Risk-reward ratio, and why win rate alone tells you nothing

Winning 70% of your trades sounds impressive and is entirely compatible with a shrinking account. Win
rate on its own says nothing — it only means something alongside the risk-reward ratio.

1. What risk-reward is

The ratio between the target profit and the accepted risk on a
trade. Entering with a 20-pip stop and a 60-pip target is 1:3.

2. Break-even win rate by ratio

• 1:1 → you need more than 50%
• 1:2 → more than 33.3%
• 1:3 → more than 25%
• 2:1 (target smaller than the stop) → more than 66.7%
• 3:1 → more than 75%

Which is why a strategy winning 70% at 3:1 against you is still a losing strategy. And one winning 35%
at 1:3 is a good one.

3. Cost raises the break-even threshold

The table above ignores cost. In reality every trade also pays
spread,
commission and possibly
swap. With a small target, that share is large:

• A 60-pip target at 1.1 pips of cost → cost is 1.8% of the target.
• An 8-pip target at 1.1 pips of cost → cost is 14% of the target.

So a small-target strategy needs a markedly higher win rate than the theoretical figure. It is also why
reducing cost per lot matters most to short-term
traders.

4. The mistake: forcing the ratio to look good

Knowing that 1:3 beats 1:1, many people push the target further out to make the ratio work — to the
point where price rarely reaches it. The win rate falls below break-even and the strategy still
loses.

The ratio has to come from market structure: the target at a level with a reason to
react, the stop where your idea would be proven wrong. If the structure only allows 1:1.4, that is the
number for that trade — or you skip it.

5. Using it in practice

• Set a minimum, for instance no trades below 1:1.5. It filters out the weaker
  setups.
• Record the ratio in your journal for every trade, winners and losers. After 50
  trades you will know your real average.
• Calculate expectancy: (win rate × average win) − (loss rate × average loss) − cost. A
  positive number means the strategy is worth continuing.

6. The thing that matters more than either number

Consistency. A positive-expectancy strategy only pays if you run it for enough trades. Changing strategy
after every short losing run means never reaching the positive part of the distribution.

This article is for information only and is not investment advice. Conditions and fee levels are published by the brokers and can change at any time — check with the broker you actually use. Leveraged forex and CFD trading carries a high level of risk and can cost you your entire deposit.