Win rate is the percentage of trades that are profitable. Risk-reward ratio is the relationship between the amount risked and the amount targeted on each trade. Alone, neither number is sufficient to evaluate a strategy. Together, they determine expectancy.
The Expectancy Formula
Expectancy = (Win Rate × Average Win) − (Loss Rate × Average Loss)
A strategy with 60% win rate and 1:1 risk-reward (risking ₹5,000 to make ₹5,000): = (0.60 × 5,000) − (0.40 × 5,000) = 3,000 − 2,000 = ₹1,000 per trade
A strategy with 35% win rate and 1:3 risk-reward (risking ₹5,000 to make ₹15,000): = (0.35 × 15,000) − (0.65 × 5,000) = 5,250 − 3,250 = ₹2,000 per trade
The second strategy is twice as profitable per trade despite winning less than half as often.
The Breakeven Win Rate Table
For any risk-reward ratio, there is a minimum win rate required for the strategy to be profitable:
| Risk:Reward | Minimum Win Rate |
|---|---|
| 1:1 | 50% |
| 1:1.5 | 40% |
| 1:2 | 34% |
| 1:3 | 26% |
| 1:4 | 21% |
A strategy with 1:3 risk-reward can be wrong on 74% of its trades and still be profitable — if it strictly follows the ratio every time.
Why High Win Rate Alone Is Insufficient
Many retail traders pursue strategies that win frequently — scalping, frequent intraday trading, holding through losses to avoid booking them. This produces high win rates but often poor expectancy because the losses, when they occur, are disproportionately large.
The account that wins ₹2,000 twenty times and loses ₹40,000 once has broken even, not profited — despite a 20-trade winning streak.
Why High Risk-Reward Alone Is Insufficient
A 1:5 risk-reward target sounds extraordinary. But if the target is unrealistic — placed at a level the market rarely reaches — the win rate will be too low to produce positive expectancy. A 10% win rate at 1:5 produces zero expectancy: (0.10 × 5) − (0.90 × 1) = 0.5 − 0.9 = −0.4 per unit risked.
Targets must be at levels that price can reasonably reach within the trade's timeframe, based on market structure — not set arbitrarily to produce a desired ratio.
The Trading Implication
Before adopting any strategy, estimate its real win rate and average risk-reward from backtesting or paper trading. Calculate expected expectancy. A strategy with positive expectancy, applied consistently to a sufficient number of trades, should produce profit. A strategy with negative expectancy cannot be profitable regardless of execution quality.
For educational purposes only. Profitma is not a SEBI-registered investment adviser or research analyst. Nothing in this article constitutes investment advice.