How seven winning trades can produce a loss
Imagine you place ten trades. Seven finish with a profit of $20 each, producing a total gain of $140. The remaining three lose $60 each, taking $180 from your account. Your win rate is 70%, but your balance is $40 lower, even before trading costs. To understand why, consider the relationship between your average profit and average loss. If you typically make $20 when you win and lose $60 when you are wrong, you need a win rate of at least 75% just to break even before costs. Now reverse the relationship. Four profitable trades earning $60 each and six losing trades costing $20 each would leave you with a $120 profit, despite a win rate of only 40%. These hypothetical examples show how two strategies with very different success rates can produce the opposite financial results.
Why traders often take small profits and larger losses
One explanation lies in how differently traders react to winning and losing positions. When a trade moves into profit, closing it can feel like the safest decision. A losing position often produces the opposite reaction. Instead of accepting the loss, the trader may wait for the price to return to the entry level, allowing the loss to grow. This behaviour resembles the disposition effect documented by economist Terrance Odean in a 1998 study of 10,000 brokerage accounts. His research found that stock investors were more willing to realise gains than losses. Although the study focused on investors, the underlying behavioural tendency can also be relevant when reviewing trading decisions. Repeatedly closing profitable positions early while allowing unsuccessful trades to exceed their planned risk can create a high win rate alongside a deteriorating account balance.
How to measure whether your strategy is actually profitable
A useful measure is trading expectancy, which estimates the average profit or loss per trade based on the win rate and the average size of winning and losing positions. The calculation multiplies the probability of winning by the average profit, then subtracts the probability of losing multiplied by the average loss. Using our earlier example, 70% multiplied by $20 produces $14, while 30% multiplied by $60 produces $18. The expectancy is therefore negative $4 per trade, before costs. Commissions, spreads and slippage can reduce the result further. These figures describe a mathematical expectation based on the assumed averages, so a sample of just ten trades is insufficient to establish how a strategy will perform over time. Keeping a trading journal with realised profits, losses and transaction costs can help identify whether a strategy has a sustainable statistical advantage.
Conclusion
A high win rate can create confidence, particularly after several successful trades in a row. However, the account balance ultimately reflects the money gained and lost, regardless of how often a trader was right. Tracking average profits, average losses and trading costs provides a more complete picture of performance. It also helps identify whether occasional large losses are erasing the progress made through smaller profitable trades. Before judging a strategy by its success rate, examine what each successful and unsuccessful trade actually contributes to the account.
This marketing material is provided for informational purposes only and does not constitute investment advice, a recommendation, or an offer or solicitation to buy or sell any financial instruments.
Trading in securities involves significant risk and may not be suitable for all investors. Prices of securities may fluctuate significantly and may result in a total loss of your investment. Investors should be aware that losses may exceed potential profits when buying and selling securities. In certain market conditions, you may sustain losses that exceed your initial investment. Securities and contracts for differences are complex financial instruments that require a high level of knowledge and understanding. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.
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