Risk reward ratio VS win ratio

New comment
 
Hi guys,

What is more important in your trading strategy? Risk reward (RR) or winrate percent?

If we want to have huge RR then entry and SL are very tight which can cause bad winrate...

On the other side we have winratio where we need to use wide SL or no SL at all) to get high winrate.
I saw many accounts burned to 0 when traders didnt want to lose/closep single trade and they were trading too much big lotsize without placing SL.

What are your experience about this topic?
 
Igor Zizek: What is more important in your trading strategy? Risk reward (RR) or winrate percent?

Neither. Expectation = %W × Rw - %L × Rl. They are both equally important.

If you increase the RR you lower the %W. Usually by the same percent.

 

Forum on trading, automated trading systems and testing trading strategies

Food for thought and brainstorming

Simon Gniadkowski, 2013.03.14 23:13

Take a look at this chart,  it shows the relation between Win rate (WR)  and Risk:Reward (R:R), in this case the spread was 0 and uses a simulated coin toss with an even number of Long and Short trades taken at random with no attempt to predict the direction of the market.  You will see for a 50:50 R:R scenario the WR is 50%.

 

 

You said TP and SL are 40 pips,  did you mean 40 pips or 40 points ?  Yo need a figure that is at last 10 times the spread or the spread will play a big part in your results. 


 
Enrique Dangeroux:

Tnx you guys for detailed explanations.
 
Is anyone else here focusing to get the bigest risk reward ratio from a trade?
How do you achieve this?
 

No.

As win rate en risk reward is closely correlated in most trading systems. What do you want?

Do you want to loose 9 times to get that 1 big reward. It  also can happen it takes 2 times 9 losses to get it.

Or do you want to win 9 out of 10 and take 1 big hit.  It also can happen you take 2 big hits in 10 trades.

So the best solution as always when risk is involved. Diversify. Instead of putting all money in 1 setup, split the capital allocation in 3 or if possible 5 of the same with a different RR/WR ratio.

The ride will be much more smooth and therefor more easy to sustain.

Off course this assumes a profitable trading system. Risk reward ratio is just one aspect. It is certainly not the "key" to a profitable trading system.

 
Enrique Dangeroux:

No.

As win rate en risk reward is closely correlated in most trading systems. What do you want?

Do you want to loose 9 times to get that 1 big reward. It  also can happen it takes 2 times 9 losses to get it.

Or do you want to win 9 out of 10 and take 1 big hit.  It also can happen you take 2 big hits in 10 trades.

So the best solution as always when risk is involved. Diversify. Instead of putting all money in 1 setup, split the capital allocation in 3 or if possible 5 of the same with a different RR/WR ratio.

The ride will be much more smooth and therefor more easy to sustain.

Off course this assumes a profitable trading system. Risk reward ratio is just one aspect. It is certainly not the "key" to a profitable trading system.

From psihological point of view it is better to win more times with low RR, than to win only few times with high RR.

But if you master winrate and RR then you are big winner :)

 
I think it depends on the system you are using to trade with to be honest. A scalper is going to value win rate over RR and a swing trader probably the reverse.
 
so no one checks for profit factor?
 
I think this is dependent on the your own trading strategy. I never trade with out a stop loss and never risk more than 3% of my account on any one trade. 
 
I don't pay attention to RR as I don't use a stoploss :-o
12
New comment
Reason: