Reward-to-risk (R:R) compares what you can win to what you can lose. Risk $100 to make $300 = 1:3.
The win rate you need
Formula
Break-even win rate = 1 ÷ (1 + R)
Expectancy: the number that matters
Formula
Expectancy = (win rate × average win) − (loss rate × average loss)
Example
40% wins averaging 2.5R, 60% losses averaging 1R: 0.40 × 2.5 − 0.60 × 1 = +0.40R per trade. Risking $100, that's about +$40 per trade on average.
Wick says
You can lose 6 out of 10 trades and still be profitable. Mind blown? Mine too, the first time.
Key takeaways
- R:R compares potential reward to risk.
- Higher R:R lowers the win rate you need.
- Positive expectancy over many trades is the goal.