Risk

Reward to risk and the win rate needed

A plan that pays R times its risk breaks even at a win rate of 1 divided by (1 + R).

What it is

At 1:1 the plan needs 50% wins, at 1:2 about 33%, at 1:3 25%, at 1:5 about 17%. Costs raise each number: the break-even rate is (1 + cost) / (1 + R), where cost is the round-trip cost as a share of the risk.

What it suggests

A higher reward-to-risk lowers the win rate needed, and targets that are far away are hit less often, so both sides of the trade-off matter.

How to check it

Compute the break-even win rate for the plan's minimum reward-to-risk, add costs, and compare with the trader's actual win rate.

Common mistakes

• Quoting a reward-to-risk without the hit rate that goes with it.

Sources

• The Exchange's own seeded simulation in src/risk-math.mjs (illustrative: real trading has streaks, gaps and slippage the simulation ignores) (abstract or primary page read)

Related lessons

• Expectancy
• Costs

Written in our own words. Education only, not financial advice.