Risk
In one sentence
What a trade pays if it works, divided by what it costs if it fails - and therefore the win rate the setup needs merely to break even.
The link is exact: break-even win rate equals 1 divided by (1 + R). At 1:1 you need better than 50%; at 1:2, 33.3%; at 1:3, 25%. This is why a trader who is right most of the time can still lose money, and one who is right a third of the time can compound.
The ratio is only honest if the target is somewhere price actually goes. Inflating the target to improve the ratio improves nothing.
The mistake it causes: judging a system by win rate alone, which says nothing until the ratio is attached.
Break-even win rate is 1 divided by (1 + R). That one formula decides whether a system can work before you ever take a trade.
| Reward : risk | Break-even win rate | At 40% wins | At 50% wins |
|---|---|---|---|
| 1 : 0.5 | 66.7% | −0.40R | −0.25R |
| 1 : 1 | 50.0% | −0.20R | 0.00R |
| 1 : 2 | 33.3% | +0.20R | +0.50R |
| 1 : 3 | 25.0% | +0.60R | +1.00R |
| 1 : 5 | 16.7% | +1.40R | +2.00R |
Read the 1:1 and 1:3 rows together. Same trader, same 40% win rate, and the difference between a slow bleed and a compounding account is entirely where the target was placed.
The easiest way to fake a good ratio is to set a target the market will not reach. A 1:5 trade that fills 5% of the time is worse than a 1:1.5 that fills half the time, and the first one looks better in every screenshot. The honest test is whether price has historically travelled that far from that kind of setup.
Costs are paid whether you win or lose, so they reduce the effective reward and increase the effective risk at the same time. On a tight stop a round-trip spread plus commission can be a meaningful fraction of 1R, which quietly pushes a marginal system negative.
This term is explained in context in the primer - and priced exactly in our free risk calculators .
More in Risk: Position sizing, Win rate, Drawdown, Risk of ruin.
Education only, not financial advice. Trading is high risk and most retail accounts lose money.
