Win rate and risk-reward only make sense when combined

Up to this point, we looked at win rate and risk-reward separately. That win rate alone is meaningless. That we should keep risk-reward high. This time, we will integrate these two.

I will state the conclusion first.Win rate and risk-reward only make sense when used together.Judging “winning” or “not winning” by looking at only one of them is not possible. The true number that determines whether you can win is the “expectation” that emerges when you multiply these two together.

You cannot judge with only win rate or only risk-reward

First, confirm that you cannot determine anything from just one of them.

Even if someone says, “Win rate is 70%,” you cannot know if you will win. Because you don’t know the risk-reward. If the risk-reward is bad (for example, 1:0.3), you can lose even with a 70% win rate. Conversely, even if someone says, “Risk-reward is 1:3,” you cannot judge without knowing the win rate. If the win rate is 10%, no matter how high the risk-reward, you will lose.

Win rate and risk-reward cannot describe performance with only one of them.Only when both are present can you see whether that trade is actually profitable. People who boast about one number do not understand this fact.

The “expectation” of combining the two

A number that integrates win rate and risk-reward, that is“expectation”. Expectation, roughly speaking, is the average amount you earn (or lose) per trade.

The concept of expectation is simple. Subtract the “loss when you lose” from the product of “profit when you win × win rate.” If this is positive, the trade will increase your capital if continued. If negative, continuing will reduce your capital.Whether the expectation is positive or negative is the ultimate criterion that separates winning traders from losing traders.

Even with a low win rate, the expectation can be positive