📚 Learn Trading Statistics

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Win Rate Drawdown Sharpe Ratio Monte Carlo

Win Rate: Why 40% Can Be Better Than 70%

Understanding the most misunderstood metric

Win rate is the percentage of trades that are profitable. If out of 100 trades 40 are profitable, win rate = 40%. Simple, right?

⚠️ Common Mistake

Many investors think high win rate = good strategy. This is a big mistake!

Case Example

Strategy A: Win Rate 70%

  • • 70 trade profit @ $10 = +$700
  • • 30 trade loss @ $50 = -$1,500
  • • Net: -$800

Strategy B: Win Rate 40%

  • • 40 trade profit @ $50 = +$2,000
  • • 60 trade loss @ $15 = -$900
  • • Net: +$1,100

What's More Important: Risk-Reward Ratio

Win rate should be viewed together with Risk-Reward Ratio (RRR). Simple formula for breakeven:

Minimum Win Rate = 1 / (1 + RRR)

Example: RRR 2:1 → Minimum WR = 33.3% for breakeven

Conclusion

  • Low win rate + high RRR = can be very profitable
  • High win rate + low RRR = can result in big losses
  • Always check Profit Factor and Expectancy

Drawdown: The Most Important Risk Metric

Understand before your capital is gone

Drawdown is the decline from peak to trough in your capital. It measures how deep the "hole" you must face before your capital rises again.

Example:

Capital rises from $1,000 → $1,500 (peak) → drops to $1,200 → rises again to $1,800

Max Drawdown = ($1,500 - $1,200) / $1,500 = 20%

Why is Drawdown Important?

🚨 The Cruel Math of Drawdown

Drawdown 10%

Need +11.1% to recover

Drawdown 25%

Need +33.3% to recover

Drawdown 50%

Need +100% to recover

Drawdown 75%

Need +300% to recover

What Drawdown Level is Acceptable?

Conservative < 15% - Suitable for risk-averse investors
Moderate 15-25% - Balanced risk/reward
Aggressive 25-40% - High risk, high reward

💡 Tips from NXVest

Use the Position Size Calculator to adjust lot size according to your drawdown tolerance.

Sharpe Ratio: Is the Return Worth the Risk?

The favorite metric of professional investors

🎯 In Simple Terms

Sharpe Ratio = How smooth is your profit journey?

Imagine two roads to the same destination. One is smooth and steady, the other is full of scary ups and downs. Sharpe tells you which road is more comfortable to travel.

🚗 Car Analogy

Car A - Roller Coaster Ride

Day 1: +$500
Day 2: -$400
Day 3: +$600
Day 4: -$300
Day 5: +$100

Final: +$500 | Sharpe: ~0.8

😰 Stressful journey, hard to sleep at night

Car B - Smooth Highway

Day 1: +$100
Day 2: +$80
Day 3: +$120
Day 4: +$90
Day 5: +$110

Final: +$500 | Sharpe: ~2.5

😌 Comfortable journey, predictable growth

Both arrive at +$500, but Car B gives you a much better experience. That's what Sharpe measures — quality of returns, not just quantity.

📊 What is "Volatility" (Standard Deviation)?

Don't let the fancy term scare you. Volatility simply means "how much your returns jump around."

Think of it like a heartbeat monitor:

High Volatility = Wild heartbeat 💓💓💓

Returns go +10%, -8%, +15%, -12%...

Low Volatility = Calm heartbeat 💚

Returns go +2%, +3%, +2%, +1%...

🧮 How is Volatility Calculated?

Here's a simple step-by-step example:

Example: 5 days of returns

Day 1

+3%

Day 2

-1%

Day 3

+2%

Day 4

+4%

Day 5

-2%

Step 1: Find the average return

(3 + (-1) + 2 + 4 + (-2)) ÷ 5 = 1.2% average

Step 2: Find how far each day is from average

Day 1: 3% - 1.2% = +1.8% | Day 2: -1% - 1.2% = -2.2% | ...

Step 3: Square each difference, then average them

(1.8² + 2.2² + 0.8² + 2.8² + 3.2²) ÷ 5 = 5.44

Step 4: Take the square root

√5.44 = 2.33% volatility

💡 Don't Worry About the Math!

You don't need to calculate this yourself. NXVest already calculates volatility for you in every report. Just remember: lower volatility = smoother returns = better Sharpe.

🧮 The Formula (Simplified)

Sharpe = Return ÷ Volatility

(Higher return + Lower volatility = Higher Sharpe = Better!)

Example calculation:

Strategy made 30% return with 15% volatility
Sharpe = 30% ÷ 15% = 2.0 ✓ Excellent!

📏 How to Read Sharpe Ratio

< 0

Bad

Losing money

0-1

Fair

Risky for the return

1-2

Good

Solid risk-adjusted

> 2

Excellent

Smooth & profitable

🤔 Why Does This Matter?

Strategy A

Return: 50% | Volatility: 50%

Sharpe ≈ 1.0

High return, but wild ride 🎢

Strategy B

Return: 50% | Volatility: 25%

Sharpe ≈ 2.0 ✓ Better

Same return, much smoother 🛤️

💡 Key Takeaway

A strategy with Sharpe > 1.5 is generally considered good. It means you're getting decent returns without taking excessive risk. Most of our AI models at NXVest aim for Sharpe > 2.

Monte Carlo Simulation: Stress Test Your Strategy

See the worst-case scenario before it happens

Monte Carlo simulation randomizes trade order to see various possible scenarios. Backtest only shows 1 path, Monte Carlo shows thousands of possibilities.

🎲 How Does It Work?

  1. Take all trades from the backtest
  2. Randomize the order (1000+ times)
  3. Calculate drawdown & results for each order
  4. Find the worst-case scenario

Why Do We Need Monte Carlo?

Real example:

Backtest shows max drawdown of 15%. But if 5 consecutive losing trades happen at the start (not in the middle like the backtest), drawdown could reach 25%!

How to Read Monte Carlo Results

  • Worst Case: The worst drawdown from all simulations - this is what you must be prepared for
  • Median: The "typical" scenario that is most likely to happen
  • Best Case: Don't expect this to happen - this is an outlier

🚀 Try It Now

Open any report and click the "Monte Carlo" button to see the simulation.

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Profit Factor: Simple but Powerful

A metric that can't lie

Profit Factor = Total Gross Profit / Total Gross Loss

Example:

Total profit from winning trades: $5,000
Total loss from losing trades: $3,000
Profit Factor = 5000/3000 = 1.67

Interpretation

< 1.0 Loss - Strategy is not profitable
1.0-1.5 Marginal - Be careful with fees
1.5-2.0 Good - Solid strategy
> 2.0 Excellent - Very profitable

Sample Size: How Many Trades Are Enough?

Don't be fooled by statistics from small data

🚨 Red Flag

"My strategy has 80% win rate!" (from 10 trades)

This means nothing statistically.

Minimum Sample Size

< 30 Not reliable - too few trades
30-100 Starting to be meaningful, but still be careful
100-500 Good sample - results become reliable
> 500 Excellent - very reliable

💡 At NXVest

All our reports have at least hundreds of trades per year to ensure statistical significance.

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