Risk-Reward Ratio And Win-Rate Math

Risk-reward ratio compares how much a trade risks against how much it targets in profit. Understanding how this ratio interacts with win rate is central to judging whether a strategy can be viable over time, independent of any single trade's outcome.

The Basic Relationship

A strategy does not need to win more often than it loses to be viable, provided winning trades are large enough relative to losing ones. For illustration only: a strategy risking 1 unit to make 2 units can be breakeven at roughly a 33% win rate, before costs — meaning a trader could be wrong most of the time and still not lose money overall, purely due to the size of wins relative to losses.

• A higher risk-reward ratio per trade requires a lower win rate to break even
• A lower risk-reward ratio requires a higher win rate to break even
• Transaction costs, spreads, and commissions reduce the effective outcome of every trade and must be factored in