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Lesson 2: Probability in Trading 
Trading is not about predicting the market with 100% certainty - it's about making calculated decisions based on probabilities. Professional traders don't focus on individual trades; they think in terms of probabilities over a large number of trades.
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10 min read

For any trading strategy to be profitable in the long run, it must have a positive statistical edge. This means that even though some trades will lose, the overall strategy should generate more profits than losses over time. Here are metrics traders must consider to calculate the probability: 

1. Win Rate (%): How often do you win?

The win rate is the percentage of trades that end in profit. It is calculated as:


Win Rate = (Number of Winning / TradesTotal Trades) x 100


Example Calculation:

  • A trader places 100 trades
  • 55 trades are winners
  • 45 trades are losers
  • Win rate = (55/100)×100=55%


A win rate alone does not determine profitability. A trader with a 40% win rate can still be profitable if they use a high risk-reward ratio, while a trader with a 70% win rate can lose money if their losses are larger than their profits.

2. Risk and Reward Ratio: Balancing Profitability and Risk

The risk-reward ratio compares the potential profit to the potential loss on a trade. It is calculated as:

Risk-Reward Ratio = Potential Reward/Potential Risk

Example Calculation:

  • A trader risks $100 to potentially make $200
  • Risk-reward ratio = 1:2

If a trader risked $100 and could potentially make only $50, the risk-reward ratio would be 1:0.5, meaning the losses outweigh the potential gains - a poor trading setup.

Even if a trader loses more trades than they win, they can still make money if their winning trades are larger than their losing trades.

3. Expected Value: Long-term Profitability 

The Expected Value (EV) is the average expected profit or loss per trade over a large number of trades. It combines the win rate and risk-reward ratio to determine whether a strategy is profitable.

EV = (Win Rate x Average Win) - (Loss Rate x Average Loss)

Example Calculation:

  • Win Rate: 50% (winning half of the trades)
  • Risk-Reward Ratio: 1:2 (winning trades make twice the amount risked)
    Average Win: $200
  • Average Loss: $100

Now, applying the formula:

EV = (0.50×200) − (0.50×100)

EV = 100 − 50 

EV = +50

This means the trader expects to make $50 per trade over a large number of trades.

If the EV is positive, the strategy is expected to be profitable in the long run. If the EV is negative, the trader is likely to lose money over time.

Trading is a game of probabilities, not certainties. Long-term profitability depends on maintaining a positive statistical edge through a balanced win rate, risk-reward ratio, and expected value. A trader with a positive EV will be profitable over time, even with some losing trades. The key to success is focusing on probabilities, managing risk, and maintaining discipline in every trade.

Key Takeaways

  • Trading is a probabilities game, not a prediction game. Success comes from managing probabilities, not expecting to win every trade.
  • A positive expected value ensures long-term profitability. Even with losses, a strategy with a positive EV will generate profits over time.
  • Win rate alone does not determine success. A trader with a lower win rate can still be profitable if their risk-reward ratio is strong.
    Risk management is essential. Controlling losses and maintaining a favorable risk-reward ratio protects capital and ensures consistent growth.