Did you know there are many traders out there who make a consistent income by winning only 35% of the time?
It might seem contrary to what we normally read, where you need a high win rate to succeed.
However, there is one formula you can apply to your trading system today.
Once you incorporate it, you’ll see how you can succeed with just about any win rate.
The Minimum Win Rate Formula
This formula will identify the minimum win rate you’ll need to keep your portfolio in the green.
A win rate is simply a percentage of the sum of your winning trades divided by the no. of trades you’ve taken.
The beauty about this formula is you’ll need nothing more than your risk to reward ratio to calculate the minimum win rate you’ll need.
The formula is as follows.
The Minimum Win/rate Formula
1 ÷ (1 + R:R)
If you choose a Risk to Reward of 1:1, you’ll risk R1 for every R1 you gain.
Your stop loss and entry level will be at the same distance between your take profit and your entry level.
So let’s plug the Risk:Reward of 1 into the Minimum Win rate formula.
Minimum Win rate = 1 ÷ (1+ R:R)
= 1 ÷ (1+ 1)
= 50%
This means, with a R:R of 1, you’ll need at least a 50% win/rate to keep your portfolio at break even.
Please note: These calculations have excluded trading costs for simplicity purposes.
The Expectancy curve of the Minimum Win Rate formula
Clearly, you can see that as the Risk to Reward rises, the necessary win rate drops.
Your goal is to stay above the expectancy break-even line (red line).
Anything above the expectancy line is profit territory.
Anything below the expectancy line is loss territory.
Let’s try another example with the same trading strategy but, this time you’ll use the risk to reward of 1:2.5
The distance between your take profit and your entry will be two and a half times more than the distance between your entry and your stop loss.
This means you’ll make R2.50 for every R1 you’ll risk.
Let’s plug the new Risk to Reward in the formula
Minimum Win rate = 1 ÷ (1+ R:R)
= 1 ÷ (1+ 2.5)
= 30%
You’ll need to maintain at least a 30% win rate to keep your portfolio at break even.
I know it’s not worth trading if you’re just going to maintain at breakeven, but you’ll need to remember something.
The markets will endure unfavourable environments where your win rate will drop for a temporary period.
Even if your win rate dropped to 40%, you’ll feel somewhat at ease knowing you’ll continue to make profits throughout the turbulent times.
Once the trading environment goes back into a trending market and chooses a direction, your win rate will pick up and so will your portfolio.
“Wisdom yields Wealth”
Timon Rossolimos
Analyst, BlackStone Futures
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