Risk and the Reward

Let’s say you have a strategy with risk and reward of 1:5. It means you are risking 10 INR to make 50 INR. What will happen if you lose 4 times and win 1 time? Will you be in profit or loss?

Let’s assume we make losses first. So we are constantly losing 4 times and winning 1 time. We’re not using trailing stop loss or cutting the profit in the middle without hitting the take profit. Hence, you’re in loss of 40 INR by 4 losses and profit of 50 INR by 1 win.

Hence you’re in profit despite having loss ratio of 80%. Now with a risk: reward of 1:5 you need a winning ratio of 20% to be a profitable trader as seen in above example.

For a risk: reward of 1:4 what is the win ratio of being a profitable trader? If you have 1 winning trade and 4 lose trade then you’re in no profit no loss which means if 1 in 5 trades are profitable its breakeven. So we need to make more than 20% winnings to be a profitable trader!

Here goes the chart of risk: reward and win ratio needed to be a profitable trader with the specified risk: reward –

So, win ratio alone is not important! Being a profitable trader needs a system like the one mentioned above. In fact, most of the profitable traders have win ratio less than 50%.

You need patience, persistence, and trust on your system. It’s the trade psychology that makes people fail.