Understanding the Relationship between % Win Rate and Reward: Risk

Understanding the Relationship between % Win Rate and Reward: Risk

To make the transition from an amateur trader to a professional trader, it’s of upmost importance that you understand the relationship between trade % win rate and trade reward: risk ratio. Understanding this relationship will ensure you have a plan that sets out how you are going to execute your trades in order to build up your trading capital.

Win rate is simply the amount of wins you have divided by the total number of trades. E.g if you have a set of 100 trades, with 50 of those being winners your win rate is 50% (50/100). Reward: risk is the ratio between your average win on a trade to your average loss on a trade. E.g if you execute 100 trades and your average win is $140 and your average loss is $100 then your reward: risk ratio would be 1.4:1 or 1.4R.

It is the relationship between % win rate and the trades reward: risk ratio that we need to understand. If we continue on from the above example, if you executed 100 trades with a % win rate of 50% in conjunction with a reward: risk ratio of 1.4R you would come out 20R ahead. We have compiled a table below which shows % return if you assume that you are risking 1% per trade. Also it’s worth nothing that the table below is based off 100 trades. 

The table above can be very useful to see where you think you could be positioned on the chart. If you think that your style of trading fits well with a win rate around 60% and a 1.4 reward: risk profile then based off 100 trades you could expect to make a 44% return. If this was the case you might look to shape your trades and profit targets to make sure that on average you make a return of 1.4R across your trades.

We encourgae you to take a look at your own trading records and try and work out where you fit on the chart. If you are in the red section then set yourself a goal to progress across to the green section and write down what changes you need to make to ensure that you make the transition. By thinking in terms of win rate and your reward: risk profile, you can really start to map out a route to profitability which will help you transition from an amateur to a professional trader.

Happy Trading! 

The TWP Team