Win Ratio In Trading – What It Is And Why It Is Important (High Win Rate Trading Strategies Explained)

The win ratio in trading is one of the most important parameters to evaluate a trading strategy. High win rate trading strategies are important to make you stick to your trading plan and not abandon it.

The win ratio is the winning trades divided by the losing trades. A high win ratio is important because it reduces behavioral mistakes and ruin. High win rate trading strategies matter a lot.

Many traders underestimate the importance of the win ratio and thus commit grave behavioral mistakes when they trade their strategies live. The win ratio is important because it influences your behavior in the markets and a low win ratio increases the risk of ruin in trading.

At the end of the article, we provide a mathematical calculation to show the optimal capital allocation per trade (or strategy) to allow a margin of safety to avoid ruin.

How to calculate the win rate in trading?

To avoid any doubt about what the win ratio (win rate) in trading is, we start with a definition:

The win ratio in trading is the number of winning trades compared to the total amount of trades. Here is an example:

Let’s assume you develop a strategy that has 556 trades over the last 20 years. 349 trades showed a profit, 5 trades were break-even, and 202 showed a loss.

To find the win ratio you need to divide the winners by the total amount of trades: 349 divided by 556. This is 0.628. To get the percentage, you need to multiply by 100, and thus 62.8% of the trades turned out to be winners.

Hence, the win ratio is 62.8%.

Profits vs. win ratio

The main idea behind trading is to maximize profits – not the win ratio. A strategy can have a very low win ratio but still be very profitable if the winners are huge and offset the losers.

As an example, look at the win ratio of the 200-day moving average on the S&P 500 from 1960 until August 2021: 28%!

72% of the trades turned out to be either flat or losers. The strategy is still very profitable because the 200-day moving average lets you ride the big trends, and thus the average winner is substantially bigger than the average loser.

Commissions and the win ratio in trading

If you pay commissions when you buy and sell an asset, you have to factor this into your win ratio. Commissions lower the win ratio.

A low win ratio increases the risk of many consecutive losers

A low win ratio means that you increase the risk of getting many consecutive losers. If you flip a coin with a 60% probability of getting head and only a 40% chance of getting coin, you’ll get longer losing streaks by betting on coin.

Let’s make an example by returning to the 200-day moving average in the S&P 500:

If you bought and sold the S&P 500 based on the 200-day moving average crossovers from 1960 until today, it shows a maximum of 9 consecutive losers. Granted, the losses are relatively modest, but it’s tough to take the tenth trade after nine losers in a row.

We guess that most traders stopped trading the system before they get to the tenth trade, which eventually turned out to be a great winner.

This shows the importance of the win ratio. You want a high win rate trading strategy, so you don’t stop trading the system.

Consecutive winners:

Most humans are constructed to feel better after a gain than a loss, even without considering the size of the gains. If you manage to make 100 000 a year ten years in a row, you would probably feel pretty good about yourself. But if you made 1 million in the first year and nothing in the next nine years, you would have nine miserable years, even though the end result is exactly the same.

Sequence matters. Thus, the win ratio influences your emotions and your well-being.

A low win ratio increases the chances of ruin

By now, most readers probably understand that a low win ratio and high bet size increase the risk of ruin. If you bet a large portion of your equity and risk many losers in a row, the risk of ruin increases substantially.

This isn’t good and something you need to avoid. A low win ratio implies a smaller betting size or the need for diversification.

A low win ratio increases behavioral risk

Even if you offset the risk of ruin by diversification, you might dilute a strategy by skipping trades after a series of “bad luck”.

Behavioral risk is the mistake of, for example, selling into a panic and reentering when it has risen 25% after the bottom.

A low win ratio increases the drawdown

A trading strategy with a low win ratio normally has a higher drawdown. We consider anything higher than 25% as high. We believe