The risk/reward ratio, and why win rate alone lies

"This strategy wins 70 % of the time" sounds impressive. It tells you almost nothing. A strategy that wins $1 seven times and loses $5 three times has a 70 % win rate and loses money. The missing piece is the size of wins compared with losses.

Calculating risk/reward

For a long trade:

• Risk = entry price − stop price
• Reward = target price − entry price
• Risk/reward = risk : reward

Buy at $100, stop at $95, target at $115: risk $5, reward $15, so 1:3.

For a short trade the signs flip: risk is stop minus entry, reward is entry minus target.

The breakeven win rate

Every risk/reward ratio has a win rate at which you neither make nor lose money (before fees):

Breakeven win rate = risk ÷ (risk + reward)

This table explains a lot. A setup with a tight target and a wide stop needs to be right most of the time. A setup with a 1:3 ratio can be wrong three times out of four and still break even.

Expectancy: the number that matters

Expectancy combines win rate and payoff into the average result per trade:

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

Example A: 70 % wins of +1 %, 30 % losses of −3 %. Expectancy = 0.7 − 0.9 = −0.2 % per trade. High win rate, slowly losing.

Example B: 40 % wins of +4 %, 60 % losses of −1.5 %. Expectancy = 1.6 − 0.9 = +0.7 % per trade. Low win rate, clearly positive.

Related measures:

• Profit factor = gross profits ÷ gross losses. Above 1 means the strategy made money in the sample.
• Payoff ratio = average win ÷ average loss.

When you read any track record, including ours, look for these alongside the win rate. A win rate on its own is a marketing number.

Planned vs. realised risk/reward

The ratio you plan is rarely the ratio you get. Three things shrink it:

1. Early exits. Taking profit at the first wobble cuts the reward side.
2. Moving stops away. Giving a losing trade "more room" increases the risk side.
3. Fees and slippage. Small per trade, significant over hundreds of trades.

Track the realised numbers. If your plan says 1:3 and your results say 1:1.2, the plan is not the problem.

The flat zone and why it is honest

Many trades end close to where they started. Counting a +0.3 % result as a "win" inflates the win rate without adding value. That is why Kairon's track record counts trades that end within ±1.5 %, or exit at breakeven, as flat, neither win nor loss. It makes the win rate look lower and more honest at the same time.

How to use this before a trade

1. Place the stop where the thesis is wrong, not where the loss feels small.
2. Place the target at a realistic level, such as the next resistance zone.
3. Calculate the ratio. If it is worse than about 1:1.5, ask what makes this trade worth it.
4. Size the position from the stop with the position size calculator.

This guide is educational and not investment advice.