Many traders lose money, but the root cause isn't poor skills; it's that they simply don't understand what positive EV (expected value) really means.

Recently, I've seen many people discussing win rates and profit-loss ratios, but most of them misunderstand these concepts. They think that just having a high win rate guarantees profits, but that's not the core logic of trading. Trading is actually about the mathematical expectation value, which, in simple terms, is how much you can expect to earn on average per trade over the long run.

Let me give you an example. Suppose you're guessing the flip of a coin, winning $2 if it's heads and losing $1 if it's tails, with a 50% chance for each. What's your expected value? It's simple: (2×0.5) + (-1×0.5) = 0.5. This is a positive EV situation. In other words, each time you guess, you can expect to earn an average of $0.50.

The formula is actually straightforward: Expected value per trade = (Probability of profit × Average profit) - (Probability of loss × Average loss). It may look complicated, but fundamentally, it's just calculating: how much I earn multiplied by the probability of earning, minus how much I lose multiplied by the probability of losing.

There are two key metrics that must not be confused. Win rate is the proportion of winning trades out of total trades, and profit-loss ratio is how much you earn on average per win divided by how much you lose on average per loss. A high win rate combined with a low profit-loss ratio can still result in a negative expected value; conversely, a low win rate with a high profit-loss ratio can yield a positive expected value. So, having a higher win rate isn't always better.

A common misconception is that people treat expected value as "the most likely outcome." For example, the expected value of rolling a die is 3.5, but you can never actually roll a 3.5. Similarly, even if your trading strategy has a positive EV, it doesn't mean you'll make money on every single trade. Short-term losses are possible due to randomness. Positive EV only manifests after many repeated trades.

Let me emphasize again: a positive expected value does not mean you'll profit on the next trade. Many people see a strategy with a positive EV and rush to go all-in, only to experience short-term losses and start doubting themselves. But this is precisely when mental resilience is tested. True trading experts are those who can believe in the positive EV, stick to their strategy, and not be disturbed by short-term fluctuations.

So next time someone brags about their high win rate, ask them what their profit-loss ratio is. Because ultimately, the game of trading is decided by the expected value. Only strategies with positive EV are worth pursuing in the long run.