Lessons › Risk and money management › Win rate and reward work together

World 5 · Risk and money management · lesson 7 · level 3

Win rate and reward work together

With bigger wins you can afford to be wrong more often, and with small wins you must be right a lot.

In one line

With bigger wins you can afford to be wrong more often, and with small wins you must be right a lot.

Explained simply

Imagine a game where a win pays 3 coins and a loss costs 1 coin: winning just 1 game in 4 keeps you even. If a win paid only 1 coin, you would need to win half your games to stay even. The size of your wins decides how often you must be right.

The lesson

Ignoring costs, the win rate needed to break even is 1 ÷ (1 + R), where R is the average win divided by the average loss. At 1R you need to win 50% of trades, at 2R about 33.3%, and at 3R 25%. A high win rate with tiny wins and big losses can still lose money. Costs raise the win rate you need, so a real method needs a margin above breakeven.

A worked example

Illustrative example: a plan wins 2R and loses 1R, so it breaks even at a win rate of about 33.3% (1 divided by (1 plus 2), times 100). Trader A wins 70 of 100 trades at 0.3R, earning 21R (70 times 0.3), and loses 30 at 1R, so A ends 9R down (30 minus 21). Trader B wins 40 of 100 at 2R, earning 80R (40 times 2), and loses 60 at 1R, so B ends 20R up (80 minus 60).

The same idea at four levels

1. Beginner. Your results depend on how often you win and how big your wins are compared with your losses.
2. Foundation. At 1R you must win half your trades to break even, but at 3R winning a quarter of them is enough.
3. Intermediate. The breakeven win rate is 1 ÷ (1 + R): 50% at 1R, 40% at 1.5R, 33.3% at 2R and 25% at 3R.
4. Advanced. A 70% win rate with 0.3R wins and 1R losses still loses 0.09R per trade, so always judge both numbers together.
5. Expert. Experts add costs before judging a method, because fees and spread shrink every win and grow every loss, raising the win rate needed.

Mistakes to avoid

• Chasing a high win rate while letting losses grow bigger than wins.
• Forgetting that costs raise the win rate you need.
• Judging a method by its win rate alone, without its average win and average loss.

Goal of this lesson: Calculate the breakeven win rate for a given reward-to-risk ratio.