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Reward-to-risk and win rate: the two numbers that decide everything
Intermediate · 6 min read
Two numbers decide whether a way of trading makes money over time: how often it wins, and how much a win pays compared with what a loss costs.
Expectancy
Per trade, on average: (win rate × average win) − (loss rate × average loss). Illustrative examples, before charges:
| Win rate | Avg win : avg loss | Result per ₹1 risked |
|---|---|---|
| 40% | 2 : 1 | +₹0.20 |
| 50% | 1 : 1 | ₹0.00 |
| 70% | 1 : 3 | −₹0.20 |
The 70% system loses money; the 40% one makes it. A high accuracy figure on its own tells you nothing — which is one reason SEBI does not let registered research analysts advertise accuracy percentages.
The break-even win rate
With reward-to-risk of R, you need to win more than 1 ÷ (1 + R) of the time just to break even: 50% at 1 : 1, 33% at 1 : 2, 25% at 1 : 3. Then add charges, which are certain and push that line higher — see the real cost of a trade.
A target is not a promise
A far target improves the ratio on paper but is reached less often. The pair only means something when both numbers come from a real record of many trades, wins and losses alike.
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