New traders obsess over win rate. It's the number that feels like skill: "I'm right 7 out of 10 times." But win rate on its own is close to meaningless, because it says nothing about how big the wins are versus the losses. You can be right most of the time and still lose money — and you can be wrong most of the time and get rich. The two numbers that actually matter are the risk/reward ratio and, built on top of it, expectancy.
Risk/reward ratio: what you stand to make vs. lose
The risk/reward ratio (more precisely, reward-to-risk) compares the distance from your entry to your target against the distance from your entry to your stop.
Reward-to-risk = (Target − Entry) ÷ (Entry − Stop)
If you buy at $100, stop at $96, and target $112, your risk is $4 and your reward is $12 — a 3:1 ratio. You're risking one dollar to make three. That ratio, by itself, doesn't tell you whether the trade is good. What it tells you is how often you need to be right for the trade to make sense.
The break-even win rate: the number that ties it together
Every reward-to-risk ratio has a win rate at which you exactly break even:
Break-even win rate = 1 ÷ (1 + Reward-to-risk)
For a 3:1 trade, that's 1 ÷ 4 = 25%. If you win more than a quarter of your 3:1 trades, you make money over time. Let that sink in: a strategy that loses 75% of the time is profitable at 3:1. This is why professional trend-followers are wrong constantly and still win — their occasional winners dwarf their frequent small losers.
Here's how the break-even win rate moves with the ratio:
| Reward-to-risk | Break-even win rate |
|---|---|
| 1 : 1 | 50% |
| 2 : 1 | 33% |
| 3 : 1 | 25% |
| 0.5 : 1 (risking 2 to make 1) | 67% |
That last row is the trap that catches high-win-rate traders. If you routinely risk $2 to make $1, you need to win two-thirds of the time just to break even — and one bad streak wipes out a long run of small wins.
Expectancy: does the whole thing actually make money?
Expectancy rolls win rate and reward-to-risk into a single number: the average result you can expect per trade. Measured in R (multiples of your initial risk), it's:
Expectancy (R) = (Win rate × Avg win in R) − (Loss rate × Avg loss in R)
Suppose you win 50% of the time, your winners average +3R, and your losers average −1R. Expectancy = (0.5 × 3) − (0.5 × 1) = +1.0R. That means across many trades you net about one unit of risk per trade. If you risk $250 a trade, that's ~$250 of expected profit per trade on average — not every time, but as a long-run tendency. Positive expectancy is the only thing that makes a trading strategy a business instead of a slot machine.
Flip the inputs — win 70%, but winners average +1R and losers −2R — and expectancy is (0.7 × 1) − (0.3 × 2) = +0.1R, barely positive and fragile. Push the losers to −3R and it goes negative despite the gaudy 70% win rate. The win rate was never the point.
How to use this before every trade
- Check the ratio against your real win rate. Don't take a 1:1 trade if you don't actually win half the time. The risk/reward calculator shows the break-even win rate instantly so you can compare.
- Track your trades in R. Scoring closed trades in R-multiples (how many units of risk you made or lost) makes wins and losses comparable across different position sizes. The R-multiple calculator does this per trade.
- Let expectancy, not vibes, decide. A setup that feels exciting but has negative expectancy is a leak. A boring one with +0.5R expectancy, repeated with discipline, is an edge.
The workflow
Good trading is two questions in order: is this setup worth taking? (risk/reward and expectancy) and how much should I put on? (position sizing). Answer the first with the risk/reward calculator, answer the second with the position size calculator, and you've replaced two of the most expensive gut-feel decisions in trading with arithmetic.