New traders obsess over win rate. Experienced traders know win rate is only meaningful alongside several other numbers — a strategy can win 80% of the time and still lose money, or win 30% of the time and be highly profitable. This article covers the metrics that actually matter.
Win Rate
Win Rate = Winning Trades / Total TradesWin rate tells you how often you're right, not how much money you make. A high win rate with tiny wins and occasional huge losses (common in strategies without stops) can still be a net loser.
Expectancy
Expectancy (R) = (Win% × Avg Win R) − (Loss% × Avg Loss R)Expectancy is the average result per trade in units of risk (R). It's the single number that combines win rate and reward-to-risk into one honest measure of edge.
Profit Factor
Profit Factor = Gross Profit / Gross LossA profit factor of 1.0 means you break even before costs. Above 1.5 is generally considered solid; above 2.0 is excellent for most retail strategies. Below 1.0 means the strategy loses money regardless of win rate.
| Profit Factor | Interpretation |
|---|---|
| < 1.0 | Losing strategy |
| 1.0 - 1.3 | Marginal, sensitive to costs and variance |
| 1.3 - 1.8 | Solid, tradeable edge |
| 1.8 - 2.5 | Strong edge |
| >2.5 | Excellent, but verify sample size and check for overfitting |
Maximum Drawdown
Max drawdown measures the worst peak-to-trough decline in equity. It's often more psychologically important than average returns — a strategy that returns 30% a year but with a 50% max drawdown will be nearly impossible for most traders to hold through emotionally.
A 50% drawdown requires a 100% gain just to break even. This asymmetry is why controlling drawdown matters as much as, or more than, maximizing returns.
Recovery needed = Drawdown / (1 − Drawdown)The Sharpe Ratio
Sharpe = (Average Return − Risk-Free Rate) / Standard Deviation of ReturnsThe Sharpe ratio measures return per unit of volatility (risk). A strategy that makes steady, consistent gains has a higher Sharpe than one that makes the same total return through wild, erratic swings, because the swings themselves are treated as risk.
| Sharpe Ratio | Interpretation |
|---|---|
| < 0 | Losing money on average |
| 0 - 1 | Weak risk-adjusted return |
| 1 - 2 | Good |
| 2 - 3 | Very good |
| > 3 | Excellent — rare and worth double-checking for errors |
Reading Metrics Together
No single metric tells the full story. A strategy should be evaluated as a package: positive expectancy, profit factor above 1.3, a drawdown you can psychologically tolerate, and a large enough sample size for all of these numbers to mean something.
| Metric | Healthy target (guideline) |
|---|---|
| Expectancy | Positive and consistent across samples |
| Profit Factor | > 1.3 |
| Max Drawdown | Within what you can tolerate without abandoning the plan |
| Sample size | 100+ trades minimum |