Exit Rules: Trading Win Rate Against Payoff

Same entry, different endings

Besides "when to buy," a trading plan must spell out "when to get out": a fixed take-profit, a trailing stop, a time stop… With exactly the same entry, a different exit can produce a very different report card.

Win rate and payoff ratio trade off

A close take-profit target is easy to reach, so the win rate is high, but each win is a small bite; a far target gives a high payoff ratio, but you get stopped out halfway more often.

Finally, check expectancy

Measuring each result with the stop distance as 1R, expectancy = win rate × average win − loss rate × average loss. A 70% win rate can still lose money, and a 35% win rate can still make money.

Key takeaways

• A trading plan must spell out the exit: where the initial stop is, and whether you exit with a fixed take-profit, a trailing stop or a time stop.
• The closer the take-profit target, the higher the win rate and the lower the payoff ratio; the further the target, the lower the win rate and the higher the payoff ratio.
• What decides long-run results is expectancy (win rate × average win − loss rate × average loss), not the win rate itself.
• A trailing stop lets winners run further, but you have to accept a lower win rate and longer losing streaks.

Try it yourself

You can do these exercises in this lesson's interactive simulation:

1. In "Fixed take-profit," drag the target from +0.5R to +4R: how do the win rate and payoff ratio change? Compare with the "Parameter scan" table below.
2. The win rate is highest with a +0.5R target. What's the expectancy? Compare with +2R: which makes more per trade on average?
3. Switch to "Trailing stop" and compare 1 × ATR with 4 × ATR: which has the higher win rate? Which has the higher expectancy?
4. Choose "Stock A" and move the cursor into a trade's holding period: read off its entry price, initial stop, and why it finally exited.

Quiz and explanations

1. If you move the take-profit target from +1R to +3R with everything else unchanged, what's most likely to happen?

Answer: Win rate falls, payoff ratio rises.A further target is harder to reach, so the win rate falls; but each win makes more.

2. Strategy X has a 70% win rate, an average win of 0.4R and an average loss of 1R. Roughly what's its expectancy?

Answer: −0.02R.0.7 × 0.4 − 0.3 × 1 = 0.28 − 0.30 = −0.02R: a very high win rate, yet a slight loss over time.

3. What's characteristic of a trailing stop?

Answer: It moves up as price rises and never moves down.It only moves in your favor, locking in part of the profit.

Terms in this lesson

• ATR (Average True Range): Average true range: the average size of each candle's move, regardless of direction.
• expectancy (Expectancy): What you make per trade on average over the long run: win rate × average win − loss rate × average loss; only worth trading if positive.
• payoff ratio (Payoff Ratio): Average win ÷ average loss; win rate and payoff ratio often trade off, so you need both to know whether a strategy makes money.
• R-multiple (R-Multiple): Measuring results in units of planned risk: the amount you'd lose at your stop is 1R, so making twice that is +2R.
• take-profit (Take Profit): Automatically closes a position when price reaches your preset target, locking in the profit.
• time stop (Time Stop): Exiting a position that hasn't done what you expected after a set time, so your money doesn't sit stuck in a trade going nowhere.
• trading plan (Trading Plan): Rules written before you trade: when to enter, where the stop-loss goes, how to take profit or exit, and how much to risk per trade.
• trailing stop (Trailing Stop): A stop that keeps moving up as price rises but never moves down, letting winners run further and exiting only after a set pullback.
• win rate (Win Rate): The share of all trades that made money.