When people start trading, most of them look at win rate first. If you're right eight times out of ten, it seems obvious that your account will grow.
Yet some traders shrink their accounts with an 80% win rate, while others grow theirs at 40%. This article looks at the risk-reward ratio (R:R) behind that difference, from the calculation to how you use it in an actual order.
Why an 80% win rate can still lose money
Say two traders each make 10 trades. A is right often but makes a little each time; B is wrong often but makes a lot when right.
| Trader | Win rate | Avg. win | Avg. loss | Result over 10 trades |
|---|---|---|---|---|
| A | 80% | 10 USDT | 100 USDT | 80 − 200 = −120 USDT |
| B | 40% | 200 USDT | 100 USDT | 800 − 600 = +200 USDT |
A won 8 times for 80 USDT but lost 200 USDT on the 2 losses. B lost 6 times, yet the 4 wins covered the losses with room to spare.
Win rate only tells you how often you're right. The risk-reward ratio tells you how much changes hands when you're right and when you're wrong.
How do you calculate the risk-reward ratio?
The risk-reward ratio compares what you lose if the stop-loss is hit with what you make if the target is hit. In price terms, it compares the distance from entry to stop with the distance from entry to target.
Say you go long BTC at 100,000 USDT with a stop at 98,000 USDT (−2%) and a target at 106,000 USDT (+6%). The risk is 2,000 and the reward is 6,000, so the ratio is 1:3. For a short, flip the direction: the stop goes above and the target below.
As in the example from our leverage article, if you cap the loss at 100 USDT per trade and open a 5,000 USDT position, you lose 100 USDT at the stop and make 300 USDT at the target. Traders often call this 1:3 "3R", where R is one unit of the risk you take on a trade.
Opening and closing fees aren't in this calculation. In practice they come out of the win and add to the loss, so the real ratio is a little worse than what you drew on the chart.
The minimum win rate set by your ratio
Once you know the ratio, the win rate you need to break even follows directly. For a trade that loses 1R or makes xR, the break-even win rate is 1 ÷ (1 + x).
That's 50% at 1:1, about 33% at 1:2, and 25% at 1:3. With a 1:3 setup, being right one time in four breaks even before fees. The other way round, with a setup like 1:0.5 where the loss is bigger than the win, you need about 67% just to break even.
Trader A above is exactly this case. Risking 100 USDT to make 10 USDT is a 1:0.1 ratio, with a break-even win rate of about 91%. That's why being right 80% of the time still lost money.
Expectancy: win rate and ratio in one number
To look at win rate and ratio together, calculate expectancy. It shows how much you make or lose per trade on average if you repeat the same approach many times.
With a 40% win rate and a 1:3 ratio, that's 0.4 × 3R − 0.6 × 1R = 0.6R. If 1R is 100 USDT, you make 60 USDT per trade on average. With a 60% win rate and a 1:0.5 ratio, it's 0.6 × 0.5R − 0.4 × 1R = −0.1R: you win often, but the expectancy is negative.
Keep in mind that expectancy is an average over many trades. Even at a 40% win rate you can lose ten in a row, and for the account to survive that, the risk per trade (1R) has to be small relative to the account.
A higher ratio means a lower win rate
So should you just put the target far away? Drawing a 1:10 trade is easy, but price reaching a target ten times further than your stop is far rarer. The further the target, the more likely the stop gets hit first.
That's why you don't set the target backwards from the ratio you want. First find where price could realistically go, such as a recent high or a resistance level, and enter only when the ratio to that level is good enough. If the stop and target you find on the chart don't even give 1:1, it's usually better to skip the trade.
In short-term trades with very tight stops, fees eat heavily into the ratio. The tighter the stop, the bigger the share the same fee takes out of your 1R loss.
In practice: write down three prices before you enter
Before placing an order, set three prices first, entry, stop and target, and check the ratio. Enter them in the risk-reward calculator and you get it right away. Then size the position from the amount you can afford to lose, following the steps in our leverage article.
Setting the stop-loss and take-profit (TP/SL) together with the order cuts down the decisions you make after entry. What usually wrecks the ratio is your own hand after entry: taking profit before the target because a small gain feels fragile, and pushing the stop back when the trade goes against you. Wins end up smaller than planned and losses bigger, so a 1:3 drawn on the chart may not even be 1:1 in reality.
So when a trade closes, record the actual result in R rather than the ratio you planned. After a few dozen trades you'll have your real win rate and real average ratio, and you can check for yourself whether your expectancy is positive. Win rate sets how often you're right, the ratio sets how big the wins and losses are, and what grows the account is the expectancy that combines the two.
Before you worry about how often you're right, decide how much you lose when you're wrong.
FAQ
Is a ratio of 1:2 or better always profitable?
No. At 1:2 you need a win rate above about 33% just to break even, and a little more once fees are included. If the ratio is good but your win rate is below that, expectancy is negative.
How do I calculate the ratio if I take profit in parts?
Average it by the share closed at each level. If you closed half at 2R and the other half at 4R, the trade's result is 0.5 × 2R + 0.5 × 4R = 3R.