The Best Reward:Risk Ratio? What You Need To Know!

Let me get it out of the way: the winrate in trading it completely irrelevant on its own. Many traders put way too much emphasis on the winrate and do not understand that a winrate does not tell you anything about the quality of a system or a trader.

You can lose money with a 80% or even with a 90% winrate if your few losers are so big that they wipe out your winners. On the other hand, you can have a profitable system even with a winrate of 50%, 40% or onl 30% if you are good at letting winners run and cutting losses short.

It all comes down to your reward risk ratio.

The reward to risk ratio (RRR, or reward risk ratio) is maybe the most important metric in trading and a trader who understands the RRR can improve his chances of becoming profitable.

The Basics – Reward Risk Ratio 101
Basically, the reward risk ratio measures the distance from your entry to your stop loss and your take profit order and then compares the two distances (the video at the end shows that).


Step 1: calculating the RRR
Let’s say the distance between your entry and stop loss is 50 points and the distance between the entry and your take profit is 100 points .

Then the reward risk ratio is 2:1 because 100/50 = 2.
Step 2: Minimum Winrate
When you know the reward:risk ratio for your trade, you can easily calculate the minimum required winrate (see formula below).

Why is this important? Because if you take trades that have a small RRR you will lose money over the long term, even if you think you find good trades.



Minimum Winrate Formula

Minimum Winrate = 1 / (1 + Reward:Risk)



Example 1: If you enter a trade with a 1:1 reward:risk ratio, your overall winrate has to be greater than 50% to be a profitable trader:

1 / (1+1) = 0.5 = 50%
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