Risk-to-Reward Ratio
Profitability does not require choosing either high win rate or high risk-to-reward alone. Reward-to-risk ratio determines the expected random-trading win rate through the formula Win Rate = 1 / (1 + Reward-to-Risk Ratio). The expected win…
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Profitability does not require choosing either high win rate or high risk-to-reward alone. Reward-to-risk ratio determines the expected random-trading win rate through the formula Win Rate = 1 / (1 + Reward-to-Risk Ratio). The expected win rate adjusts inversely as the risk-to-reward ratio changes. The random-trading relationships between different risk-to-reward ratios and win rates form the trading break-even line. Combining high win rate with high risk-to-reward is not always achievable because of market conditions and a trader's edge.