ForgeXRisk and position sizing
Risk to reward and win rate: the trade off nobody explains
A high win rate is not the goal. Here is how win rate and reward to risk fit together, and the break even table you can check your strategy against.
New traders chase a high win rate. Experienced ones look at win rate and reward together, because on their own neither number tells you anything about whether you make money.
The two numbers
Win rate is how often you win. Reward to risk is how big your average winner is compared to your average loser.
You can make money with a 30 percent win rate. You can lose money with an 80 percent win rate. What matters is the combination.
The break even table
This is the win rate you need just to break even at a given reward to risk, before costs.
| Reward to risk | Win rate needed to break even |
|---|---|
| 0.5 to 1 | 67 percent |
| 1 to 1 | 50 percent |
| 1.5 to 1 | 40 percent |
| 2 to 1 | 34 percent |
| 3 to 1 | 25 percent |
| 5 to 1 | 17 percent |
Read it the other way round and it becomes useful. If you win 45 percent of the time, you need better than 1.25 to 1 to make anything. If you win 70 percent, you can get away with 0.5 to 1.
Add costs on top. Every one of those numbers is a few points worse in real trading.
Why high win rates feel better and often pay worse
Winning often is pleasant. It is also usually bought by taking profit early, which caps your winners while your losers stay full size.
That trade is fine if the maths works. It stops working when the win rate slips a little, because a strategy that needs 67 percent to break even has almost no room. Drop to 60 and you are losing money while still winning most of your trades.
Strategies that need a low win rate have the opposite problem. They are mathematically comfortable and psychologically hard, because you will sit through long runs of small losses.
What to actually measure
Expectancy. It combines both numbers into one and tells you what an average trade is worth.
Expectancy in R is your win rate times your average win in R, minus your loss rate times your average loss in R. If it is above zero you have an edge. If it is below zero, no amount of discipline fixes it.
Measure it in R rather than cash so it stays comparable as your account changes size.