-60% is generally considered very good.
However, this depends on the size of your wins and losses.
If your wins are much larger than your losses, on average, you may be profitable with a lower winning percentage.
Conversely, if your losses are larger than your wins, you may need a higher winning percentage to be profitable.
Overall, it’s important to focus on expected value rather than winning percentage.
This means making sure your average wins are larger than your average losses and that you are consistently making profitable trades over the long run.
This video talks about how a high winning percentage isn’t necessary if you have good risk/reward with your trades:
The Truth About Win Rates In Trading
What Percent of Your Months Should You Have Winning Periods?
We looked at a balanced portfolio allocation for this exercise.
Portfolio Allocation
| Asset Class | Allocation |
|---|---|
| US Stock Market | 30.00% |
| TIPS | 30.00% |
| Commodities | 5.00% |
| Gold | 15.00% |
| 10-year Treasury | 20.00% |
Portfolio Summary Statistics
| Portfolio | Initial Balance | Final Balance | CAGR | Stdev | Best Year | Worst Year | Max. Drawdown | Sharpe Ratio | Sortino Ratio | Market Correlation |
|---|---|---|---|---|---|---|---|---|---|---|
| Portfolio 1 | $10,000 | $24,769 | 5.80% | 7.59% | 16.68% | -11.44% | -17.70% | 0.66 | 0.98 | 0.76 |
You can see in the table below that we were ahead in about 60% of our months.
Portfolio Metrics
| Metric | Portfolio |
|---|---|
| Arithmetic Mean (monthly) | 0.50% |
| Arithmetic Mean (annualized) | 6.11% |
| Geometric Mean (monthly) | 0.47% |
| Geometric Mean (annualized) | 5.80% |
| Standard Deviation (monthly) | 2.19% |
| Standard Deviation (annualized) | 7.59% |
| Downside Deviation (monthly) | 1.46% |
| Maximum Drawdown | -17.70% |
| Stock Market Correlation | 0.76 |
| Beta(*) | 0.35 |
| Alpha (annualized) | 2.49% |
| R2 | 58.25% |
| Sharpe Ratio | 0.66 |
| Sortino Ratio | 0.98 |
| Treynor Ratio (%) | 14.37 |
| Calmar Ratio | 0.30 |
| Active Return | -3.00% |
| Tracking Error | 11.76% |
| Information Ratio | -0.26 |
| Skewness | -1.05 |
| Excess Kurtosis | 4.50 |
| Historical Value-at-Risk (5%) | -3.08% |
| Analytical Value-at-Risk (5%) | -3.11% |
| Conditional Value-at-Risk (5%) | -4.93% |
| Upside Capture Ratio (%) | 36.19 |
| Downside Capture Ratio (%) | 28.42 |
| Safe Withdrawal Rate | 8.62% |
| Perpetual Withdrawal Rate | 3.16% |
| Positive Periods | 116 out of 193 (60.10%) |
| Gain/Loss Ratio | 1.21 |