Win rate and payoff
Why can a strategy that wins most of the time still end up losing money overall?
In plain words
Win rate is the share of trades that finish profitable. Payoff is the size of an average win compared with an average loss. What matters is the combination: win rate multiplied by average payoff, minus win rate's complement multiplied by the average loss.
Why it matters
A high win rate can hide a strategy that wins small and loses large, producing negative expected value. Risk is set by the losses, not by how often they occur, so a run of small wins can fund one unrecoverable loss.
In a real week: BTC, week of 19 November 2018
In the week of 19 November 2018, BTC fell 27.84%. Its best day gained 3.87% on 25 November, while its worst day lost 13.28% on 19 November, so the worst day's loss was more than three times the best day's gain. The week closed at 4085.78, 65.15% below the 52-week high. The two days were not the same size in opposite directions, which is the part win rate alone leaves out.
A common mistake
Judging a strategy by how often it wins. Payoff size decides whether those wins add up to more than the losses they eventually encounter.