A win rate says little without the size of your wins and losses. This tutorial uses worked examples to show how they fit together and why your stake per trade matters so much.
This tutorial builds on Risk Management: The Basics.
Win rate and ratio belong together
Your risk/reward ratio is what you could win divided by what you risk. Together with your win rate, it decides whether you make or lose money over many trades.
The win rate at which you exactly break even (before costs) is:
1 ÷ (1 + ratio)
| Ratio | Win rate needed to break even |
|---|---|
| 0.5:1 | 66.7% |
| 1:1 | 50% |
| 2:1 | 33.3% |
| 3:1 | 25% |
Costs, spreads and slippage come on top. In practice you need a slightly higher win rate.
Expected result per trade
The expected result is the average outcome per trade over a long series. You calculate it like this:
(win rate × average win) − (loss rate × average loss)
Example A: you risk € 100 each time and win € 200 when it goes well, with 40% winning trades.
- 0.4 × € 200 = € 80
- 0.6 × € 100 = € 60
- Expectation: € 80 − € 60 = + € 20 per trade, before costs
Example B: you win 60% of your trades, but your win is € 50 and your loss € 100.
- 0.6 × € 50 = € 30
- 0.4 × € 100 = € 40
- Expectation: € 30 − € 40 = − € 10 per trade
Example B wins more often and still loses money. A high win rate means nothing without the size of wins and losses. Note that these are worked examples. You only know your real percentages after many trades, and they can change.
Choosing a target
Choose your target from the chart, for example an earlier high, and then calculate the ratio.
Example: entry € 50, stop € 47, target € 59.
- Risk: € 3 per share
- Possible profit: € 9 per share
- Ratio: 9 ÷ 3 = 3:1
If the ratio is low, you can skip the trade. Do not raise the target just to make the ratio look better. Use the risk/reward calculator to compare scenarios.
Trailing stop
A trailing stop moves up with the price. Example: entry € 100, stop € 95, so € 5 risk. The price rises to € 112 and your stop follows at a € 5 distance, so € 107. If it is hit, you close with € 7 profit. That is 1.4 times your original risk.
This protects profit, but it can also take you out of a rising price on a normal pullback. Which approach works better depends on your strategy. Test it in your journal.
How much to stake? The Kelly criterion
The Kelly criterion is a formula from mathematics that shows what share of your capital you could stake per trade when your edge is known:
f = W − (1 − W) ÷ R
W is your win rate, R your ratio of win to loss.
Example: W = 45% and R = 2.
- f = 0.45 − 0.55 ÷ 2 = 0.175, so 17.5% of your capital
That looks high, and it is. The formula has two big drawbacks:
- You do not really know W. If your true win rate is 35% instead of 45%, f drops to just 2.5%. At 30%, f turns negative: there is no edge left.
- Full Kelly gives large swings in your account.
That is why people who use it often take only a fraction of the result, for example half (8.75% in the example). Try your own numbers in the Kelly calculator. For most beginners, a small fixed percentage as in Risk Management: The Basics is a much safer choice.
Why recovering from a loss is hard
Loss and recovery are not symmetric. The recovery needed is loss ÷ (1 − loss):
| Loss | Gain needed to get back to the starting amount |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 50% | 100% |
This is why keeping losses small matters. Use the drawdown calculator to work through your own situation.
Total risk across all positions
Add up the risk of all open positions. Five positions with 1% risk each means 5% total risk. Positions that move together, such as shares in the same sector, count almost as one position. Read more in Portfolio Basics: Spreading Risk.
Summary
- A win rate only has meaning together with the size of wins and losses.
- Calculate the expected result with your own journal figures, not with assumptions.
- Keep losses small: recovery gets harder as the loss grows.
- The Kelly criterion is a learning model. It depends on estimates you rarely know exactly.
- Keep a trading journal to check your numbers.
Work it out yourself
Test yourself
Practice questions to check your understanding, not advice.
You aim for a ratio of 3:1. What win rate do you need to break even, before costs?
- 50%
- 33.3%
- 25%
Show answer
Answer:C. 25%
The formula is 1 ÷ (1 + ratio). At 3:1 that is 1 ÷ 4 = 25%.
You win 60% of your trades with an average gain of € 50, and lose 40% with an average loss of € 100. What is the expected result per trade?
- + € 10
- − € 10
- + € 30
Show answer
Answer:B. − € 10
0.6 × € 50 = € 30 and 0.4 × € 100 = € 40. Expectancy: € 30 − € 40 = − € 10 per trade. A high win rate says nothing without the size of wins and losses.
Entry € 100, stop € 95. Price rises to € 112 and your trailing stop follows at a distance of € 5. The stop is hit. How much profit per share do you make?
- € 5
- € 7
- € 12
Show answer
Answer:B. € 7
The stop is then at € 107. Closing there gives a profit of € 107 − € 100 = € 7 per share, 1.4 times your original risk of € 5.
You lose 30% of your account. How much recovery do you need to get back to your starting amount?
- 30%
- 35%
- 42.9%
Show answer
Answer:C. 42.9%
The recovery needed is loss ÷ (1 − loss) = 0.30 ÷ 0.70 = 42.9%. Loss and recovery are not symmetrical.
What does the tutorial say about the Kelly criterion?
- It is a learning model that depends on estimates you rarely know exactly
- It gives a fixed percentage you must always stake
- It only works if your win rate is below 30%
Show answer
Answer:A. It is a learning model that depends on estimates you rarely know exactly
You do not really know your win rate, and a small error can give a stake that is far too large. The tutorial therefore calls Kelly a learning model, not an instruction.
Frequently asked questions
- What minimum risk/reward ratio should I aim for?
- There is no fixed minimum. It depends on your win rate. At 1:1 you must win more than half of your trades to make a profit, at 2:1 a little over 1 in 3, before costs. Costs and slippage push those limits up. Measure what you really achieve in your own journal.
- How do I set my profit target?
- Look at the chart: an earlier high or resistance level is a logical target. Then work out the ratio against your stop. If it is too low, you can skip the trade. Do not move the target just to make the ratio look better, because the market does not care.
- What does a trailing stop do to my ratio?
- A trailing stop follows the price up and protects part of your profit. The downside is that a normal pullback can take you out before the price reaches your target. Your achieved ratio can end up lower or higher than planned. Test it on paper or in your journal.
- Should I use the Kelly criterion?
- It is a model that shows what share of your capital you could stake when you know your edge. In practice you do not know your win rate exactly. A small error in your estimate can give a far too large stake. Many people therefore use at most a fraction of what the formula says. Treat it as a learning tool, not an instruction.