Strategy A wins 70% of the time (+1R on wins, -2R on losses); Strategy B wins 40% of the time (+3R on wins, -1R on losses). Which has the higher expectancy?

Question

Accepted Answer

Strategy B — despite the lower win rate, its risk-reward ratio gives it roughly 6x the expectancy of Strategy A - Expectancy = (win rate × average win) − (loss rate × average loss). Strategy A: (0.7×1) − (0.3×2) = 0.1. Strategy B: (0.4×3) − (0.6×1) = 0.6. Even though A wins far more often (70% vs. 40%), B's better risk-reward ratio gives it 6x the expectancy. This is the core idea behind risk-reward: a strategy that's wrong 6 out of 10 times can still be profitable long-term if the reward-to-risk ratio is good enough — which is exactly why many trend-following and breakout traders stay profitable at fairly low win rates.