About Win Rate and Risk/Reward Ratio

Many crypto “gurus” like to use “Win Rate %” for promoting their premium trading signals and showing how good they are! They say: “Look, I have an 80% win rate! I’m a very good trader!” or “Buy my trading signals as they show an 85–90% win rate!” etc… But you know what? THE WIN RATE MEANS NOTHING!!! If you use it without a risk/reward ratio! Why? Because your risk-reward ratio shows how you trade and the potential of each trade. Knowing it, and adding win rate %, you can calculate your trading results. Risk reward ratio without win rate as well as win rate without risk reward ratio won’t be able to show you trading results. They have to be used together! In the image, you can see the relation between the win rate and the risk/reward ratio. An interesting fact is: if you increase your risk/reward ratio, be ready to decrease your win rate! And if you decrease your risk/reward ratio, you may increase your win rate. Why? It’s simple. Because we play with probabilities. If you trade with a risk/reward ratio = 1:1, your profit and stop orders are at the same distance from your entry point. By default, you have a 50%-50% probability that the price will move to your stop or profit target. From 10 trades you may expect to get 5 profitable trades and 5 trades closed by stop = your win rate will be 50%. By adding TA, and FA you may increase your win rate by just trading in the right direction. So, you can increase your win rate from 50% to 60%-70% and it’s a way how you become a profitable trader. But if you use a 1:5 risk/reward ratio, you risk $1 to make $5 for example, it won’t be so simple to reach a 50% win rate. Because your profit target will be in x5 distance than your stop. It means that the probability to close the trade by stopping is higher than to reach your profit target. But what’s good, in order to be profitable you need a 20% win rate = 2 profitable trades from 10. With 30% and 40% win rates you will have solid profit. With the example above, it’s very important to pick the right trades and care about the quality of your trading. But at the same time, such an approach allows the creation of a very robust trading system. As for an 80%-90% win rate, mainly you can reach such a number by trading with a “wrong” risk/reward ratio. Again, we talk about probabilities. If your stop size = x8–10 of your potential profit, let's say you risk $8–10 just to make $1, of course, your win rate will be high. But it means absolutely nothing! Trading with an 80%-90% win rate and “wrong” risk/reward ratio you have amazing chances to blow your trading account. Because your trading approach is far from the proper risk and money management rules. It’s not a robustness trading approach. In the distance, you will fail. Do you think I’m wrong? Ok. But I have a solid argument supporting this idea. The majority of trading robots use this model. These robots try to catch small movements using wide stops or even ignoring them. As a result, such robots have a 70%-90 rate and they fail in the distance. It’s just a matter of time! The same goes for manual trading, when you trade without stops you can even have 100% because you close only profitable trades! But in the distance, you will fail! So, don’t be cheated by high win rates! Consider win rates only in combination with the risk/reward ratio. And trade the following principles of proper risk and money management: risk per trade up to 2% from your capital, risk/reward = 1:2 or 1:3 min. It’s how you will be able to become a better trader.