High Win Rate or High Risk to Reward Ratio
When developing your forex trading strategy, it can be hard to decide whether to prioritize having a high win rate or taking trades with very high risk to reward ratios. Traders often struggle to prioritize one of these elements, leading to them constantly trying to chase a trading strategy with a 95% win rate and an average risk to reward ratio of 1:8. However, we know this is not remotely possible!
Traders should focus on both win rate and risk to reward ratio, ensuring they get the highest risk to reward ratio as possible, without sacrificing their win rate.
In this article, we’ll be looking at the difference between win rate and risk to reward ratios, which you should prioritize and how to influence these metrics within your trading. So, let’s get into it!
Win Rate vs. Risk To Reward Ratio – Which Should You Prioritize?
Retail traders are frequently falling victims of shiny ball syndrome, jumping from trading strategy to trading strategy for many years until eventually giving up altogether. Largely, this happens because they are chasing a fantasy of a trading strategy with a large win rate or giant risk to reward trades. This is often a pipe dream. Most of our Elite funded traders do not have a huge win rate, nor a giant risk to reward ratio – it’s unneeded and there is a lot of profit to be made without trying to achieve the impossible!
Manual traders tend to have a slightly higher risk to reward ratio, whilst algorithmic traders tend to have a low risk to reward but very high win rates – from what we have observed with our prop firm funded traders!
What Is Win Rate?
Win rate within trading is precisely what it says on the tin – what percentage of trades do you win. If you have a win rate of 84%, you win, on average, 84/100 trades. Win rate itself is incredibly useful to track during the learning, testing, building and refining stages of your trading journey. Once you’re already a profitable trader with a somewhat respectable win rate, it’s more of a vanity metric than anything – profit is all that matters!
What Is Risk to Reward Ratio?
Risk to reward ratio is usually presented in a format such as 1:3. This means you have 1 part risk, and 3 part reward. Some trades would also show this as 3:1. This means that for every £1 you’re risking, you’re making £3. So if my total risk on the trade was 100 pips, using a 0.1 lot size – I’d be hoping to profit 300 pips and £300 from the trade!
Most traders like to trade setups that offer a risk to reward ratio of 1:2 minimum, meaning they’re set to profit double their risk. This allows for the losses they take to be nicely offset by the profits. On the flip side, some traders like to take 1:0.2 risk to reward trades, for example. This is simply due to the fact they’re much more likely to win. If you risked 10 pips, to make 2, which is a 1:0.2 risk to reward trade, you should be winning very frequently. And, when you eventually do take a loss, it’ll take numerous tiny profits to make your money back!
Traders within the online trading communities love to post their high risk to reward trades, boasting 1:30’s and 1:50 trades – these kinds of traders are usually lying and have no proof to back up their claims, so beware!
Increase Win Rate By Decreasing Risk To Reward Ratio
It’s possible to increase your trading strategies win rate, by reducing the average risk to reward of your trading strategy. It’s worth understanding that if you take a buy or sell randomly in the markets with a 10 pip stop loss and a 10 pip take profit, with no trading logic – you will win 50% of the time. This is due to the market being zero-sum.
Therefore, we know that if you decrease your take profit to only be 5 pips, rather than 10, you would have increased your win rate and should win 75% of your trades, over the long term. So it’s possible to completely manipulate your win rate and push it as high as you wish, by reducing your risk to reward ratio within trades. However, this isn’t always the best idea – it goes without saying that when you take losses, you will, of course, be hit much harder if your risk to reward ratio is lower. Ideally, you’d want your profits to be much larger than your losses, unless you’re using an algorithm to trade.
Decrease Win Rate By Increasing Risk To Reward Ratio
On the flip side, you can decrease your win rate by choice if you’d like to. This can be done easily by increasing your risk to reward ratio. In essence, this means you’ll win fewer trades, but when you do win trades, the profit will be much larger than your losses. The art here is to increase your risk to reward ratio as much as possible, without drastically affecting your win rate. This means your edge is actually increasing within the market and over the course of 100+ trades, you’ll be in a much better position by doing this.
Could You Create A 100% Win Rate Forex Trading Strategy?
Now we understand the relationship between win rate and risk to reward, you may be wondering if it’s possible to create a trading strategy that wins 100% of the time. Well, nearly – but it’s not as wise as you think! In theory, you could create a trading system that enters trades randomly, oron a time-based confirmation/breakout etc, with a 1 pip take profit and a 1000 pip stop loss.
Your 1 pip take profits will be being hit constantly, whereas your 1000 pip stop losses will very rarely ever be hit. Therefore, your balance/equity chart will be constantly moving up in tiny increments. However, when you face a drawdown or a loss, or several trades in drawdown, you’re going to face some fairly heavy losses. The loss will be 1000x bigger than the profit from a win, meaning your balance/equity chart will be destroyed every time you take a loss! However, in the long run, it may still be profitable – it would need to be back tested to fully understand how a system like this performs.
Regardless, this system would have very close to a 100% win rate, which would definitely be nice to see!
In Summary – Should You Go For A High Win Rate Or A High Risk To Reward Ratio?
In conclusion, you should not go for just a high win rate or just a high risk to reward. Ideally, you have to find a balance of them both to find success and consistent profits within the markets.
Push your win rate as high as possible without sacrificing your risk to reward ratio. Likewise, push risk to reward ratios as high as possible without sacrificing your win rate too much. This can all be done through back testing to establish whether these changes are actually profitable for your trading strategy!