Learning note · Risk:reward · Risk
Risk:reward vs win rate: why you need both
A high win rate can lose money and a low one can make it. How risk:reward and win rate combine, with the break-even maths.
Beginners often focus on one number. Some want to win most of their trades; others chase trades that could pay three or four times what they risk. Neither number means much without the other.
Risk:reward
The risk:reward ratio compares the distance to your stop with the distance to your target. A 20-pip stop with a 40-pip target is 1:2: you are aiming to make twice what you risk. It describes distances, not the chance of reaching either one.
Win rate
The win rate is the share of trades that close in profit. Out of 10 trades, 4 winners is a 40% win rate. A small sample can make win rate look much better or worse than it really is.
How they combine: the break-even win rate
If every loss is 1 unit (1R) and every win is R units, you break even, before costs, when:
break-even win rate = 1 ÷ (1 + reward ratio)
Some examples:
- 1:0.5 (target half the stop): need to win more than 66.7% of trades.
- 1:1: need more than 50%.
- 1:1.5: need more than 40%.
- 1:2: need more than 33.3%.
- 1:3: need more than 25%.
Wider targets lower the win rate you need, but they are also usually reached less often. Tighter targets are reached more often but need you to be right much more of the time. There is no ratio that is automatically better.
Expectancy puts it together
Expectancy is the average result per trade over many trades:
expectancy = (win rate × average win) − (loss rate × average loss)
Two very different traders can have the same expectancy:
Trader A: 60% wins of $100, 40% losses of $100 → 0.6 × 100 − 0.4 × 100 = +$20 per trade
Trader B: 30% wins of $300, 70% losses of $100 → 0.3 × 300 − 0.7 × 100 = +$20 per trade
And a high win rate can still lose:
80% wins of $50, 20% losses of $250 → 0.8 × 50 − 0.2 × 250 = −$10 per trade
That last pattern is common when someone takes profits quickly and lets losing trades run "until they come back".
Thinking in R
Measuring each result as an R multiple (profit or loss divided by the amount risked) makes trades of different sizes comparable. A loss stopped at the planned level is −1R. If your average R over many trades is above zero after costs, wins and losses are working together; if it is below zero, they are not.
Points to remember
- Costs move the break-even point. Spread and commission make every win a little smaller and every loss a little bigger.
- Real results only appear over many trades. Ten trades tell you very little; even a hundred is a small sample.
- Past results, real or simulated, do not guarantee future ones.
Try ratios in the risk / reward calculator. The practice simulator shows the break-even win rate on every order and reports win rate, average R and profit factor at the end of each session.
Education, not advice. This note explains a concept with illustrative numbers. It is not a recommendation to trade. Currency trading carries risk, and losses can exceed expectations. See the risk disclaimer.