Understanding the performance metrics of trading strategies is crucial for success in financial markets. While maximum drawdown evaluates risk exposure, win rate and risk-reward ratio (RRR) measure profitability efficiency. These metrics are interdependent—neither alone guarantees success.
Win Rate Explained
Win rate calculates the percentage of profitable trades over a given period:
Win Rate = (Number of Profitable Trades / Total Trades) × 100%
Example:
- Total trades: 100
- Profitable trades: 70
- Win rate = 70%
Limitations of High Win Rates
A 70% win rate doesn’t ensure profitability. Consider:
- 70 trades profit $100 each → $7,000 total
- 30 trades lose $250 each → $7,500 total
- Net loss: $500 despite the high win rate.
Extreme Scenario:
- 99% win rate with aggressive position sizing.
- 99 trades gain 10% each; the 100th trade loses everything.
- Key takeaway: Poor risk management undermines high win rates.
Risk-Reward Ratio (RRR)
RRR compares average profit to average loss:
RRR = (Total Profit / Profitable Trades) ÷ (Total Loss / Losing Trades)
Example:
- Total profit: $7,000 (70 trades)
- Total loss: $7,500 (30 trades)
- RRR = ($100 ÷ $250) = 0.4
Interpretation:
- An RRR of 0.4 means earning $0.40 per $1 risked.
- To break even, win rate must exceed 71.4% (calculated via
1/(1+0.4)).
The Win Rate–RRR Relationship
Formulas reveal their inverse correlation:
Minimum Win Rate for Profitability:
Win Rate (y) = 1 / (1 + RRR (x))- Higher RRR → Lower required win rate.
Minimum RRR for Profitability:
RRR (y) = (1 − Win Rate (x)) / Win Rate (x)- Higher win rate → Lower required RRR.
Graphical Insight:
- As RRR ↗, required win rate ↘.
- As win rate ↗, required RRR ↘.
Practical Applications
Balancing Win Rate and RRR
- High Win Rate: Challenging due to market unpredictability.
- High RRR: Achievable through strict risk management (e.g., cutting losses early, letting profits run).
Recommendations:
Aim for an RRR ≥ 2–3.
- RRR of 2 requires > 33.3% win rate.
- RRR of 3 requires > 25% win rate.
- Use historical backtesting to evaluate these metrics before live deployment.
👉 Master Position Sizing to Optimize Your Strategy
FAQs
1. Can a strategy with a 40% win rate be profitable?
Yes, if the RRR exceeds 1.5 (e.g., risking $1 to gain $1.5).
2. Which is more important—win rate or RRR?
RRR often matters more; a lower win rate with high RRR can outperform a high-win-rate, low-RRR system.
3. How do I improve my RRR?
- Set tighter stop-losses.
- Use trailing stops to lock in profits.
👉 Advanced Risk Management Techniques
4. Is a 90% win rate sustainable?
Rarely; such strategies often involve high risk (e.g., overleveraging) or curve-fitting to past data.
5. How do I calculate these metrics in backtesting?
- Track trade outcomes in a spreadsheet.
- Compute averages for profit/loss per trade.
6. Should I prioritize win rate or RRR in day trading?
Focus on RRR—intraday volatility makes consistent high win rates difficult.
Final Tip: Combine both metrics with robust risk controls for long-term success.