Risk-reward ratio vs win rate: why one number never tells you enough

Signal providers love to advertise win rates. "85% accuracy!" sounds impressive, but on its own it tells you almost nothing. A strategy that wins 85% of the time can still lose money, and one that wins a third of the time can be profitable. What matters is the win rate together with how big the wins are compared with the losses.

Risk-reward ratio

The risk-reward ratio compares what you stand to lose with what you stand to gain. If your stop loss is 25 pips away and your target is 50 pips away, you're risking 1 to make 2: a 1:2 risk-reward ratio, or "2R".

The break-even win rate

For any risk-reward ratio, there's a win rate you need just to break even, before costs:

Break-even win rate = 1 ÷ (1 + reward-to-risk)

• 1:0.5 (risk 2 to make 1) needs 66.7%
• 1:1 needs 50%
• 1:1.5 needs 40%
• 1:2 needs 33.3%
• 1:3 needs 25%

Above that line you make money over time. Below it you lose, however good the win rate sounds.

Expectancy: the number that matters

Expectancy is what you make or lose per trade on average, measured in R (multiples of your risk):

Expectancy = (win rate × average win in R) − (loss rate × average loss in R)

Take two traders:

• Trader A wins 75% of trades, but takes profit at 0.3R and loses the full 1R when wrong. Expectancy = 0.75 × 0.3 − 0.25 × 1 = −0.025R. A losing system with a great win rate.
• Trader B wins 40% of trades, with 2R wins and 1R losses. Expectancy = 0.4 × 2 − 0.6 × 1 = +0.2R. A winning system that loses most of the time.

This isn't just theory. When we tested a popular breakout indicator on gold, it had a win rate of around 74%. But its typical win was smaller than that win rate needed to break even, so the high win rate was hiding a losing trade-off. A high win rate often just means the targets are small and the stops are far away.

Costs move the line

Spread and commission make every win a little smaller and every loss a little bigger. On a trade with a 10-pip stop, a 1-pip spread is a tenth of your risk. That's enough to turn a small edge into a loss. Small targets and tight stops are hit hardest, which is one reason scalping is so hard to do profitably.

Partial profits change the maths

If you close part of a trade at a first target and let the rest run, your average win is a mix of the targets you actually reach. A signal with targets at 1R, 2R and 3.2R, closed in thirds, makes about 2R when every target is hit. A trade that reaches TP1 and then comes back to a breakeven stop makes only a third of 1R. Your real average sits somewhere between the two, and only your records can tell you where. The calculator below works out the risk-reward of the whole plan.

How to use this

1. Track your real average win and average loss in R, not just how often you win. A trading journal makes this easy.
2. Compare your win rate with the break-even rate for your actual risk-reward.
3. Be suspicious of any service that quotes a win rate without the average win and loss. Our guide on checking a signal provider explains what else to ask for.

Risk note: trading forex carries a high level of risk and may not be suitable for everyone. This article is for education only and is not financial advice.