R, expectancy and breakeven win rate: three numbers that say whether your edge is real

Why win rate on its own misleads

Win rate is the number traders quote first, and it is the one that says least. A trader who takes small profits and holds losers can win seven trades in ten and finish the month down. A trend trader who is stopped out six times in ten and lets the other four run can finish well up. The missing piece is the size of the wins against the size of the losses, and the cleanest way to see it is to measure every trade in units of what it risked.

R-multiple: the result in units of risk

R is the amount you were prepared to lose on the trade: the distance from entry to stop, times the position size. A trade's R-multiple is its result divided by that amount. Make 2.5 times what you risked and the trade is +2.5R; take the full planned loss and it is -1R; a loss beyond the stop, because of a gap or a late exit, is worse than -1R, and that is worth seeing.

From prices: buy at 100 with a stop at 98, so the risk is 2 per share, and sell at 105 for a 5 per share gain. R = 5 / 2 = 2.5. From amounts: risk $100 on the trade and make $250, and R = 250 / 100 = 2.5 again. Fees are left out of R from prices, so a thin winner can round down once they are in.

The reason to keep R rather than dollars is that it makes trades comparable. A $400 win on a trade that risked $100 and a $400 win on a trade that risked $800 are not the same trade; one is +4R and the other +0.5R.

Expectancy: the average result per trade

Expectancy is what a trade is worth on average, before you know which one it will be. It is the win rate times the average win, minus the loss rate times the average loss, with every trade counted as a win or a loss, so the loss rate is one minus the win rate.

A worked example: a 45 percent win rate, an average win of $300 and an average loss of $200. Expectancy = (0.45 x 300) - (0.55 x 200) = 135 - 110 = $25 per trade. Positive, which means that over enough trades the account grows; small, which means a modest rise in fees or a drop in the average win turns it negative. Run the same sums in R and the result reads as a fraction of a unit of risk, which is the version that survives a change in account size.

Breakeven win rate: the line you have to clear

Given an average win and an average loss, there is a win rate at which they cancel out: the average loss divided by the sum of the average win and the average loss. With the figures above, 200 / (300 + 200) = 40 percent. A trader with that win-loss shape and a 45 percent win rate is five points above the line, which is the whole edge.

The useful part is the shape of the table, not any single row. Win and lose the same amount and you need better than 50 percent. Win one and a half times what you lose and the line drops to 40 percent. Win twice what you lose and it drops to a third; three times, to a quarter. Every strategy lives somewhere on that curve, and the two questions to ask of it are where the line is and how far above it the real win rate sits.

What the three numbers cannot tell you

They are averages, and averages hide things. Twenty trades is not a sample; a single +6R in it moves the expectancy more than the other nineteen. A strategy with a positive expectancy can run twelve losers in a row with no change in its odds, which is why the position size has to survive the run, not the average. And the figures describe the trades you have taken, in the conditions you took them; a change of market, instrument or session resets the count.

Fees belong in the arithmetic, which is why the net and gross versions of each figure should both be visible. The gap between them is the cost of trading more.

Getting the numbers from your own trades

The calculators linked below take the figures you type and show every step, so you can check the arithmetic by hand. For the figures themselves, your record has to carry a stop for every trade, or R cannot be computed; that is the one habit the whole method depends on.

In Leaf Edge, a trade's page shows its R from the stop you planned, the dashboard carries an expectancy tile and the win rate beside it, and Reports gives the average win and average loss for any period and any breakdown, net or gross of fees. Put the averages into the breakeven calculator and you have your line; compare it with the win rate for the same trades and you have the honest answer to whether the edge is real.