The break-even win rate
If you risk 1 unit to make a reward of RR units, you break even when your win rate equals 1 divided by 1 plus RR. At a risk to reward ratio of 1, you need to win half of your trades. At 2, you need to win one trade in three, which is 33.3 percent. At 3, you need 25 percent. At 0.5, where you risk 2 to make 1, you need 66.7 percent.
Below that win rate, the strategy loses money on average. Above it, it makes money. The further above, the larger the expectancy.
Costs raise the bar
Spreads and commissions make a winning trade pay a little less and a losing trade cost a little more. In effect they increase the risk and decrease the reward, so the break-even win rate rises. A strategy that needs 33.3 percent in theory can need 36 or 38 percent once the costs of a given broker are included.
The effect is stronger when stops are small. A cost of 1 pip is a large part of a 5 pip stop and almost invisible on a 50 pip stop.
The trade-off between the two
In most strategies the two move in opposite directions. A target that is close is reached more often but pays little. A distant target pays more but is reached less often. Moving from a 1 to 1 target to a 3 to 1 target does not make a strategy better by itself. It changes the win rate it needs, and the win rate it actually delivers usually falls.
This is why the pair has to be measured together on real data. The platform strategies in ATLAS use a stop at 1.5 times the average true range and a target at 2 R, so their break-even win rate is 33.3 percent before costs, and the signal statistics show the win rate they actually achieved.
What losing streaks look like
With a win rate of 40 percent, the chance of losing five trades in a row from a given starting point is 0.6 to the power of 5, about 7.8 percent, roughly one sequence in thirteen. The chance of ten losses in a row is about 0.6 percent. Long streaks are rare in a short period and ordinary over hundreds of trades.
A strategy with a low win rate and a high risk to reward ratio will go through such streaks regularly, even when its expectancy is positive. If you cannot accept them, size your trades accordingly or choose a different profile.
Frequently asked questions
What win rate do I need with a 2 to 1 risk to reward?
About 33.3 percent to break even before costs. With typical spreads and commissions you need somewhat more.
Is a higher risk to reward ratio always better?
No. A higher ratio usually lowers the win rate, and what matters is the expectancy, which combines both.
See it in ATLAS
Signal Statistics
Buy or sell: which strategy works best, on which timeframe and on which market.
Strategy Lab
Describe a strategy in plain words or paste a Pine Script; ATLAS turns it into rules and measures it.
Future Simulation
Thousands of possible futures for a strategy, so you see the drawdowns you would have to live with.
Terms used in this guide
Win rate, Risk to reward ratio, Break-even win rate, Expectancy, Stop loss, Take profit.
More guides
This guide explains methods and arithmetic. It is not financial advice, and past results do not guarantee future ones. Read the risk disclosure.
