• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

TraderGav.com

Gav's trading blog - Perseverance, Consistency, Confidence

  • Home
  • Start Here
    • Back to Basics of Trading
    • Resource For Traders – The Best Tools for Traders
    • Learn Trading Articles
    • Sierra Chart Resource
  • Blog
    • Blog Posts
    • Other learning resource
    • Dummy Collection
    • Harmonic setups
  • About Me

Accuracy Vs Risk-Reward Ratio -The Trading 101

by Gav 9 Comments

Accuracy vs Risk-Reward Ratio

This website is free and supported by readers. This post may contain affiliate links. Read the disclosure for more info.

I have been thinking about writing something on money management, I just didn’t know where to start. Of course, I do not claim as an expert on this topic, I am just sharing materials I have learned.

Accuracy vs Risk-Reward Ratio

There are times I read traders’ blog who revealed their risk-reward ratio when making certain trade. Some traders are trading with 1 R in order to earn 0.3R (basically, risking $100 to earn $30, that’s the idea).

There is nothing right or wrong in the trading business, I am not arguing if the trader is doing the right thing. I am interested in looking at some simple mathematical details of this risk plan.

Accuracy or winning rate is the percentage of winning after a serious of trades.

Just how much accuracy is required from your system for you to be profitable after a certain number of trades when you are risking, say, $100 to earn $30 each trade?

Accuracy = (Number of wining trades/Number of losing trades) x 100%

Risk-Reward Ratio is the ratio of the amount you will lose if a trade is stopped out and the profit amount if a winning trade is closed.

Risk-Reward Ratio = $loss/$Win

I found an excellent spreadsheet from Kreslik.com (An excellent forum, with some great traders sharing strategies, programming etc). I have recreated the spreadsheet and it can be found here. moneymanagementchartupload.xls

Feel free to download a copy and play around to get the idea.

Let’s take an example, risk amount $100, profit target $30.
rr1to3

As you can see, with this risk-reward ratio, you will need a system/methodology that gives 80% accuracy in order for you to be profitable.

A system with over 80% accuracy?

Well, I believe it does exist, but I have no luck to see it so often. Most of the time, I will be happy if my system gives me over 60% accuracy or sometimes, just around 55% accuracy.

This time, I am risking 1 R in order to earn just 1.5 R (risk $10, to earn $15).
Here is the result.

rr1to15
With 1:1.5 Risk-Reward Ratio, you need 50% wining rate to be profitable

Basically, it is just like a coin tossing game, I need 50% accuracy in order to be profitable.

How about risking 1 R to earn 1 R?

Not a good idea. Remember, commission kills.

Accuracy vs Risk-Reward Ratio : 1R-1R
with 1:1 Risk-Reward ratio, you need to product at least 53% accuracy to be profitable

For example, we assume each trade, $4 is required for the round-turn commission. With a 1:1 risk-reward ratio, over 100 trades, we are still at the losing end, if our system is unable to produce 53% accuracy.

You can try out different Risk/Reward combinations in the spreadsheet.

Accuracy vs Risk-Reward Ratio – Final Words

Some simple calculations do help traders to understand the nature of trading. It is crucial to have a good understanding of these concepts between you start trading.

Trading is a long game. Having a good understanding of risk management will go a long way.

If you think it is ok to risk bigger dollars to earn a small profit, make sure you have a high accuracy system that pays you.

Tool I use

The Advanced Calculator from Forex Smart Tools is one of the best retail money management tools I have used. It helps to calculate and fine-tune my overall risk plan before I put on a trade.

It is a robust tool that caters to different trading styles including cost-averaging, stop-and-reverse, and multi-leg positions, etc.

If you are interested in finding more about the journaling tools I use in my trading, check out the resource page for more details.

What is your winning rate and risk-reward ratio in your trading? Which money management tool do you use for your trading?

Do you have any questions or comments? Please feel free to drop me a line in the comment section. I am happy to help.

Filed Under: Back to Basic Tagged With: Strategy & tools

Reader Interactions

Comments

  1. Eyal says

    at 12:57 am

    Good stuff. Here’s another way to look at it using a randomizer that can generate multiple equity lines to simulate returns for user input of risk:reward and win rates combinations.

    http://hquotes.com/tradehard/simulator.html

    Reply
  2. Eyal says

    at 5:57 am

    Good stuff. Here’s another way to look at it using a randomizer that can generate multiple equity lines to simulate returns for user input of risk:reward and win rates combinations.

    http://hquotes.com/tradehard/simulator.html

    Reply
  3. Gav says

    at 6:06 am

    Eyal: Thanks for the link.:)

    Reply
  4. Gav says

    at 1:06 am

    Eyal: Thanks for the link.:)

    Reply
  5. tiger says

    at 2:50 pm

    this is good site I am trading in indian stock market, as experince here indian stock market with high risk trading but reward too high , how to minimise risks any tips ?
    thank you
    Tiger

    Reply
  6. tiger says

    at 1:50 am

    this is good site I am trading in indian stock market, as experince here indian stock market with high risk trading but reward too high , how to minimise risks any tips ?
    thank you
    Tiger

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

Best Tools For Traders

My Name is Gav.
I am a Father, Husband, Trader, And Blogger. A serious coffee addict. I started training since 2005, mainly on FX and Futures.

About Me

Footer

Recommend FX Charting

Recommended Training

FXSAnalytics

Copyright © 2023 · Affiliate Disclosure · Privacy